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SodaStream (NASDAQ:SODA)

Q1 2013 Results Earnings Call

May 8, 2013 8:30 a.m. ET

Executives

Yonah Lloyd - Chief Corporate Development and Communications Officer

Daniel Birnbaum - Chief Executive Officer

Danny Erdreich - Chief Financial Officer

Gerard Meyer - President, SodaStream USA

Analysts

John Faucher - JPMorgan

Joe Altobello - Oppenheimer

Jon Andersen - William Blair

Scott Van Winkle - Canaccord Genuity

Bill Schmitz - Deutsche Bank

Tony Brenner - Roth Capital Partners

Jim Chartier - Monness Crespi Hardt

Jim Duffy - Stifel Nicolaus

Greg McKinley - Dougherty

Operator

At this time, I would like to welcome everyone to the SodaStream International first quarter fiscal 2013 earnings conference call. Today’s call is being recorded. [Operator instructions.] I would now like to turn the call over to Yonah Lloyd, chief corporate development and communications officer.

Yonah Lloyd

Welcome, everyone. This morning’s call will consist of prepared remarks from our CEO Daniel Birnbaum. We filed the 6-K this morning, which includes the press release and financial tables along with the CFO commentary document and a supplemental slide presentation featuring business highlights. These are also available at our IR website and on our IR app for both iPhone and Android platforms.

Present as well are Danny Erdreich, our CFO; and Gerard Meyer, president and general Manager of our U.S. Subsidiary. Following Daniel’s remarks, we will open the call for questions.

I would like to remind everyone that certain statements will be made during today’s conference call which are forward-looking within the meaning of securities laws. Due to the uncertainty of these forward-looking statements, our actual results may differ materially from anything projected in these forward-looking statements. As such we can give no assurance as to their accuracy and we assume no obligation to update them.

Results that we report today should not be considered as an indication of future performance. Changes in economics, business, competitive, technological, regulatory, and other factors could cause SodaStream’s actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today.

In addition, we will make reference to certain non-GAAP financial measures, including adjusted net income. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company’s first quarter earnings release, which is posted on the company’s website.

For more detailed information about these factors and other risks that may impact our business, please review the paragraph in this morning’s press release that begins with the words, “this release contains.”

And now it is my pleasure to the turn the call over to the chief executive officer of SodaStream, Daniel Birnbaum.

Daniel Birnbaum

Thank you, everyone, for joining us today. 2013 is off to an excellent start. Strong gains from several of our largest markets in the Americas and Western Europe drove revenue to a record first quarter of $118 million. Soda maker sales increased 28%, and consumables sales grew 37%, delivering top line growth of 34% and adjusted net income growth of 26%.

The largest contribution to our performance came from the U.S., where results were exceptional across the board. Total U.S. sales increased 93% from a year ago, fueled by soda maker sales growth of 68% and consumables sales growth of 109%.

On a unit basis, sod makers increased 78%, flavors increased 119%, and gas refills rose 101%. First quarter gas refills of 1.1 million marked the first time quarterly refills surpassed 1 million units in the U.S.

U.S. growth came both from existing retail locations as well as from doors added since the first quarter of last year, notably Walmart. This growth spanned all machine models, including the Source, which was expanded to Walmart and Target during the quarter.

At $129, we didn’t anticipate the Source to be as significant a revenue driver in these channels as the $79 Jet. However, the excitement generated by its introduction has had a halo effect on our entire product portfolio at retail.

In April, we completed our most recent U.S. tracking survey. There were several highlights we’d like to share. First, unaided brand awareness increased from 25% to 38% since last July, and aided brand awareness increased from 46% to 63%. Second, more than 70% of consumers who purchased or received a SodaStream are still using it after one year. Third, over 80% of active users are using SodaStream at least once a week. And finally, almost 75% of our active users are using our syrups regularly to make soda. These results indicate robust brand awareness growth and more importantly, user stickiness. We look forward to providing more details around these findings at next week’s investor meeting.

Following a successful 2012, in which we enhanced our brand equity, expanded our distribution, and advanced our innovation agenda, we made the strategic decision to run an ad during the Super Bowl. Our as I mentioned was to capitalize on expanded retail presence and strong momentum coming out of the holiday season to further build awareness and strengthen our retail relationships by demonstrating our commitment to growing the category.

Strong selling ahead of the Super Bowl was followed by strong sell out and replenishment in the weeks immediately after the game, and we expect additional returns on this investment in the future quarters, particularly Q4.

The second major driver of our top line and the biggest contributors to operating income was continued strength from Western Europe. Revenue increased 17% as marketing activities generated strong growth in France, as well as some of our more established markets, like Germany and the Nordics. These results are a strong indicator that despite concerns around maturing markets and recessionary conditions, our business in Western Europe as a whole continues to be very healthy and very profitable.

