Sodastream's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Sodastream International Ltd (NASDAQ:SODA)

Q2 2013 Earnings Call

Jul 31, 2013, 8:30 am 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

Wendy Nicholson - Citi Research

John Faucher - JPMorgan

David Kaplan - Barclays

Jim Chartier - Monness, Crespi & Hardt

Joe Altobello - Oppenheimer

John Anderson - William Blair

Bill Schmitz - Deutsche Bank

Greg McKinley - Dougherty

Scott Van Winkle - Canaccord Genuity

Operator

Good morning, My name is Marquita and I will be your conference operator today. At this time, I would like to welcome everyone to the SodaStream International second quarter fiscal 2013 earnings conference call. Today's call is being recorded. (Operator Instructions).

Thank you. I would now like to turn the call over to Yonah Lloyd, Chief Corporate Development and Communications Officer.

Yonah Lloyd

Thank you, Marquita. Welcome, everyone. Today'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 for 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 second 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."

Now it is my pleasure to the turn the call over to the Chief Executive Officer of SodaStream, Daniel Birnbaum.

Daniel Birnbaum

Thank you, Yonah, and thanks to everyone for joining us today. We are very pleased to have delivered second quarter revenue of over $132 million. This was above plan and up 29% on top of strong gains a year ago that that had been fueled by our launch at Walmart.

Our robust top line performance, included soda maker sales growth of 25% and consumables sales growth of 28% which came primarily from strong demand in the Americas and Western Europe, especially gratifying was the operating expense leverage we were able to generate in the quarter as global A&P spend increased just one-third of the rate of revenues. This helped us grow operating income by 51% and deliver earnings per share that exceeded expectations.

I understand that with some concern about the ability to grow our U.S. business in the second quarter as we lapped last year's rollout to Walmart. Well, total U.S sales increased 42% and excluding Walmart from both periods, Q2 sales in the U.S. increased 90% over the same period in 2012.

Our growth was driven by soda maker units, up 60% flavor units up 45% and gas refills up 71%. These results demonstrate that our growth is not dependent on new door expansion, rather our growth reflects strong brand momentum resulting from the effectiveness of our consumer and retail marketing programs, positive word-of-mouth from our growing community of SodaStream enthusiasts and a strong reception to our product innovations.

Recent introductions of Source and Revolution soda makers, dishwasher safe bottles and our growing portfolio of flavors, including Country Time, Crystal Light, Kool-Aid, are all performing well and our innovation pipeline remains robust for the back half of this year and beyond.

In terms of new distribution activity in Q2 we, debuted QVC and we expanded our presence in the grocery channel with the launch at 400 Kroger locations. Selective new distribution is planned for the second half of the year, including our launch just this past month at P.C. Richard, BJ's and 425 Office Depot locations.

With the expansion of our gas exchange programs all Best Buy doors, we ended Q2 at over 13,000 gas locations throughout the U.S. It has become increasingly convenient for consumers to quickly exchange their empty CO2 cylinders, which is an important enabler for creating stickiness and increasing usage rates.

On the strategic partnership front, our collaboration with Samsung refrigerators was launched in Q2 at Best Buy and Sears. And, based on the initial success, Samsung is already expanding distribution to Home Depot, Lowe's and other retailers in the U.S. and Canada. In June, we announced our most recent partnership with Whirlpool for their iconic brands KitchenAid to develop a great looking innovative soda maker powered by SodaStream. Overall, it was another strong quarter in the U.S..

Turning to Western Europe, Q2 sales grew 26% above year ago, with Germany and France, once again two of our top-performing markets. Italy was another bright spot and we are pleased to announce the acquisition of our Italian distributors business in June. We are excited to own this business now and look forward to harnessing the full potential of this market.

Asia-Pacific returned to positive growth in the second quarter with revenue up 9%. The region was again led by Australia and New Zealand while Japan demonstrated improved sales trends compared with the first quarter.

In CEMEA, revenue was down just over $2 million as challenging macroeconomic conditions continue to hamper sales to our Czech distributor which represent nearly half the sales of this region. However, the healthy activity of our user base in the Czech market, as evidenced by 52% gas sell out growth combined with meaningful untapped opportunities throughout this region such as Russia and Poland has us optimistic about the long-term growth prospects for CEMEA.

