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SodaStream International Ltd. (NASDAQ:SODA)

SodaStream at dbAccess Consumer, Retail, Gaming & Lodging Conference Call

March 06, 2013, 9:20 am ET

Executives

Daniel Birnbaum – Chief Executive Officer

Analysts

William Schmitz Jr. – Deutsche Bank Securities Inc.

William Schmitz Jr. – Deutsche Bank Securities Inc.

We are going to get started here with SodaStream. I want to point to the forward-looking statements in the presentation and on our website as there might be some forward-looking statements. Currently there is some – but so we’re going to start here, I’m Will Schmitz from Deutsche Bank and this is Daniel Birnbaum from SodaStream. So we’re going to get started.

Can we just stop the webcast for a second and to take care of this? Israeli labor law. And we won’t do that. So that’s the background for what you hear here. I don’t get it, because I don’t believe in sacrificing human beings for any cause, because the unemployment rate in the PA, in the Palestinian Authority is about 30%. So anyone we fire will not find another job, so we just have to put up with this and hasn’t heard our business by the Bill.

Daniel Birnbaum

Right.

William Schmitz Jr. – Deutsche Bank Securities Inc.

I don’t think we’ve lost a single customer in the world, single retailer including in Europe where they’re pretty lot about this issue. But we just have to put up with this and there’s an ethical decision. We can easily get out of that facility. In fact we’re building a new factory, it’s probably in your Q&A, we are building a new factory within the green line in Israel, a huge, almost one million square foot facility near the Intel facility in Israel, south of Tel Aviv. And if we wanted to we can vacate the one in the West Bank and just transfer the capacity into the Israeli, the new facility. I hope we don’t have to do that. And if we do that, then I would like to try to arrange work permits for those Palestinian employees to be able to work within the green line of Israel. So that’s kind of where we are in that. But it is not, but we are about home carbonation, and I think we should give you the opportunity to ask questions.

William Schmitz Jr. – Deutsche Bank Securities Inc.

So I said it from the business (inaudible).

Daniel Birnbaum

So you would guess I know you did a survey every year that’s already that I guess on the U.S. household penetration, where we do? We’re fielding a survey now it should be ready for the next earnings call, but I can, we estimate that we crossed the 1% household penetration line just by seeing how many gas refills we’re doing in the U.S. and how many soda makers we’re selling in the U.S. So we in Q4, we did it 890,000 gas refills and spared some of the sales in the U.S. alone. So we – that means that we have add about 890,000 users just from the gas and I didn’t buy all of those exchanges. Someone is using SodaStream out there. And then in addition to that, in the previous six months we sold more than 600,000 soda makers. So if you add them together, we cross the 1% household penetration line.

Unidentified Analyst

Gotcha. And did you got target for where you think that could ago.

Daniel Birnbaum

No it’s hard to say where it can go, but what we can do is look at benchmarks out there in other countries. SodaStream is in 45 markets as you know. The highest penetration market is Sweden where we had 25% household penetration. And active by the way, the penetration of non-active is higher than that obviously because no one always uses anything. Okay there’s (inaudible) is 100% loyalty of anything, so the household penetration in Sweden is well over 32%, but active is 25%. So if that – and then there is other markets that have high penetration. Finland is approaching 15%, the Czech Republic is at 10% and we’ve only been there for three and a half years. So this thing can ramp up and the question is how – is what the path to that, how fast and how do execute on that, but there is no reason why the U.S. shouldn’t ramp up into double digit penetration, I can’t say when, but I believe its going to happen.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Great. How about – how are things went so far, there’s been a lot of commentary from Wal-Mart about January being okay, February started a little slow and then got a little bit better, so other thing sort of trending more recently.

Daniel Birnbaum

I haven’t heard that February is not a strong month by the way. Everything we’re getting from sell out data from our customers in the Untied States and not only in the U.S. but everywhere by the way is that, the year is off to a strong start. We had very strong momentum following Q4 and then the Super Bowl came, and the Super Bowl was a positive surprise even for me. I’m an optimist, but I didn’t expect to get banned by CBS, so we ended up with two commercials not one, one on YouTube that got nearly 5 million views for free, and the other one that is at the Super Bowl during the prime time.

