SodaStream International LTD. (NASDAQ:SODA) is scheduled to report Q1 2013 Earnings results on May 8, 2013. The company has managed to surpass analysts' estimates in every quarterly report since its IPO in 2010. After an extremely strong performance in FY12, 4 out 11 analysts covering SodaStream ramped up Q1 2013 estimates this past February. Expectations are high for SODA after a stronger than expected Q4 2012 and its first Super Bowl commercial appearance. With that said, let's take a look at analysts' expectations for the 1st quarter and the full year as provided by Capital IQ.
Analysts are looking for the company to grow the top line (revenue) by 28.70% and bottom line (earnings) by roughly 12% for the 1st quarter of 2013. Capital IQ utilizes diluted earnings per share in its respective table. Now let's take a look at last year's 1st quarter performance metrics.
- Total revenue increased 50.2% to $87.9 million from $58.5 million in the first quarter of 2011.
- Net income increased 84.3% to $10.1 million compared to $5.5 million a year ago, and Adjusted net income was $11.5 million compared to $6.9 million last year.
- Diluted earnings per share increased 71.4% to $0.48, compared to $0.28 in the first quarter of 2011 and Adjusted diluted earnings per share were $0.55 compared to $0.35 a year ago.
- Soda Maker Starter Kits sold: 683,000, up 15% YOY
- CO2 Refills sold: 3,668,000
- Flavors sold: 5,790,000
- Gross margin for the first quarter of 2012 was 55.0%, compared to 53.5% for the same period in 2011. This increase was primarily due to the addition of higher margin revenues in the Nordics following the shift to self-distribution in this territory. .
This year, the company has already announced plans to enter India, Mexico, Greece and China within FY13. These regional expansion plans should help to facilitate SodaStream's efforts to achieve and possibly exceed full year guidance should the company execute its plan to desired goal. It is a lofty goal to add three major soda drinking markets all in one year. This feat will be doubly difficult if we consider current capacity utilization strains. While we do expect India and Mexico to come on line during the fiscal year, China and its booming middle class economy may take further consideration as the company gauges demand vs. manufacturing build out needs.
As noted earlier this year in Capital Ladder's IHH/SodaStream report, SodaStream was once again the stand-out exhibitor at the IHH Show in March. Thousands of retail buyers poured into the SodaStream exhibit to taste, touch and place orders for its latest product line-up. The presentation and networking SodaStream committed to at the IHH Show should undoubtedly result in broadening the brand recognition and the company's product distribution. Through our network of associates around the world, Capital Ladder Advisory Group has discovered that SodaStream has begun selling products in the nation of Greece through an electronics and housewares chain called Easy Buy.
In February this year, SodaStream expanded its distribution network in Romania by signing a deal with Altex. Altex is a company in Romania, located in Piatra Neamt , whose activity is selling household appliances, electronics and ICT . In May 2011, the company had 89 stores (of which 13 were units Media Galaxy).
Last, but certainly not least, SodaStream effectively added nearly 100 doors in the region of Poland during the quarter via a new retail distribution partnership in the region. The Poland flag was also added to the sodastream.com website. The Source and Revolution soda makers began selling in Poland during Q1 2013. Poland is a region for which SodaStream has plans to double its existing retail footprint and brand this year. In Russia, and aided with the company's new distribution partner Bureaucrat, SodaStream launched nationwide at Media Mart during the most recent quarter ended March 31 2013.
Product Line Expansion:
As SodaStream continues to expand its retail distribution network globally, the company has also continued to expand its product line offering. SodaStream's first major licensing agreement came by way of Kraft Foods (KRFT) and their distinct Country Time and Kool-Aid brand flavors. The Kraft line of flavored syrups have accounted for nearly 25% of all United States syrup sales since Q3 of 2012. During the 1st quarter of 2013, Kool-Aid has rolled out to Canada's retail stores. Additionally, Macy's (NYSE:M), Bed Bath & Beyond (NASDAQ:BBBY) and a host of other retailers have all begun selling the Kool-Aid flavor syrups during Q1 2013. Through its ever-expanding partnership with Kraft Foods, we are expecting new Kraft flavors to hit stores this year.