To sum-up, we are delighted with how the first half of this year has unfolded. Each of our three growth pillars winning through innovation, winning at retail and winning with the consumer has contributed to the expansion of our user base and strengthened brand loyalty. We are confident that we have established a strong foundation to drive momentum through the second half of the year and beyond.

Based on our strong first half and a more bullish stance in the second half, we are raising our outlook and now project full-year sales to increase approximately 30% over 2012, up from our previous projection of 27%. We are also raising our adjusted net income projection to 30% over 2012, up from our initial guidance of 27%. 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 23% over 2012 levels compared with our previous guidance of 20%. This guidance includes stock option expense of approximately $11 million compared to $6.2 million in 2012. Looking at adjusted EBITDA, we now project approximately 38% growth in 2013 compared with our previous guidance of 36%.

Based on our sales forecast and marketing plans, we anticipate second half net income to be more or less evenly distributed between the third and fourth quarters. Longer term, we remain confident in our 2016 target of $1 billion in annual revenue and net income margins between 15% and 18%.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Wendy Nicholson with Citi Research.

Wendy Nicholson - Citi Research

Hi, good morning. Quick question. Can you tell us how much the acquisition of the Italian distributor added to revenues in the second quarter? Then secondarily, sort of a bigger picture question on the pulling back of the advertising spending. What's your confidence that there aren't going to ramifications of that lower spending as we go into the back-half and as we look forward to 2014? Just your sense of confidence in terms of the elasticity, if you will, of that investment spending? Thanks.

Danny Erdreich

Okay. Hi, Wendy. It's Danny. About Italy, it was acquired very late. Actually it was the June 13 when we acquired Italy. They didn't have any material impact on revenue and no impact on net income.

Daniel Birnbaum

If I may move on to the second question around advertising spending. I would say, Wendy, that it is more about effectiveness than dollars spent. Sometimes I compare our advertising budgets to the budget of our competitors, Coke and Pepsi. We spent in year what they would spend in one and a half days. So theoretically we have no right to be heard. But the reason we are heard is because of how creative our sending is, how effective our spending is. The viral impact of the word-of-mouth that we have.

That said, we are increasing our advertising spend in the second half versus last year's second half. It is going to be about $8 million up versus second half of 2012. As I said, the effectiveness is going to be stronger. We are now focusing on flavors. For the first time, we are actually doing ad campaigns around consumable. We have a strong sense of the embracement that we are receiving from our retail partners as far as the amount of shelf space, the amount of products, initiatives that they are putting on their shelves and also the amount of feature and display support that we are getting, that is currently being planned for the half of 2013, so we are not concerned that there will be any long-term or mid-term ratifications of a softer A&P investments in the second quarter.

Operator

We will take our next question from John Faucher with JPMorgan.

John Faucher - JPMorgan

Thanks. Good morning. Just wanted to ask a little bit about sort of the long-term revenue growth target that you guys have put out there, and as we look at it can you talk a little bit about in terms of new country rollouts and how those factor into your long-term revenue growth targets. Then also, if we look at the benefit of distributor acquisitions, are you factoring that in as well? Then what kind of household penetration numbers do you think you need to see in the U.S. as you look at long-term revenue growth target you have. Thanks.

Daniel Birnbaum

Hi. We don't factor in any significant new market penetration in our long-term $1 billion number. We have so much growth potential in the markets we are in and neither by the way do we factored in any a distributor acquisitions neither that's not part of our strategy. We do that opportunistically on an as needed basis, so the growth is going to come from increased household penetration in the markets we are in right now and I remind you that we are just beginning. We have 1%, slightly above 1% household penetration in the U.S.

I would guesstimate that we should be able to double and triple that easy by 2016 and that type of growth we should be able to see in other key markets such as Germany, France, et cetera. So, the upside is tremendous beyond that. I don't think 2016 is an aggressive target. I think it's a very doable target. There's a lot of upside beyond that just in the markets that we are in right now.

John Faucher - JPMorgan

Great. Then as we look to sort of model out the CEMEA business, sort of any thoughts there in terms of how we should be thinking about that going forward given what was the below expectations number for me at least this quarter?

Daniel Birnbaum

John, I think CEMEA eventually is the small region. It has a very high potential going forward, but right now it's under 10% of the business. I think in terms of modeling, going forward, I won't assume it will go above that.

John Faucher - JPMorgan

Okay. Thank you.

Operator

We will go next to David Kaplan with Barclays.