By the way the last two minutes had the higher viewership of the entire Super Bowl for some reason probably because of the score, because of the game and we saw that we saw bump on that, and I believe I’m confident there’s an awareness bump within the marketplace and consumers are learning more about SodaStream and that’s important to drive consumption. So I think Q1 is off to a strong start.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Right. There is some sort of speculation that you’re going to start outsourcing some of the flavor manufacturing, is that something you guys are doing now?

Daniel Birnbaum

That’s right. It’s more than speculation. As we grow and we reach critical math, we do want to do more local sourcing. Made in USA for USA consumption is the right thing to do. And we are at that point of critical math. Now, we also have capacity constraints. It’s no secret that we actually lost some sales in Q4 because we couldn’t deliver the growth no one expected a 55% growth rate in Q4. Had I expected that, I would not have guided 25% at the beginning of the year. So we have the pushing capacity, we are building capacity and one way to build capacity is through outsourcing. And if we can do it in the U.S. for those consumables that are consumed here in the U.S. then we will do that.

In Q4, we sold 2.4 million bottles of syrup in the U.S. alone, 2.4 million, that’s a lot. So, yes, we are in active negotiations and very close to finalizing a co-pack agreement for the U.S. and I expect that we should be able to announce that within weeks.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Gotcha. And then can you (inaudible) in the U.S. or is there…

Daniel Birnbaum

I don’t think we have that point that makes sense to do that. I don’t know when that point would be, there is no plans to do that right now. There is quite a bit of technology in that and we want the engineering concentrated as much as possible in one place. By the way for those soda makers, we make about 30% of our soda makers in China. Even for those, we shift the black box in carbonation ahead and the bottle and the gas cylinder from Israel to China or to some other DC where they marry. So there is some sensitive technology in the machine that we don’t want to just outsource it and do it quickly in another market including U.S. I don’t think that’s going to happen in the foreseeable future.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Gotcha. So will that affect your tax rate too like the 10% tax rate you have? Is that content on new manufacturing a certain amount of product in Israel?

Daniel Birnbaum

That’s right. Israel has a very favorable tax rate. It’s a well kept secret. I don’t tell anybody, but the facility we are building in Israel is expected to generate about a 6% tax rate, because of the location and because of the Israeli tax policy. That’s not to say that our long term tax rate will be 6% because we will continue manufacturing around the world and in the U.S. we are subject to double digits, in Europe we are subject to double digits, high double digits. So our merged tax rate for 2013, we already guided is about 10%. And beyond 2013, it will migrate slightly higher. I think gradually over the long term to about 15%, but still it’s a fantastic tax rate. And yes, it is a reason to continue to manufacture in Israel.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Gotcha, that makes sense. And then the question I get a lot from investors is, you lost the big distribution gains in March, April, May with Wal-Mart and Target. So is there a plan to slide things forward as you elapse initial pipelines onto those retailers or may be the pipelines were wasn’t as big as some people think.

Daniel Birnbaum

The pipeline field was pretty significant especially with Wal-Mart. We went into about 3,000 Wal-Mart doors last year and we are not going to anniversary that. But the year 2013 is the opportunity for us to demonstrate how we grow without pipeline fill. And there is a lot of skepticism out there, lot of people said in the investment community that when we entered Wal-Mart it’s the beginning of the end for SodaStream, you remember that? And we said, no, it’s the end of the beginning because now we have the distribution platform to go ahead and push with the consumer through marketing investments and product innovations, and that’s exactly what we are executing against.

And by the way, we’ve proven that we know how to grow without retail distribution growth. In Germany, we’ve been at a 11,000 (inaudible).

By the way on that topic, I would encourage you all to take a look at a video that shows what's going on inside this particular facility. This gentleman is very ill informed. There is a video on YouTube called Building Bridges Not Walls. So if you go and look for that on the SodaStream take note, SodaStream Building Bridges Not Walls, you'll see how Palestinian employee is being interviewed in their homes and in the factory, and you'll get a sense for what is really going on.

Unidentified Analyst

(Inaudible)

Daniel Birnbaum

Surprised, no.

Unidentified Analyst

Okay.

Daniel Birnbaum

Europe, there is no such country as Europe, let's remember that Europe is a collection of markets, and they are in different development stages economically and they have different beverage consumption habits and they are in different development stages for SodaStream. So we have more mature markets there like Germany and Switzerland. In Switzerland, we have 15% household penetration and then we have newer markets where we just launched in the last three of four years like France, Czech Republic, Poland and then there is older markets like Jerry spoke about his experience as a child in the UK, SodaStream has been in the UK for 100 years. So we are relaunching there, it’s a completely different situation.