As we’ve said on past calls, our Italian distributor continues to struggle finally, due to challenges with its non-SodaStream-related operations. We are now in active discussions to resolve the situation and develop a go-forward plan to reinvigorate this business as we remain bullish about the long term opportunities in Italy.

In Asia-Pacific, strong gains in Australia and Korea were offset by declines in Japan. Following a successful launch in Japan, and rapid expansion throughout 2012, our distributor plans to add an additional 1,000 electric appliance doors in the first half of 2013. Due to delays in obtaining the necessary hazmat permits by several appliance chains, this rollout is now scheduled for the second half of the year.

To avoid an overinventoried situation, we made the decision to postpone additional sales to Japan until the retail expansion is underway. We’re pleased with the progress we’ve made establishing SodaStream in Japan after just one year, and remain excited about the future prospects for our business in this large consumer market. We’ll soon be opening an office in Japan to better manage our operations, both in that country and across the entire Asia-Pacific region, which has so much potential.

Turning to CEMEA, revenue was flat with last year, at approximately $6.7 million, as sell in to our Czech distributor was down due primarily to a softening retail environment. To be clear, this is not a pipeline issue like we dealt with in the past. This is more macroeconomic related. However, our user base remains very active, as evidenced by a 37% increase in gas sell out in the Czech market.

To summarize the overall quarter, revenue and earnings growth was led by exceptional results in the U.S. for both soda makers and consumables. Throughout the rest of the world, consumables sales increased 14%, highlighting the continued growth of our global user base.

Soda maker sales growth outside the U.S. moderated as retail consumers and distributors in all regions worked down their existing inventories ahead of the Source launch this summer. In addition, the delayed retail expansion in Japan also had a temporary impact on soda maker sales.

Based on our strong start to the year, we’re raising our outlook, and we now project full year sales to increase approximately 27% over 2012, up from our previous projection of 25%. We’re also raising our adjusted net income projection to 27% over 2012, up from our initial guidance of 25%.

Our effective tax rate is still projected to be approximately 10%, compared with an unusually low tax rate of 1.7% in 2012. On an IFRS basis, net income is now projected to increase approximately 20% over 2012 levels, compared with our previous guidance of 18%. This guidance includes stock option expense of approximately $11 million compared to $6.2 million in 2012.

Looking at adjusted EBITDA, we are now projecting approximately 36% growth in 2013, compared with our previous guidance of 34%. While the first quarter has provided us a strong start to the year, it’s the conviction we have in our ability to execute our proven growth strategies that has us confident about achieving both near and long term objectives and to significantly expand the size and scope of our business.

As we outlined on our year-end call, our top line plan focuses upon three growth pillars, beginning with our primary focus, which is on winning with the consumer. We have a focused marketing plan in place for the balance of 2013 that includes advertising, PR, social media, point of sale, and targeted in-store demo activity.

Our second growth pillar is to win through innovation, providing our consumers better, easier solutions for enjoying their favorite carbonated beverages at home. Source is off to a strong start as is the automatic Revolution soda maker, both of which are expanding distribution in the U.S. and globally.

As planned, soda caps will begin rolling out to selective markets in late summer, and with our recent launch of diet flavors, naturally sweetened with Stevia, we now have more than 160 flavors globally, including more than 70 flavors in the U.S. market, and there’s more to come.

During the quarter, we announced our newest co-branded partners, Ocean Spray, our first flavor partnership to include markets outside North America, and Samsung, with whom we’ve collaborated to develop a refrigerator model that dispenses sparkling water using our technology. As of this past Sunday, Samsung launched at Best Buy, and will soon expand to other retailers across the country and to other markets. Samsung will support this launch through a national TV and digital campaign starting next week.

And finally, we’re seeing to drive growth by continuing to win at retail. We plan to expand with both existing accounts and selected new channels that properly support our brand and enable us to make our consumable products more readily available.

Now that we’ve discussed our financial results and our three growth pillars, let me take a moment to share my observations of what’s going on behind the numbers. A few years back, we were a products company, very much focused on the functionality of transforming water into soda at home. But over the last few years, SodaStream has evolved further into a full-fledged platform.

We did this by leveraging our first mover advantage, our technical know-how, decades of experience, our installed base of 60,000 retailers, and the growing strength of our brand as category champion. Our platform is essentially the operating system that empowers consumers and enables partners like Kraft, Ocean Spray, and Samsung to participate in the burgeoning new category of home soda.