David Kaplan - Barclays

Hi, everyone. Good morning. I am going to just flow of follow-up on the first question about the A&P spend. Can you talk specifically about where, which geographies saw reduced spend or was it really across the board? We talked little bit about the impact on our sales and I guess you are measuring that, so how are you thinking about it going forward. And, when we think about Q2 going forward [is it just the] quarter, where we should expect to see reduced A&P relative to the rest of the year. That's the first question.

Daniel Birnbaum

David, we are investing in those markets, so they are strategic markets for us, where the growth potential is greatest namely the U.S., so about half of our A&P spend currently is targeted against the U.S. and we expect that to continue. In absolute dollars, we are increasing spend and will also retain the possibility of spending opportunistically according to the effectiveness of our campaigns and other opportunities that come our way perhaps around product initiatives such as SodaCaps that are coming this year. Again, a consumables focus and other new technologies that will be rolling out. So, the way we look at A&P again, is more around quality versus quantity. That said, we continue to increase our investment.

Danny Erdreich

Maybe if I can add to that, first half's A&P the rate of revenue was 14%. If you go back to 2012, you will see that the first half was also lower than second half. Actually second half was closer to 19% of revenue, so you will see the same, the same trend also this year. We will have higher A&P as a percentage of revenue going into the second half. Last year, overall the year was 17% of revenue. We said and stay with this assumption that it will be slightly under this, this year, but the second half will take a bigger percentage of revenue in A&P.

Daniel Birnbaum

Not only as a percentage, it's absolute dollars. So just to be very clear, the second half is going to receive $8 million in incremental dollars in A&P versus last year's second half, and about $18 million incremental dollars versus the first half of this year.

So dollar wise we are stepping on the investment and percentage wise, slightly reducing it overtime. We even said that in 2016, we expect our A&P to be reduced towards the 13% to 15% mark.

David Kaplan - Barclays

Okay, great. Then, I will make these last two. I will stick them together. During the Analyst Day, you guys communicated a 12 month retention rate of about 70%. So are there any updates on that? Are there any updates or numbers you can share with us on your install base in numbers terms or at least what the CO2 resell rate per install base is?

Daniel Birnbaum

David, we look at that once-a-year because that's just an important question and there is a lot of metrics that go in there and you need to do an accurate calculation and research. We will do that and we will share those numbers in our Q1 earnings call in May. Right now, we don't see any outstanding indication that there is a dramatic change from what we reported earlier this year. Just for those of you who try to do quick back-of-the-envelope calculations, there is a lot of factors that go into this that you should be aware of in calculating stickiness, retention.

For example, you need to look at gas sell out, not gas sell in. You need to look at the 130 liter size carbonator where if we sell a soda maker with 130 liter and we have sold quite a few of those starting last Q4, then that means that the time gap until the consumer will come for their first refill will be approximately twice as long as would be with the regular 60 liter cylinder.

Things like that. So I just caution to do quick back-of-the-envelope retention calculation. But as I said, we don't see any indication of any deterioration in our stickiness whatsoever. In fact our consumables sales are high. This quarter, in Q2, we had record high gas sales and record high syrup sales, all time quarter record highs.

Yonah Lloyd

David, it's Yonah. Just a quick follow-up. That 130 liter is actually being rolled out wider across the U.S. Bed Bath & Beyond are now carrying it in all stores and it is going to become more and more part of our portfolio.

David Kaplan - Barclays

Okay, great. On the install base? The CO2 refill per install base? Or that's kind of the same answer? That's it for me.

Daniel Birnbaum

It's the same answer. We look at it annually. We will report after we do our surveys and calculations.

Operator

We will go next to Jim Chartier with Monness, Crespi & Hardt.

Jim Chartier - Monness, Crespi & Hardt

First question. How much does the acquisition of Italy add to your outlook for 2013 revenues?

Danny Erdreich

It won't be that significant. It will be a couple of million on topline and there won't be any impact on bottomline.

Jim Chartier - Monness, Crespi & Hardt

Thanks, and then, can you just give us the U.S. unit numbers for machines, flavors and CO2?

Daniel Birnbaum

Yonah, you want to have that?

Yonah Lloyd

I think Danny will do it.

Danny Erdreich

So U.S. soda makers, 312,000 soda makers for the quarter, 1.2 million in CO2 refills and 320 million in flavors.

Jim Chartier - Monness, Crespi & Hardt

Great, and then the percentage growth numbers that you gave earlier? I think the 60% machines, 40% CO2 and 71% flavor. Is that correct?