And when you look at the portfolio of countries in Europe all in all, it’s been very strong facility stream, we had growth of 28% in 2012. If you made out the acquisition of our Nordic distributor, then our growth is about 20% in Europe. We acquired the distributor and now we sell wholesale and not distributor pricing in the Nordic region. But overall North is very strong. We are growing both in mature markets like Germany and also in the new markets like France. And I think for the same reasons that we are growing in the United States, it’s not a very different consumer. Everyone is looking for convenience, for health and wellness, also to save the environment if they can, and for personalization, for empowerment to be able to do the drinks where they want. It doesn’t matter if the consumer lives in Prague, London or Boston. And we deliver that.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Sure, great. Just back to the sort of the U.S. comp store sales growth question, are there any big initiatives that are going to drive that growth. I mean is anything going to change in terms of like you guided to advertising spending already you kind of know what it is, but new product wise or otherwise.

Daniel Birnbaum

The biggest driver of growth for the company and also for the U.S. is our marketing investment.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Yeah.

Daniel Birnbaum

And just a word about our marketing investment, we take sour from the big soda companies. We don’t create additional consumption of soda, so for every leader of sparkling water was cola that you are going to drink with SodaStream it’s probably a leader less of Coca-Cola or Pepsi that you are going to buy. Now how do you compete against those giants? Coca-Cola’s A&P budget for 2012 was $11.9 billion, $11.9 billion last I checked. How do you compete against that, if you are SodaStream? So when our marketing budget for 2012 was something like $74 million, day-and-a-halfs worth of spending for Coke was our entire annual A&P. The only way to compete against that is to be very, very creative.

And we challenge ourselves, and we challenge our partners, our marketing partners to deliver the unexpected to somehow amplify every $1 of marketing spending that we do and turn it into $20. So we build cages that illustrate how many bottles and cans a family will use in one year. And we use celebrities who will talk about how passionate they are about this business. And we engage partners like Kraft and Ocean Spray and EBOOST and V8 from Campbell and create that type of empowerment and amplification because they also now embrace this solution and we do other things like that. So that’s how we think about market, it has to be unique, it has to be creative.

By the way when we go on TV, we typically don’t air the way other companies do. Other companies will do immediate plan, spend I don’t know $10 million in U.S. for wave for three weeks worth of TV and they would look at it in terms of reach and frequency GRPs, we will do that. We will treat such a provocative thought provoking commercial that if we aired one time or five times, the media will talk about it so much that we’ll get the PR value from net without paying. So it’s a very – we are riding a book on marketing. We are doing it completely we have to and that’s what is going to drive the consumption in the U.S. It’s not, we don’t need more retail distribution, but we will get more retail distribution and not to the extent of another Wal-Mart. But we will and may be experimenting with new formats this year, but what’s going to drive our sales is marketing, consumer education.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Gotcha. But that seems like the only pain point in the business is the exchange, right. So is there a chance to – I know you talked about before you get into drug stores, or gas stations, is that an opportunity that a place…

Daniel Birnbaum

Sure. Look we’re already 9,500 exchange locations in the United States, because Wal-Mart is doing exchanges now, Bed Bath & Beyond and almost everybody, almost all of our earlier retailers are doing exchanges. Now we're working with homedepot.com, this week we are rolling out to coals with gas $1,000 or so, because they don't want to lose the consumable sales to their competition. And at the same time, we will be experimenting this year with drug convenience we’ll be careful, okay, we want to make sure that we’re not growing the distribution of our consumables ahead of the distribution of our soda makers, ahead of our installed base, that have to build hand in hand. We'll be experimenting with grocery distribution, because really that's where you shop every week. We'll be experimenting with DIY, it's pretty obvious we're going to get some DIY distribution because of the Samsung deal, because the retailers sell a refrigerator with carbonation, will also want to be part of the exchange system.