A host of new flavors are also being added to the flavor assortment in North America currently. Diet Orange Mango, Diet Cola with Lime, Diet Cherry Cola, Pineapple Grapefruit, Diet Grape, Crystal Light Raspberry Lemonade and variant flavors of My Water Essence were added to the flavor syrups during the 1st quarter of 2013.
Although the United Kingdom's economy has remained under pressure for the last 12 months, recent GDP results showed the economy actually grew at a rate of .3%. SodaStream has an extensive distribution network in the region with partners such as ASDA, Staples, Curry's, Argos and many more. Capital Ladder believes that at some point this year, SodaStream could expand its retail distribution to include certain grocery retailers in the region.
SodaStream launched eight new syrup flavors in the U.K., including Dr. Pete and Diet Dr. Pete. This kind of flavor launch, so specific, has us thinking about the implications for these two flavors and the future of flavors to come. In addition to these eight new flavors did you know that My Water Flavor Essences were not sold in the U.K. until this April? Additionally, SodaStream just launched Stevia-sweetened flavor syrups in the U.K. and the U.S. and several other countries during the quarter and in the month of April.
Alongside flavor syrups, the Source machine has been widely adopted around the world. Retailers wanted to get their hands on this product ahead of the Super Bowl commercial which featured the machine and they did. Some 6,000 retail stores in the U.S. are now selling the Source machine in addition to other soda maker variants. In addition to advanced distribution of the Source machine during Q1 2013, SodaStream has also advanced its CO2 distribution network to include nationwide Kohl's (NYSE:KSS) stores. Best Buy (NYSE:BBY) has also begun testing the CO2 exchange process while adding the Spare CO2 product to all of its big box retail stores. SodaStream expects all of its retail partners to adopt the CO2 exchange process over time.
The relevance of all these new products and the adoption of these products is that they afford SodaStream the opportunity to grow sales in existing markets where they have already expanded the distribution network. Increasing the choices along the product line helps drive consumption rates.
New Licensing Deals and Partners:
Earlier this year, SodaStream added new licensing partnerships. Ocean Spray and EBOOST became licensed partners of SodaStream. Campbell's (NYSE:CPB) will launch its V8 Fusion and V8 Splash flavored syrups for SodaStream in the coming weeks, possibly ahead of the Father's Day Holiday in North America. EBOOST initial flavors will be Orange and Super-Berry (Acai Pomegranate), which will be available during the second half of 2013. Ocean Spray's regular and diet versions of Cranberry, Cranberry-Grape and Cranberry-Raspberry will be available during the second half of 2013 in North America and will likely expand to Europe in 2014.
With demand outstripping production and capacity utilization at existing SodaStream manufacturing facilities, the company has sought out third party production partners to assist the company with meeting that demand. During the company's Q4 2012 conference call, CEO Daniel Birnbaum outlined that these third party manufacturing partnership initiatives will serve to flatten margins through much of the year, but the company should achieve 54% gross margins for the balance of 2013. "Higher dependence on subcontracted manufacturing will keep gross margins flat year-over-year at approximately 54% for 2013. We expect the drag from subcontracting to ease once our new facility is fully functional in 2014."
Considering manufacturing needs alongside meeting demand, this brings us to the most recently announced partnership with Cott Beverages INC. (NYSE:COT). This is a strategic agreement with Cott Beverages Inc. to produce flavors made specifically for the SodaStream carbonation system. The initial production will consist of existing SodaStream flavors and will take place at Cott's primary concentrate production facility in Columbus, Georgia.