Danny Erdreich

45%, flavors and 71% on CO2. That's for U.S. only.

Jim Chartier - Monness, Crespi & Hardt

For U.S.?

Danny Erdreich

Yes.

Jim Chartier - Monness, Crespi & Hardt

Okay, great. Then there has been a lot of talk in the investor community that sell-through in June. Can you just talk about the puts and takes for the sell-through during the quarter?

Gerard Meyer

Yes, this is Gerard. We did see a few soft NPD weeks recently but Q2, overall, was quite strong and every month in Q2 was good across all categories, including June if you look at the total business. So we see NPD looking fine. Our retailers we have been living with, they are delighted with our sellout rates, we are committed to growing category and I will just remind you of one last thing just to tell you now is that NPD's didn't have the entire universe. There are some very important retailers that are not in there including (Inaudible) beyond NHSN and a few small other ones.

Jim Chartier - Monness, Crespi & Hardt

Great. Then can you talk about how you started TV campaign in France yet? And how is the TV marketing in Austria?

Daniel Birnbaum

Well, the TV campaign in Austria has been working so well, the business is up triple-digit in Austria, but it's of a lower base granted that we decided to reapply that campaign to the German market and we are now on T.V. in Germany, and this is an example of our Q2 upside because this was not part of our initial plan, but it's we were opportunistic and responded quickly to what we saw something that works really well.

It's a campaign that focuses on the benefit of no schlepping. It speaks to these consumers very well and it is too soon to see how the German market is going to respond, but early indication is that it's responding very, very well. We see that true indications about Google searches of SodaStream et cetera, but we will be able to report that in the next quarter. I am pretty personally optimistic about both of these markets, Germany and France.

Later this year, France will be rolling out the SodaCaps aggressively with the campaign, with some very strategic partnerships at retail, so it's going to be a good second half for Europe.

Jim Chartier - Monness, Crespi & Hardt

Great. Then finally, last quarter you mentioned that the timing of Source shipments had impacted machine sales. Where are you enrolling out the Source? Did you ship to all markets in second quarter or you are still going to ship to some markets in the third quarter?

Daniel Birnbaum

Source is largely rolled out now to all key markets in the world, those who will take them this year already have them. Of course, the volumes will grow. We see that the share of Source within the soda maker universe is growing. It's up to 50% in some of the retailers where it's in the U.S. By the way internationally in other retailers, it's even more than that, 70%. We have retailers in Australia and Canada where the Source is 70% of the total soda makers, which is remarkable considering the short amount of time it's been on the market. So, this is a product very well received and it is one of the components that gives us confidence about the of the possibilities for the second half.

Jim Chartier - Monness, Crespi & Hardt

Great. Thanks a lot. Best of luck.

Operator

We will go next to Joe Altobello with Oppenheimer.

Joe Altobello - Oppenheimer

Good morning, guys. First question about the second half and sort of the cadence as to you touched on earlier, Daniel, about this third quarter and fourth quarter net income being roughly equal. The investment in the second we are seeing in advertising, I certainly understand, but could you talk about the timing of that investment, because it looks typically you guys like to invest obviously in the fourth quarter around the holidays and seems like you are investing a little bit earlier this year than normal, so could you just give us a little more color there?

Daniel Birnbaum

Joe, let me start with this. You can already see on T.V. new ads of the Kraft flavors, so we are increasing our investment in A&P in the third quarter. We are not putting all of it, the largest part of it only on Q4. This is the main reason why we said it will impact profit line.

Gerard Meyer

Joe, this is Gerard. We will definitely be spending more in Q4 than in Q3, but we do think in Q3 is an important quarter. There are important timings, they are including back to college and summer is important. As Daniel mentioned, we are putting more of a focus our flavors and with our Kraft flavors which are summer-oriented flavors. This is a very good time to spread our message, so we are not being shy about Q3, because we are year around business.

Okay. Understood secondly we do you guys think you any idea, might impacted by thousand quarter US show in our QVC started well enough to comment specifically on retailers in terms of percentage of our business, but certainly thousand 700 million and were delighted with the new home shopping is an important vehicle for us to believe that our message.

Joe Altobello - Oppenheimer

Okay. Understood. Then secondly, the QVC spot you guys ran, I guess, late June. Any idea how much that might have impacted sales in the quarter in the U.S.?