You know, the Super Bowl ad was not just a 30-second media buy. It was a statement that the landscape has changed and that SodaStream has arrived. There now is a legitimate alternative to traditional packaged soda. Our market expansion, our global household penetration - which by the way just crossed 1% in the U.S. - our consumables sales, which indicate stickiness with both consumers and retailers around the world, is all proof that home carbonation is a game-changing category that is here and here to stay.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator instructions.] We’ll go first to John Faucher with JPMorgan

John Faucher - JPMorgan

It seems as though the number of new doors in the U.S. is obviously slowing down, so can you talk about machine sales into existing doors, and how we should think about that in the U.S. over the next couple of quarters? Do you think that you can get same-store sales growth on machines specifically as we look out over the next 12 months or so?

Daniel Birnbaum

I’m going to ask Gerard to address that.

Gerard Meyer

We’ve seen, so far already in Q1, not only that our sales per door go up, I believe it was over 29% overall. If we look at our top 10 accounts, we also saw improvement in same-store sales. And that was across the board. That was both in machines and consumables. It was more than double digit improvement. So we’re definitely seeing growing velocity trend behind the new product, our new innovation, our advertising, which is working. So it’s looking good.

Daniel Birnbaum

Just a comment on the observation that our new door count is slowing down. Just as a reminder, we are more and more active in non-traditional retail such as home shopping, internet shopping, partners such as Amazon and different places around the world, and there’s also traditional brick and mortar retail that we are beginning to experiment with, and will be announcing in the future, that will expand particularly the accessibility to our consumable products in the United States.

Danny Erdreich

John, let me add to that, that our sales per door increased this quarter to $2,900 per door, up 30% compared to last year. So it’s obvious that we’re growing sales per door in our existing number.

John Faucher - JPMorgan

And then following up on the Japan piece, can you talk about what you’re seeing on a same-door basis in Japan? Is the business down year over year, along with the shipment issues? And then it sounds as though the shipments should probably also be a drag on the second quarter. Is that correct?

Daniel Birnbaum

There’s really no same-door business. It’s new business. We launched Japan in early 2012, which was a strong quarter for Japan, because it was the pipeline, a lot of it was the initial pipeline, which created a high base for Q1 of this year by the way.

But what we do have is indication for the sell out, and it’s about 500 doors that we’re in right now in Japan, and it seems to be healthy sell out, response is good. It’s just a matter of continuing that roll out, which is a certain hurdle, slower than expected, because of the hazmat certification. Every single door needs to be certified in Japan. It’s not only a headquarters certification.

So that roll out is happening more gradually, every day, but more gradually and we expect that as that roll out is completed, we’ll see a significant growth also in Asia. We maintain our projections for double-digit growth for Asia-Pacific this year.

Operator

We’ll go next to Joe Altobello with Oppenheimer.

Joe Altobello - Oppenheimer

Just wanted to go back to the U.S. for a second. Obviously this is not really the toughest quarter. I think Q2 proved more challenging given that will be the anniversary of the introduction into Walmart.

So as we think about growth in the U.S. later this year and more importantly same-store sales growth, it seems like you’ve got three components to that, the innovation side, with the Source and soda caps, SKU expansion, and then maybe an improvement in advertising ROI. So can you talk to the SKU expansion you’re seeing right now? Are you happy with the SKUs you’ve got so far? And do you need to get more SKUs to help drive growth in the back half of this year? And then also, on the advertising ROI, are you seeing an improvement on that as well?

Gerard Meyer

We’re certainly continuing to expand our assortment within our doors. We obviously have the sourcing machine, which we launched last Q4, and we’re expanding that this year into more and more accounts. So accounts are adding more machines, accounts are adding more syrups. Obviously we started with Kool-Aid, which we’re now launching more broadly.

And in the back half of the year you’re going to see more syrups as well. And then the advertising, the last piece of it, absolutely we’re seeing some very good ROI on it, and we continue to believe that that’s going to improve.

One last piece, other ways we’re working on our in-store, our point of sale, messaging to the consumer and to the shopper. So it’s all coming together. In Q1, again, we saw double digit growth in same-store sales versus a year ago, and we see no reason why that’s not going to continue.

Joe Altobello - Oppenheimer

And then also, secondly, in terms of new channels, you mentioned in the past DIY, drug, convenience, grocery, etc. Can you give us a sense of the timing on those tests?

Gerard Meyer

Some of them are going on now. We’re in grocery, as you may know, and we’re continuing to test there as well. And we’re looking at the other channels. We only go in when we know we can do it right. So when it makes sense, and when we’ve got the right partnership, and we can do it right, we’ll go in. But right now, we’re focused on what we know is going to build the business. But it will all come.

Danny Erdreich

Just take note of the number of consumables that we’re seeing coming out. The growth is starting to come from consumables.

Operator

We’ll go next to John Andersen with William Blair.

Jon Andersen - William Blair

The soda maker shipments clearly quite strong in the U.S. It looks like rest of world, though, it may have been kind of down slightly year over year, and I’m just wondering, what kind of an impact that inventory work down that you discussed ahead of the Source launch, what kind of an impact that had. And should we be expecting soda maker unit growth rest of world or outside the U.S. as we kind of move through the balance of the year?