So and then we are also doing Home Shopping, this coming Sunday, today we have a program with HSN, it's a small program, but on Sunday, this coming Sunday we're doing HSN and QVC for the first time, and I don't know if anyone ever did HSN and QVC with the same brand on the same day, but we're doing that. We are breaking the rules. We are also probably the only brand that fit William Sonoma and Wal-Mart, that you don't see that. Okay, but that really shows the strength to the appeal to the retailers of our content. So there will be more distribution, it’s happening right now, I think gas exchanges is becoming less and less of a problem in the United States.

Unidentified Analyst

And how about new flavor partnerships, a new brand of flavors I mean should we expect more in 2013?

Daniel Birnbaum

We got four companies under our belt. Kraft is the first with the Crystal Light, Country Time and then Kool-Aid, Kool-Aid did great in Wal-Mart by the way and that's before we marketed it. I’d like to see a marketing campaign with Kraft under the umbrella of Kool-Aid goes bottles. I think that will be exciting, and that type of approach where we co-market could be fantastic. After that, after Kraft, we got Campbell, so V8 is coming. We already close to manufacturing that in the next few months and then we got Ocean Spray which really both V8 and Ocean Spray really strengthen our health and wellness positioning. It’s something we haven’t talked a lot about it, but we have a great health and wellness story, we are not only an environmental brand, okay. So the TV talks environment, bottles disappearing but we have a fantastic health and wellness story, because we don’t use high food cause because our regular flavors have two thirds less calories, because our diets use Splenda and not aspartame, et cetera, et cetera and we have natural soda. So that’s where V8 is a strong story so as Ocean Spray.

And most recently, we announced EBOOST and you might not know EBOOST, but you know that said before you get married check out her mother, it goes for the guys, okay. And the mother of EBOOST is Jillian Michaels, she is the celebrity spokesperson for EBOOST, it’s a healthy energy drink and Jillian loves SodaStream. She was at her Chicago show unveiled their Cage last year and she is a big health and wellness supporter, and that’s – we expect to have that type of endorsement with her in promoting a healthy energy drink. So that’s the fourth partnership.

Now there is more in the pipeline, so I can say you stay tuned on that.

Unidentified Analyst

Okay, gotcha. And are they exclusive so the track could make their own flavors. I mean if it’s going to be a flavor for SodaStream, they couldn’t do it independently, it’s...

Daniel Birnbaum

Well they could. We see ourselves as a platform.

Unidentified Analyst

Yeah.

Daniel Birnbaum

So just like we don’t want to handcuff ourselves in these relationships...

Unidentified Analyst

Yeah.

Daniel Birnbaum

And we do here you do V8 and, I don’t know how happy is perhaps that we are doing V8 and Ocean Spray there. We are kind of in the same space of healthy drinks and now they all provide bubbles.

Unidentified Analyst

Yeah.

Daniel Birnbaum

So we’re careful not to handcuff ourselves, but we do give them all the chance to succeed before we create a competition. We also don’t handcuff them with the exception of the gas. So we, the heart of our business is the gas. And that’s also where we make the most money. So when we look at partners, we expect them not to be competing in the carbonation system. But if they want to make their own flavor, god, that's great, that means we’ll sell more gas, we are happy about that.

William Schmitz Jr. – Deutsche Bank Securities Inc.

So did you see any sort of truth of the gross margin mix improvement, if you sort of took out the expedite orders, I know there were some supply issues because of the storms and other things. But are you seeing that mix shift up to more the consumables and then obviously up to the canister which have the best gross margin in the portfolio?

Daniel Birnbaum

Not yet.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Okay.

Daniel Birnbaum

And that's good news. If we were to sell less soda makers, we would have a gross margin improvement.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Right.

Daniel Birnbaum

So that could be kind of the way to show you all that we're shifting a mix to higher gross margin you'd be happy, but I want to build this business for the longer term, and I need to get more soda makers out there, even if I’m sacrificing some gross margin, because the soda makers are the lowest gross margin component in the story. So we’re pushing soda makers, because we want to build out household penetration, because we want to see longer term shift from the soda makers to the consumable to the high margin consumables. And right now it's about 50-50 in our total mix of revenue, 50% soda makers, 50% consumables more or less.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Gotcha. And just on the product supply issues, I mean one of the, I know the first quarter still have some air freight coming through, are we done after the first quarter?

Daniel Birnbaum

I believe so.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Okay.