Daniel Birnbaum

Joe, the QVC spot did well. We don't comment on specific retailers in terms of percentage of our business, but certainly that was the factor in our business and we are delighted with it and we think home shopping is certainly important for us as we spread our message of our brand.

Joe Altobello - Oppenheimer

Just as a reminder, you guys have QVC spots planned for 3Q and 4Q as well?

Daniel Birnbaum

Well, we are always talking to them. As you know with TV shopping it's a matter of, sometimes months in advance, sometimes days in advance. So we don't have a schedule that I can give you but certainly with both QVC and HSN we see no reason why that's not going to continue throughout the rest of the second half.

Operator

We will take our next question from John Anderson with William Blair.

John Anderson - William Blair

I just had a question on Western Europe which came in above our estimate and really accelerated nicely relative to Q1. Can you talk a little bit about maybe some of the country specific drivers of that acceleration in year-over-year growth in Western Europe? Then how, perhaps, we should think about modeling that growth in that part of the business in the second half of the year? Thanks.

Daniel Birnbaum

I would say that the three key drivers in Western Europe were France, Germany and Italy, each for different reasons. In France, there is just ongoing momentum. The household penetration is growing nicely there. The retail expansion is growing nicely. What happened during this quarter, is that we got the distribution in Carrefour, in hypermarkets and grocery and it has all been good. So France is a market that's really developing very nicely.

In Germany, we have the upside of this advertising that was born in Austria and now we are rolling out in Germany and it's proving effective and retailers are seeing the success of Sodastream and then embracing it, giving it displays. I was in Germany last week and I saw a different Sodastream than I saw a year ago.

Italy is great because there is optimism in the air. We have the business. We are able to have inventory. All things that are recovering because the distributor didn't have the financial capability to be able to support the business appropriately. In Italy, we are also supporting the business with a TV campaign that is currently on air.

So we have these three markets that are all positive and there is no reason why it shouldn't continue moving into the second half of the year, especially as we are adding on the innovations, the SodaCaps, expanding the distribution of the revolution, et cetera, et cetera. and other flavors and even some partnerships flavors that will roll into Europe later in this year.

John Anderson - William Blair

Can I just confirm on the acquisition of the Italian distributor? Your expectation is that it will add about $2 million in the second half of the year to sales, no impact on the bottomline and $4 million on an annual run rate basis? Is that the right way to think about that?

Danny Erdreich

That's right, John.

John Anderson - William Blair

Okay, thanks, Danny. I guess the last question I have is just on the U.S. business. The unit growth that you talked about on the soda maker side, units being up 60%. Is that sell in consistent with the sell-through growth that you have seen across the various retailers that are selling the product today? Was there any type of mismatch between sell in and sell-through? Just trying to get a sense of that. Thank you.

Danny Erdreich

No, its reflective of the sell out growth that we saw. We saw strong sell out growth across retailers, again, including NPD and non-NPD retailers.

Operator

We will take our next question from Bill Schmitz with Deutsche Bank.

Bill Schmitz - Deutsche Bank

Can you help us with the modeling? My head is spinning right now, just in terms of like the tenor of sales, of net income to the third and fourth quarter? So I look at the street estimates and Joe kind of asked that question but it looks the streets are looking at $1 for the third quarter and $0.56 for the fourth quarter? I know that the guidance went up a little bit but you are saying that it will be evenly split EPS wise between those two quarters and that maybe some inside (inaudible) like how revenue and expenses are going to flow. So I just want to make sure we get the numbers right.

Danny Erdreich

Well, let me try and guide you through the numbers going into the second half. Second half increase is, just let me go for a minute into the numbers. The recent increase and overall increase of 30% and second half is, according to this increase, is going to go up by approximately 28% and it goes down to the net income with an increase of 24%.

Bill Schmitz - Deutsche Bank

And the split between the quarters?

Danny Erdreich

Yes, its, as we said, there would be more A&P going into the third quarter without guiding specifically building to each of the quarter higher A&P will make the difference between the quarters compared to last year.

Bill Schmitz - Deutsche Bank

Okay. What's driving the higher A&P? Is there a big ad campaign, because that's a lot of money moving from quarter-to-quarter?

Daniel Birnbaum

Again, I think in that at least in the U.S., we did do advertising last year in Q3, but again we are doing it again this year in Q3 and our overall spending as a percentage of revenue in the US for A&P is not going to be dramatically different for the quarter. So, and again it is a year-round business. So, it is a year-round business and we want to support the year-round.