Daniel Birnbaum

This is something we called out in a previous call. The markets are gearing up to transition from the older models, primarily the Genesis and the Jet, into the new Source, which is off to a strong start. And there’s appetite for Source in the market. The retailers and our distributors are working down their inventory in preparation for the Source launch that’s happening in most of our international markets this summer. That includes France and Germany, even Australia and New Zealand, Korea, Russia, Nordics. They’re all expanding Source this summer.

So what we’re seeing now is a little timing shift in the soda maker sales, and then there’s the Japan effect, where basically we’re holding back shipments into Japan because of their 1,000 electric door delay of rollout. So that’s why we’re seeing a significant softening in the rest of world soda makers. This is temporary. As we ship the Source in Q2 and Q3, and certainly into holiday, we expect to continue to see robust growth of soda makers and with it the expansion of our user base.

Jon Andersen - William Blair

Just shifting to the U.S. for a minute, on the soda maker unit shipments you clearly probably got a nice lift coming off of the Super Bowl ad. And I’m just wondering if you could comment at all about perhaps what you’ve seen more recently, exiting Q1 and in true kind of five weeks of Q2. Have you been able to kind of sustain that comp store sales growth? Has there been an acceleration or deceleration?

Daniel Birnbaum

I think it’s too specific. And certainly we won’t comment to Q2. But I can just say, generally speaking, that coming out of the Super Bowl and the performance, and both sell in and sell out, is strong in the U.S., continues to be strong. By the way, we continue to get strong support from our retail partners as far as feature and display in the U.S. And that’s also a sign that we have the full support of our U.S. retail partners, including Walmart and our other partners there that will be able to continue to growth, and the growth momentum, after the Super Bowl. Super Bowl was not a moment in time, but rather a threshold, a step change, in the awareness and something that we’ll continue to build on. Build on that momentum going forward.

Jon Andersen - William Blair

Just one technical question on the tax rate. As you look forward, I know you have some NOLs and some tax credits. I know that kept the tax rate at a certain level. As you look for the balance of this year and into ’14 and ’15, what are you expecting there for the tax rate and what are some of the things that may drive that lower or higher?

Danny Erdreich

Obviously when we’re running out of NOLs, we’ll see some increase in tax rate going further. I will speak more about this in the meeting on Monday, but we do expect to see tax rates in the longer term to come up to 16% and even higher. For now, we’re keeping the 10% for this year.

Operator

We’ll go next to Scott Van Winkle with Canaccord Genuity.

Scott Van Winkle - Canaccord Genuity

Can you give us an update on the Source rollout by region and how it kind of flows through this year?

Daniel Birnbaum

The Source primarily rolled out in the U.S. in holiday and early in the year. And pilot is, in a few of the other markets, typically in one retailer if at all. So we were using the capacity for the U.S., primarily Bed Bath and Beyond and a few other retailers that started with it.

And also we wanted to get some experience and at the same time work on cost reduction to make the Source more profitable and enable us to eventually achieve our target retail price of $99, which is what we announced when we first came out with this product and revealed it, that the right price for the Source basic, plastic, is $99. That’s a killer price point, but the initial launch ended up being at $129 and we knew that there was going to be a significant volume impact on that price difference.

So that’s been going on. The response to Source, both at retailers and from consumers, but also for media and industry experts and reviews and awards and whatnot, has been phenomenal across the board. We announced recently that it won the Red Dot award, the premier design award, and we’re very excited about it. So now it’s a matter of rolling it out to all the regions and executing with excellence. We’re very optimistic on the Source.

Scott Van Winkle - Canaccord Genuity

Do you plan to stage that kind of region by region? Or it’s ready to go and kind of hit everybody middle of the year?

Daniel Birnbaum

It’s ready to go, but some of the markets have their own preference as far as when they want to roll it out. Depending on key retailer activity and things like that, or when they set the shelving and things like that. Some retailers set the shelves once a year, so they want us to be introduced when that happens. But by and large, we’re talking about a July rollout. July 1 is kind of the date where most of the markets are starting to roll this out, and we’re ready to go. From a capacity standpoint, from a product optimization, we’ve improved some of the minor kinks we had in product when we launched. Every new product always has. We’ve optimized the packaging. So we’re ready to roll out and meet consumer demand on Source.

Scott Van Winkle - Canaccord Genuity

And I’m sure you’ll be digging into the U.S. survey data next week at the analyst day, but that 70% figure, if I have that right, for use after one year, is that ahead of your expectations?

Daniel Birnbaum

Yes, much ahead of my expectations. My expectations for the U.S. were that as many as 50% of Americans won’t even open up the box. But that’s not the case. And what we’re also seeing, and we’ll talk about this more next week, is an improvement over time in our stickiness, in our retention.