Daniel Birnbaum

Unless there is some unexpected surge in demand like what happened in Q4 do you end up with 55%. But again we have the choice of not providing, not shipping, we always have that possibility to allocate. And when we need to allocate we’ll always allocate first for the U.S. to the extent possible, what other strategic markets like Japan, Japan is the great market for us, okay, Australia is on fire, it’s a market back for us. Czech Republic is a market that had some problems year ago and now they are back. So always be sensitive to the needs of the market, but typically U.S. is such an important market, we usually allocate first year. I hope to be out of allocations after Q1 and we are building and some of the CapEx that we have and we have a significant CapEx here, this year $75 million to $80 million compared to $34 million last year in 2012. So we are both using CapEx to increase our capacity and both elevate the supply issues, but also improve the gross margin by building a facility that’s going to be co-located, everything within one location less transportation of work in progress.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Gotcha. That makes great sense. I mean because if you look at some of the retailers, who are still out of stocks now, I mean online in some places...

Daniel Birnbaum

That’s usually our fault.

William Schmitz Jr. – Deutsche Bank Securities Inc.

It couldn’t bad too; I mean people want to buy your stocks.

Daniel Birnbaum

Right.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Gotcha. How about, in the U.S., we get to NPD data and the Nielsen data, do you think our [stock] is our directionally accurate in terms of looking at your business?

Daniel Birnbaum

Yeah, but you got to be careful, you got to be careful because they only cover a small part of the universe, a photostream here. For example, I’ve looked closer at NPD to Nielsen, I know you look at Nielsen and you share that, but keep in mind that Nielsen only covers Wal-Mart and Target from our universe and that’s not representative at all. NPD cover Wal-Mart and Target and then a bunch of others, so including JCPenney and Sears and others. So I would prefer to look at NPD, but keep in mind that’s only directional because they do not cover retailers like Bed Bath & Beyond and Cosco, and SoluTab and those are important retailers.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Great. Well, I think we can take questions from the audience now if there are any out there.

Question-and-Answer Session

Unidentified Analyst

I think already just came back from the International Home and Houseware Show, and there were a few things discussed there. One that could you talk about the single serving product and how you might be bringing that out? Second thing, there was an issue about the different size cylinder; could you explain what’s that is all about? And then the fact that Hamilton Beach I think is talking about having a bringing out a machine that would be compatible with your cylinders three things I don't know you want to talk about those things?

Daniel Birnbaum

Okay. So let me do a demonstration, and I can show the audience what the single serve, single unit syrup that you referred to that we did show at the show, at the International Houseware Show in Chicago that ended yesterday, it was a very successful show (inaudible) was buzzing and we had so many contacts from retailers and other strategic partners that now we just have to execute against them, it's really an execution game. So if this is the sole soda maker, which was featured at the show, we featured the source, the soda caps this is the single serve dosing mechanism, I'll show it to you in a second. And the third thing that we'll be able to show is the partnership brand that we have, so this is Kool-Aid and Ocean Spray and I spoke about the other one.

So those are the three main stories, so this how the source soda makers, its not in less – so no more screw in the bottle in the soda maker that belongs to last century, now it's a very quick snap-and-lock. This is a patent pending mechanism, so any direct competitor who wants to get in this business without the snap-and-lock, there’s going to have a different user experience. When we call the [mid year] and we have an LED that shows the level of carbonate thing, and if you want to do Kool-Aid you want a lot of carbonation, you want to do sparking order, then you do less and everyone can do the way they like it, okay, and you release and the snap-and-lock again quick release. So as quick as that you can make carbonation in six seconds or so, five, six seconds.

Now here is the flavor, all you need to do on this, is close it down, and the flavor mixes within the box, its pre-dosed, it’s consistent, you will get same sweetness, the same flavor strength every time, it's about five seconds, you take this and dispose the recycles it’s all PET we are working on a biodegradable version of this. And you want to have to mix any more has done. So I just made (inaudible) grateful, I think great fruit for Bill.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Thank you.

Daniel Birnbaum

Okay. So that’s the single service, as far as the other folks who have try again in this category, it is a compliment that other companies are trying to get in this category. We saw two attempts so far in the United States, the first was cream and water and the second was squeezing out in Q4 only at Bed Bath. They had a lot of real estate at Bed Bath. And you have to do and find out for yourself how successful they were. But I can tell you that any direct competitor that wants to enter this category and be successful, is a competitor that really understands that the heart of the business and the key to success is to work with our gas exchange program, because we have gas and 60,000 retailers in the world, including 9500 in the States before we count Kohl’s and others.