SodaStream's recent partnership with Samsung (OTC:SSNLF) has proven to raise the bar for other would-be entrants into the at-home carbonation market. The Samsung refrigerator is powered by SodaStream's CO2 and is available at Samsung.com, sears.com and bestbuy.com presently. Additional points of distribution will progress throughout the year. With this new product advancement and potential distribution, most adopters of the refrigerator powered by SodaStream's CO2 will also adopt the CO2 and CO2 exchange process. This will assist SodaStream with increasing its brand recognition and add to the number of CO2 exchanges globally, thus adding convenience for the end user. One last partnership to note comes in the way of soda makers. NACCO Industries (NYSE:NC), with its small appliance brand Hamilton Beach, will be introducing a home soda maker later this Fall. The company decided that if it was going to dive into the home carbonation category, it had better do so using SodaStream International as a partner. Therefore, Hamilton Beach soda makers will be powered by SodaStream's CO2 and CO2 exchange program. Hamilton Beach expects to have its product line of two soda makers on shelves by August 2013.
Although we have not heard much about the upcoming launch of the Breville, powered by SodaStream soda maker, CLAG believes it is safe to assume the product will be out later this year. Recent delays in the product launch have come in part due to the rapid innovation created by SodaStream's Source machine. Breville decided that it wanted the same innovative features offered in the Source machine to be made available in the Breville machine. Subsequently, the original Breville machine was scrapped in favor of starting an entirely new machine which has caused delays in the product launch. The launch of Breville's soda maker will likely not add meaningful revenues for SodaStream initially.
New licensing and brand partnerships will come in 2013 as noted by the CEO previously on the Q4 2012 earnings conference call. "We'll continue to expand brand relaunched during 2012, such as Country Time, Crystal Light and Kool-Aid. And we'll introduce V8 Splash and Samsung as well as brand some partnerships we are currently developing, including global brand partnerships." Of course there remains a host of international small and large appliance makers out there for the company to partner with, not to mention beverage companies such as Arizona, Monster Beverage Corp. (NASDAQ:MNST) and Dr. Pepper Snapple Group (NYSE:DPS) just to name a few. Naturally when dealing with an international company we have to consider international partnerships as well like Phillips, Krups and a plethora of possible partners.
With regard to A&P, fourth quarter spend was 22.7% of revenue, a 240 basis point improvement from 25.1% in Q4 of 2011. While the company continues to devote a large portion of revenues to A&P, the total portion devoted will continue to decline in maturing markets. Ideally, advertising spend reductions will also be aided by the acquisition of distributor's rights such as the acquisition of both the Nordics distributor rights in 2011 and Canada's distributor rights in Q4 2012. CLAG's expectation is that SodaStream will acquire at least one distributor's rights in the current fiscal year.
Ahead of the all-important Mother's Day and Father's Day holiday gift giving season, SodaStream has begun to air its previously banned CBS (NYSE:CBS) Super Bowl commercial advertisement. The revised version of the Super Bowl ad was viewed by more than 100 million Americans. The original Super Bowl ad which features two suppliers of Coca Cola (NYSE:KO) and Pepsico (NYSE:PEP) racing to a grocery store entrance has recently aired during the NBA Playoffs on TNT. The same commercial is also airing on HGTV, Lifetime and Fox News Network. For the balance of 2013, SodaStream's plan is to execute an integrated marketing program with emphasis on growth markets, like the U.S. that will include TV, as well as robust PR, social media, retail marketing vehicles, in-store point of sale and targeted in-store demo activity.
Shares of SODA are nearing a 52-week high ahead of earnings so expectations are high. Guidance will be highly relevant to investors as the company began raising guidance last year during Q1 2012 and proceeded to do so through Q3 2012. Investors may not appreciate anything less than the same measures taken this year. Additionally, SodaStream should be sharing market penetration and attrition rate data on the upcoming conference call with analysts and investors.
Capital Ladder's full scale report adds even more color to the expansion efforts which took place during the quarter and there are some surprises for investors. We include our Q1 estimates for important reporting metrics as well. In the report, we also disclose future partners to be announced in the mid-term. If you desire greater details on SodaStream's Q1 activities and operations, visit us at capitalladders.com.
Disclosure: I am long SODA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.