And I personally attribute that to the improvement over time of the availability of our consumables in the United States. We’ve tripled the number of door locations that carry a gas exchange in the United States from last year. Last year was about 4,000 stores, and today it’s 12,000 stores, because during this last quarter we just added Kohls and Target. And we believe that there is a direct correlation between availability of the consumables and the stickiness of our product.

Scott Van Winkle - Canaccord Genuity

And then lastly, are there any promotions set for the U.S. going into the summer beverage season?

Gerard Meyer

We support Mother’s Day and then Father’s Day in particular for the summer beverage. It’s not so much in summer beverage season, but the summer category of small appliances. Because again, remember, we enter the house that way. So the real focus is on that. We don’t promote our gas at all. We don’t need to. But the key is on promoting and getting machine penetration into the household. And so you’ll see some of those. You’ll also see our advertising, which has just started, both on TV and on radio.

Operator

We’ll go next to Bill Schmitz with Deutsche Bank

Bill Schmitz - Deutsche Bank

Should we be mindful of any sort of quarterly differences in terms of sales and EBIT? Because I know you have the big Walmart lap coming in next quarter. So as we kind of model this thing, maybe some direction on how you think the quarterly tenure is going to work? And then maybe some details on what you think the U.S. growth is going to be for the year and perhaps something close to the advertising ratio?

Danny Erdreich

I think the best way to look at it, as we are still in the early stages of the year, is to assume that the trends that we’ve seen around 2012 will happen also this year. In terms of quarterly development, we’ll obviously see higher consumable quarters in the second and third, an Q4 is usually a more machines-oriented quarter. That’s as much as I can say now. I think we just need to see how the year continues to develop.

Bill Schmitz - Deutsche Bank

And how about advertising? I know it’s not going to stay at 33%, but can you just take a stab at maybe where you think it might come out, the advertising?

Danny Erdreich

We said that advertising is going to be this year, it’s going to be still high. It’s another important investment. But we said as a percentage of revenue it’s going to be slightly under last year. It was 17% last year, it’s going to be slightly under that. And again, it’s going to be more Q4 investment and obviously the U.S. is going to take the main chunk of this budget.

Bill Schmitz - Deutsche Bank

And then a couple of housekeeping items. It looks like receivables picked up quite a bit in the year. I’m looking at the cash flow statement. So was that because you had really good growth toward the end of the quarter and things are looking good? Or could you sort of explain why that receivables number is so high? The use of cash for receivables.

Danny Erdreich

It’s actually the other way around. Receivables went down. It’s just a natural follow after the lower sales in Q1 against Q4. Q4 was $133 [million] and now we’re slightly down. This is what you meant to ask?

Bill Schmitz - Deutsche Bank

It is. I just got the columns mixed up, and I was looking at the cash flow statement. [laughter]

Danny Erdreich

Yeah, you’re looking at cash flow, and I think you are looking at 2012.

Bill Schmitz - Deutsche Bank

Yeah, exactly. Can you also give us a store count in the U.S. for the end of the quarter?

Gerard Meyer

It’s 15,000 for the end of Q1, right now, compared with last year, about 10,000 at this time.

Bill Schmitz - Deutsche Bank

And then one last one if I could. Just the U.K., I know you launched like a year and a half, two years ago. There was really no mention of the U.K. business in the press release. What’s going on with that market? And do you still have pretty high hopes for that being a compelling growth market for you?

Daniel Birnbaum

Yeah, the U.K. is an incredible story, because the growth is very strong relative to where we were several years ago. Basically, it was a dormant market. We’re in all the key retailers now. We actually expanded to Asda. That’s another 540 stores. We’re at DSG, and Argus and Tesco, in their biggest 34 megastores. And there’s more coming. And it’s not an easy market, but we’re very happy with the progress that we’re making there. And the potential there is very significant because of the awareness, which is above 90% in that particular market.

Bill Schmitz - Deutsche Bank

What was the quarter like in the U.K.? Was it okay?

Daniel Birnbaum

It was okay. We’re not sharing the specifics of one particular market, but it was okay. It wasn’t anything exceptional. But it’s also not a significant quarter for the U.K. It’s winter, hibernation, post-Christmas. And we need to see what the summer looks like in the U.K. in Q2 and Q3.

Operator

We’ll go next to Tony Brenner with Roth Capital Partners.

Tony Brenner - Roth Capital Partners

This is not the first time the Jet distributor has disrupted trends in that market. It seems geographically an enormous territory, and I’m just wondering what proportion of that business this particular distributor accounts for.

Daniel Birnbaum

CEMEA at this point in time is largely about the Czech Republic. And so it’s probably a good half of the region or so, roughly speaking. But you’re right. There’s so much potential, and we’ve seeded a lot of that potential. In fact, one good example is Russia, where we recently appointed a new, very strong distributor there, and that partner is getting organized right now and seeding their distribution for SodaStream in Russia.