So rather than they try to reinvent the gas exchange program which is very complicated, which is what primo try to do and which is what (inaudible) try to do, we invite credible high-quality appliance manufacturers to work with us. And so far two have embraced this, one is Breville and we will be launching a soda maker with them the very high end, beautiful. And the second is Samsung, who’ve chosen us as their partner to put sparkling in the refrigerator. And there will be others. And we tell these manufacturers that if you partner with us, we will do everything in our power to ensure your success. But if you don’t partner with us, we will to do everything in our power to ensure our success. So that’s the name of the game. And if you saw the Hamilton Beach machine they probably indicated which gas they are going to use, did they not, what if they say.

Unidentified Analyst

(Inaudible)

Daniel Birnbaum

SodaStream. Okay. Does that answer your questions?

Unidentified Analyst

And then what topic…

Daniel Birnbaum

Okay. The little cylinder is a four-ounce cylinder, it is a mini, we call it the mini, we don’t have it here and the beauty in that is that, it enables us to fulfill e-commerce and Home Shopping orders without having to pay the hazardous material surcharge because we’ve been ripped off by our delivery companies so far who took advantage of the fact that we are classified as hazardous material and they took a $20 or whatever surcharge, $25 surcharge for a delivery of soda maker which we chose usually not to charge the consumer for shipping. It’s a ridiculous amount of money in addition to the shipping fees, okay. It’s just a fee in extra surcharge, profit center for them.

So now we came out with a cylinder which is small enough, but it’s not classified as hazardous material and now we can start also making some money on Home Shopping for example and that’s why we are now starting to work with QVC and we expect to ramp up the whole area of Home Shopping and e-commerce as well. So that’s good news for us.

The consumer where we see the product with a small cylinder that makes 8 liters or 10 liters of beverage and they can go into any of the 9,500 stores and exchange that for a larger size, for the 60 liter cylinder for the price of the gas only, for $15, so that’s the idea. It’s a real enabler for a new channel for us basically. By the way, we do work with QVC and other markets in the world, in the UK and Germany and Home Shopping is a very good channel for SodaStream, very good channel.

Question out there?

Unidentified Analyst

With the competitors that you partner with on gas exchange, typically what do you ask or what are typically the terms for that? How does it work?

Daniel Birnbaum

We don’t disclose the terms but what we care about is the future revenue stream of the gas, so that’s ours and really doesn’t so much matter to what extent we are helping them with technology and what we are charging for it and those are in the confidentials, but what's important to us is to retain the revenue stream and the gas and typically we’ll get the revenue stream on the syrups as well, because America likes to drink soda with flavor not sparkling water. So we know that every unit that sold there’s another household penetrated for SodaStream, regardless of whether it's the (inaudible) brand or Samsung brand or another brand out there, and that's what we preserve the gas.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Any question. There is another one here.

Unidentified Analyst

The new facility for gas how many million square feet is this, can you talk about what...

Daniel Birnbaum

One is enough.

Unidentified Analyst

One is enough okay.

Daniel Birnbaum

1 million.

Unidentified Analyst

Can you talk about what kind of efficiencies in lower cost you should get from operating in one facility versus having everything around between all the different production facilities?

Daniel Birnbaum

Right. The new facility in (inaudible) will have four facilities in it in one campus, that's a plastics facility, the metals facility, a syrup facility and the assembly line. So each one of them is from a manufacturing standpoint completely different discipline, it's a different factory with different QA requirements and qualifications and people, but we're putting it on the same campus, by the way it's going to be a beautiful green facility and when you visit Israel, please come visit us, I'll show you.

And we said that we expected the savings from collocation to be about 200 basis points. I think it's going to be a little bit more, because those hidden cost and having to manufacture and right now seven facilities in Israel not even to realize sometimes the cost, the transportation of trucking that we've done – the mistakes also sometimes that you make when you have to control so much, so many moving parts. For example right now we don't make in our facilities the soda maker from A to zero. What we have done is for efficiencies, we’ve outsourced certain elements of the manufacturing for our first soda maker. So we don’t inject the plastic in-house any more for example, okay. So we do that in one facility (inaudible) and we have to truck that about 200 miles or so to our main assembly and put the whole thing together.