And during the course of this year we expect the CEMEA region to have better distribution. And we’ll see the results accordingly. And that region includes South Africa, Hungary, Poland, and Israel. And they’re smaller than the Czech Republic, obviously.

Danny Erdreich

Tony, let me add to that that the Czech Republic is probably smaller than many individual chain stores in the U.S. So for itself, it’s not that significant. Actually, the main reason why we are providing information about CEMEA is more about the potential of the region. This could be a very big region. But right now it’s small.

Daniel Birnbaum

Right now it’s less than 6% of our total sales.

Operator

We’ll go next to Jim Chartier with Monness Crespi Hardt

Jim Chartier - Monness Crespi Hardt

On the Czech Republic, have you gotten into all the potential doors in that market? Or is there an opportunity to expand to more doors?

Daniel Birnbaum

There’s always an opportunity to expand. We have not yet penetrated the grocery channel there. We’re close to the 10% household penetration mark, so it’s about at that point where in a market the size of the Czech Republic we will do that in a broad way. And there’s other retail we can expand into. But overall, the business is good.

And the most important metric that we look at at this point in time is the gas, or the consumables, consumption. And gas in the Czech Republic is up 37% for Q1. So consumers love the product, they use it, and our user base is growing.

But the growth momentum has slowed versus last quarter. We attribute it to the macroeconomic situation, the traffic at retail has slowed down. And we’re working with the distributor to correct that, but I can also say that until we see a change in the macroeconomic foundation of this market, and until we see growth in other CEMEA markets, we’ll remain a little cautious on the CEMEA region.

Jim Chartier - Monness Crespi Hardt

And then how many doors are you in in Japan, currently?

Daniel Birnbaum

About 500 doors.

Jim Chartier - Monness Crespi Hardt

And then you mentioned the price point on the Source, the target is $99. Will the Source be that $99 in these new markets this summer? Or is that going to happen at a later date?

Daniel Birnbaum

In euro markets, the target is EUR99. And just a technical comment, in most of the non-U.S. markets, the retail price point includes their VAT, their sales tax. So that’s why it’s slightly higher. But it’s EUR99, $99, or 1,000 Swiss kroner. That is the target, and that’s where we expect to introduce our product when we launch during the course of the summer.

Jim Chartier - Monness Crespi Hardt

And then in the U.S. should we expect a lower price point Source to come in? Or is it selling well enough at the current price point?

Daniel Birnbaum

It’s selling well enough at the current price point, but it’s going to sell a lot better at the correct price point of $99. So the answer is yes.

Jim Chartier - Monness Crespi Hardt

And when do you expect to get there?

Gerard Meyer

In late Q2 we should be starting to see that. And just as you know, we’ve also phased a rollout of the Source in the U.S., so more and more retailers will start getting Source in the U.S. as well. But late Q2.

Operator

[Operator instructions.] We’ll go next to Jim Duffy with Stifel.

Jim Duffy - Stifel Nicolaus

The numbers in the U.S. look great. From what we saw, inventories were very lean at retail out of the holiday season. In the Q1 numbers, is there any way to characterize the split of holiday sales replenishment between the fourth quarter and the first quarter? Or is it hard to even think of it in those terms?

Daniel Birnbaum

We don’t look at it in those terms. Certainly the holiday was very strong. But I wouldn’t say that Q1 was based on only holiday replenishment. We already saw replenishment in December at the end of fourth quarter. So Q1 was a combination of strong holiday, but also strong Q1, between Super Bowl and between momentum in the business.

Jim Duffy - Stifel Nicolaus

And then the consumer research data about the stickiness one year after the fact is very encouraging. Maybe this is front-running some of the investor day data, but I’m curious if the research gave you any new insights on CO2 usage frequency. Is the four times per year still a good number?

Danny Erdreich

Let’s say between three and four times per user. I can take the average of three and a half. Also, based on the number of cartridges we’re selling. If you do the math, you see only 30% attrition is working very well with an assumption of three to four gas refills a year per user.

Jim Duffy - Stifel Nicolaus

And then the Source launch in the rest of the world, I’m a little bit wrapped around the axe on this. Last quarter you mentioned a number of international retailers who’d taken the product, including a Japanese retailer. What’s the distinction between those shipments and then the launch that you’re talking about for July?

Daniel Birnbaum

In last quarter and throughout the holiday, we tested the Source in typically one retailer in the market. That was the allocation. So Canada did it in the Bay. And every market had their retailer. Australia did it in Meyers.

And that was an opportunity for us to gauge the consumer response to see the response to the price point, to see the preference of which models, because we have six models of Source, metal Source, and different colors, etc. And now we’re talking about a national rollout.

So it will be in all of the retailers, primarily, unless there’s a retailer that should not carry it. For example, we think the Source is a little bit up market for grocery retailers, so in those markets where we do have grocery we’re not going to start there. But now we’re talking about cranking up the volume.

Jim Duffy - Stifel Nicolaus

And then the July 1 rollout, should we think about that as being recognized in your sales in the second quarter? Or in the third quarter?

Daniel Birnbaum

For distributor markets, it will be in our sales in the second quarter and for our markets, it will be in the third quarter.

Jim Duffy - Stifel Nicolaus

I’ve got you at about 200 days of inventory. Is that inflated any by the shift in timing of the Source shipments? And if so, how much? And then Danny, if you have any thoughts on the right number for days of inventory looking forward, do you have an objective for inventory turns that we can benchmark you against?

Danny Erdreich

Yeah, you can. You can always. Inventory, first of all, does include, to some degree, the Source preparation. But you’ve got to understand the general environment in which we’re operating. We are working a lot with subcontractors, and we’re working on meeting demand, and let’s say limited capacity right now. So we are building inventory to prepare for shortage in capacity for the high season. And this will accompany us until we have the new production site up and running at the end of next year. So inventory is to some degree inflated because of that.

Also, there’s one other point that we should remember, and that’s the fact that we are a full product company. We are manufacturing from the basic raw material until the end product. So we should be keeping at least one quarter’s inventory for each of our markets and in some markets we’re keeping more than that. Take Australia for example. In Australia sometimes you need to keep inventory, including underway, for five or six months. So this does of course show in our inventory numbers. Overall, I think we are keeping a pretty good level of inventory to service what we need.

Daniel Birnbaum

There’s one more comment on inventory. In this quarter, we increased our percent of self-distribution. Last year it was 72%, and in Q1 of 2013 it was 81%. And for our markets, where we do self-distribution, we carry the inventory. So overall, I believe we’re doing well on inventory management, considering all of those items.

Danny Erdreich

That’s right, because we just added Canada, for example, this quarter. This is an additional chunk of inventory. So yes, that’s right.

Jim Duffy - Stifel Nicolaus

On balance, as you think about all those different factors, is a turn of 3x a reasonable objective?

Danny Erdreich

You mean inventory at 3x a year?

Jim Duffy - Stifel Nicolaus

Correct.

Danny Erdreich

I think you can assume that, yes.

Operator

We’ll go next to Greg McKinley with Dougherty

Greg McKinley - Dougherty

International, we talked about some of these new markets, Brazil, India, Mexico, China, in past calls. If you look forward in the year, which of those new markets should we expect distribution to emerge in in 2013?

Daniel Birnbaum

Well, all the markets that you just mentioned are slower markets from a lead time standpoint, because of the bureaucracy or in the case of Brazil, it’s going to be because of customs. So each market, it’s a case-by-case story. But we’re aggressive certainly on Brazil and India. Mexico is taking longer, and China is something we’ve not yet seeded, but we plan to, and we’re studying that market. But for Brazil and India, there’s action in place.

Specifically in Brazil, we are now working on local production of the flavors, because the customs there are so ridiculously high that it’s almost impossible to have a business by importation of food, certainly sugar-based food, into that market. So we’re really keeping the business on a low burner right now, building the brands gradually and working on local production. I think that will occur and enable us to break out in the latter part of this year for holiday. That’s our goal.

And for India, we’re working through regulatory issues now to get the hazmat, the cylinders, gas, food, and all that certified, as well as doing local production on the syrups. And that’s not so much for the customs issue, but rather for the cost sensitivity in that market. We need to strip out any possible cost, and that includes shipping and importation cost. So that’s where we are.

For modeling purposes, I wouldn’t model any of those markets this year as extremely material. We have tremendous growth in the other markets we’re in, where we’re seeing and focusing our growth on, whether it’s the U.S., France, Germany, the U.K., Austria. Australia is doing great, and of course we’ll make sure that Japan does great as well. So there’s a lot of growth opportunity out there with those markets.

Greg McKinley - Dougherty

What are your thoughts on migrating the product into the grocery channel in the U.S.? Where are we in the evolution of that?

Daniel Birnbaum

We’ve already said that as the household penetration increases, we will start experimenting with that. Now that we’ve crossed the 1% household penetration line, and the awareness is as strong as it is coming out of the Super Bowl and all the marketing activities, we are starting to test in grocery and stay tuned on the results of how that’s going.

Greg McKinley - Dougherty

I wonder if you can give us an update on the progress of your manufacturing facility? In terms of timing, is it on track? And also, maybe a sense for total capex for this year?