So it’s very difficult to manage also from a management standpoint. We say 200 basis points savings, I think its going to be a little bit more than that and it should also help reduce our work in progress inventory levels, and allow management to focus on things like innovation and cost reduction and other things rather than focus on where is the truck.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Question up here.

Unidentified Analyst

On your advertising promotion spending, say in the mature market or a fully developed market like Sweden, let’s say as a percentage of sales in those markets relative to the company as a whole right now. So just give us an idea of where it could be as you continue to ramp penetration?

Daniel Birnbaum

In the mature market, if we are not defining them as high growth markets such as Switzerland and I’ll speak about Sweden in a moment because that’s a unique case. But Switzerland for example is a more mature market, Germany is a more mature market, typically the advertising spend is about 9%, 10% of sales. But what happens is, the extra markets where we identify as growth opportunity, growth opportunities and we call them high growth markets, Sweden is one of them. Even though we are 25% household penetration, we want to know how high is high. And that’s the primary reason we acquired back that distributor ship. That’s why – I really wanted to push the limit on Sweden and see can we get to 30%, can we get to 35%, can we get to 50% and what’s the pack to that in household penetration terms.

So in Sweden, we are not holding them to 9%. Marketing, we are allowing a little bit more. In the U.S., we also have a much higher level of marketing and we’re allocating almost the entire incremental marketing spend for 2013 is coming to the U.S. And marketing spend is going up from about $74 million as a group to about $88 million and that extra $14 million is going to go primarily to the U.S. So we are really one that’s something new this year into ‘13, we are just spreading, marketing equally among our markets, but we are designating high-growth opportunities markets versus more mature less lower growth markets. Next question.

Unidentified Analyst

Are there any new countries you’re going to enter this year?

Unidentified Company Representative

Although we distribute the geographic expansion is not a priority for this year, I mean and other things are priority for this year, consumer education, through marketing and also improving the quality of our performance from cost standpoint, logistics standpoint, launched innovation, et cetera. So, and also work on loyalty, consumer loyalty that’s something we’ve not focused on until now. We were always obsessed about household penetration and we really never paid attention to consumer loyalty. How often do they use the product and how much do they use it and whatnot.

So those are areas of focus for the year. We are expanding geographically, strategically. So expect to hear the news about India, during this year, for example. India is a wonderful beverage market, carbon is beverage market. There is a world war going on between Coke and Pepsi in India. And it’s the one market by the way anecdotally where Pepsi has a higher market share than Coca-Cola does among these bigger markets, the beverage markets. And we want to get into that mix. They drink a lot of coke and beverage and a large percentage of the population that has capital to make, to buy something like this also have filtered water in the home, built into the home or into the community where they live in.

So we think that is an interesting market, we are looking at that market closely. We also will be expanding in Mexico, and we are going to do that through our own subsidiary, there’s not enough profit in a country like Mexico to enable another hand there, so we’re changing our model in Mexico from a distributor model, which is very low level right now anyway. But don’t expect many announcements in the geographies during 2013, we have enough to focus on right now with 45 countries actually.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Okay. And then how do you look at economic to buyer distributor kind of run that business, I mean will the next year be or this year be any distributor buy-ins and kind of what is your experience with them prior for instance.

Daniel Birnbaum

Yeah, we don’t have a strategy of growth through acquisitions of distributors. We want to grow organically and this is the year when we are going to demonstrate that. But we do buy a distributor opportunistically, if there is a commercial move to do so or if there is a strategic need to do so, and that was the case with Empire, Empire had some financial troubles and we also wanted to take the Swedish market for the reasons, I explained to manage that directly.

It caused us capital, okay, so we spent about $20 million in doing that. Okay, but its good experience, it’s very good, and we are learning a lot and we’re growing those markets now, some of those markets are very interesting, Finland is on fire, Norway is an exciting market, Denmark is great market. So those are things that we are doing, I expect that there might be another acquisition of the distributor through 2013 and its not built into our numbers, so there’s an upside there.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Gotcha, that makes sense. I apologize again for the disruption and thank you guys for being patience and Daniel, thank you very much for coming.

Daniel Birnbaum

Thank you very much.

William Schmitz Jr. – Deutsche Bank Securities Inc.

Thank you. Thank you all.

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