Daniel Birnbaum

I’ll let Danny speak to the capex, but I’ll tell you the facility is very much on track. There’s construction going on on the site. We’re going to have an operating unit before the end of this year, which will be a logistics center and some assembly going on over there. So our goal is to turn that live this year, and then gradually add different manufacturing modules as we go into 2014.

By the way, speaking of capacity, we’ve recently expanded in another facility in Israel, in Alon Tavor, where we’ve actually tripled our assembly capacity for soda makers over there. And also, the manufacturing partnership with Cott is live and Cott are shipping soda maker syrups out of Columbus, Georgia for the U.S. market. So that’s a very good development that enables us to have available capacity and our primary syrup facility in Israel for the rest of the world.

Danny Erdreich

As far as the magnitude of the cost, the total budget is approximately $90 million. And some details in the 20F we just filed. We, by the way, intend to finance 50-60% of this long term investment by taking long term debt against it.

Greg McKinley - Dougherty

And Danny, total capex for this year?

Danny Erdreich

Total capex for the year is planned to be approximately $50 million.

Greg McKinley - Dougherty

And then finally, last question, we talked about some of the destocking of channel inventories internationally in preparation for the Source launch. Can you just remind us on the timing of that launch in these different markets? And as a result maybe give us a sense for when those inventories normalizes so that wholesale shipments can resume? And I just wonder if there’s any context you can place outside of the markets you’ve already commented on internationally, how sell-through behaved versus the sell-in as distributors got inventories a little leaner.

Daniel Birnbaum

Well, sell-through in our markets is strong. We don’t see any indication other than in the markets we discussed, Czech Republic, where we see a softening of sell-through. Other than that, it’s fine. It’s robust. The inventory adjustment for the soda makers I expect to be normalized by Q3, because in Q2 we’re going to be shipping to the distributor market, which represents about 18% of our total volume today. So we’ll take those shipments in Q2.

Our markets will start shipping Source, their rollout of Source, during July, which we’re going to see those revenues come in in Q3. Certainly by the end of Q3, we should have normalized inventory levels of soda makers, as normalized as they can be in the quarter entering the holiday season. So there’s always going to be some inventory fluctuation in this business, but we’ll be back to the normal seasonal fluctuations at the end of Q3.

Operator

We’ll go next to Tavy Rosner with Barclays.

Tavy Rosner - Barclays

Just to follow up on the last question, you said capex would be around $50 million. Can you give some color, a geographical breakdown, of that capex?

Danny Erdreich

It’s mostly in our production sites, and the production sites are based here in Israel. There are some investments that will go into the distribution regions. For example, gas-filling locations, we plan on expanding that. And some investments related to flavor manufacturing, some machinery and molds related to flavor bottles in the U.S., these sorts of things. But the majority is in Israel.

Tavy Rosner - Barclays

And what about Brazil, since you’re doing pretty much everything locally? Is it taking a lot of capex on that?

Danny Erdreich

No, Brazil is not going to have any significant investment this year.

Daniel Birnbaum

The model for local manufacturing in Brazil is to use co-packer partnerships.

Tavy Rosner - Barclays

And just to clarify, I might have missed this part, on the sequential decline of soda maker units sold, is this attributable to the timing of new product launch?

Danny Erdreich

The sequential decline, Q4 is always a very strong soda maker period. Q4 holiday season is actually the peak period for this in the U.S., so obviously we always see in Q4 a record number in terms of soda makers, and afterwards there is some reduction in Q1.

Tavy Rosner - Barclays

And lastly, how can we think about modeling these unit sales sequentially, what to expect in Q2, Q3?

Danny Erdreich

For modeling purposes, I think the best way is to see how this developed in 2012 and more or less assume that we’re going to see the same trend this year.

Operator

And we’ll take our final question, a follow up from Bill Schmitz with Deutsche Bank.

Bill Schmitz - Deutsche Bank

I just wanted to get some clarity on the gross margins. I think a lot of the production issues are probably gone, so should we assume that that’s no longer going to be an overhang for the remaining quarters of the year?

Danny Erdreich

In gross margin, we guided it will be approximately 54%. We had 54.5% this year. In Q4 we had some heat due to expedited shipments. If you’ll remember, there was Sandy. We forgot about this already, but this impacted Q4. Other than that, we don’t see any exceptional things that would have an impact, except for of course the ongoing production with subcontractors and the transportation involved, which is giving us additional cost.

Bill Schmitz - Deutsche Bank

Right, because you do air freight, right? And some of that carried over to this quarter? So are we done with the air freighting?

Danny Erdreich

Yeah, we didn’t have any material air freighting this time.

Operator

And I would like to turn the conference back over to Yonah Lloyd for closing remarks.

Daniel Birnbaum

Thank you very much. We look forward to seeing many of you next week in New York and sharing additional insights into SodaStream’s future at the investors conference. And for those who can’t make it, a live webcast of the presentations will be available on our IR website. I wish you all a great day.

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