Bill Schmitz - Deutsche Bank

Yes. I get that, but it seems like the historical patterns of sales are changing, because there's always kind of like the third quarter was always the highest. Not that it matter, just trying to make sure to make the numbers right. So, would earnings be kind of evenly spread across the years now? That's how it looks like the way it's trending, so like maybe historical sales has been anomaly in terms of having so much earnings in the third quarter and now sort of going forward, should we have that evenly split across the quarters?

Daniel Birnbaum

Okay. Got you. Past years if you remember, third quarter was impacted by sell-in going ahead of the holiday season. I think, this was may the difference this time. We are seeing it's part of the growth also selling supporting sell-out in Q3 more than just supporting only the holiday season sales, so this is why we are spending on A&P and this is why we are seeing the impact already now.

Bill Schmitz - Deutsche Bank

Got you. Then if I can keep going just a little bit on sort of working capital side of things and kind of cash flow going forward, I know you called out the inventory from the Italian distributor, but there's also a big use in receivables in the quarter, so what's driving that? Is that maybe because QVC towards the end and you haven't collected that yet or is there something else going on there?

Danny Erdreich

First of all this is right that we did see large increase in the cash flow reporting. Accounts receivable and then we had large portion of revenue taking place right now in this quarter, in June. QVC was part of it and others were also impacting this, so this wasn't collected yet. Also just to point out, in the cash flow report there are increasing account receivables includes also other receivables. Not only trade receivables and there we had an issue of delayed VAT payment that we should have been receiving in June and we received it only in the 1st of July. The increase was substantial $7 million in this accounts only.

Bill Schmitz - Deutsche Bank

Got you. $7 million. Okay. Then lastly just in terms of kind of partner and I am sure you saw the speculation in the press and the post and there's also (Inaudible). I mean, would you guys ever consider finding like a more permanent partner as you kind of look at what is going to happen going forward?

Daniel Birnbaum

Bill, let me just before even I would address that I just want to make sure that the breakdown between the third and fourth quarter is very, very clear. We still expect the fourth quarter in sales to be the strong quarter year. The breakdown in revenue should be about 45% in Q3 and 55% in Q4, which is pulling some of the marketing spend a little bit earlier this year.

As far as partnering, I am not going to comment on any rumors or speculation that have been out there in the press, but we are always open to partnering with brands, with great brands, we have done so until now with Samsung recently KitchenAid and on the flavor, side of the Kraft brands and then Ocean Spray and then V8 Splash and I expect that there will be day where we are going to get some soda brands on the platform because they can't ignore the fact that there is growth in this category and then it's we are going to continue, the growth is just going to continue in his category.

The consumer wants this growth. It's not being invented or created or fabricated. And it's here to stay, so these partnerships are going to emerge in the next few years, I believe, but I have nothing to report at this moment.

Bill Schmitz - Deutsche Bank

Got you, so it sounds like you are just going to be dating and there's no marriage plans.

Daniel Birnbaum

You said so.

Bill Schmitz - Deutsche Bank

All right. I appreciate. Thanks, guys.

Operator

We will go next to Greg McKinley with Dougherty.

Greg McKinley - Dougherty

Good morning. I wonder if you could give us a little bit of update on your manufacturing facility construction. How was that progressing versus planned? Maybe just remind us a little bit about the timing of how that may enable you to bring more production in-house versus third-party, et cetera?

Gerard Meyer

The construction in Lehavim in Israel is going ahead as planned, which is unusual for any big industrial project. You always expect delays but we are on track. We are going to start operating on the ground before the end of this year in at least one of the structures that we are building there, which will be a logistics/assembly type of operation. Then gradually, during the course of 2014, we are going to add modules and be fully operative by early 2015. It's a $60 million project. Investments are going to start increasing in this project over the next few quarters.

This year, in total, we are going to spend approximately $40 million on this. Overall, throughout the entire project it is going to come to $90 million plus. There isn't any change in the plan right now. There maybe some shift of cash flow going into next year but right now we are on plan, on schedule and no change in budget.

Greg McKinley - Dougherty

Can you comment on, last quarter the thought was there was some channel destocking in international markets in advance of the Source launch. How would you characterize just your global channel inventory positions with your distributor and your retail partners, be it U.S. or other markets?

Daniel Birnbaum

I don't know if any unusual pipeline that can impact future revenue performance. Danny, can you comment on this? You know of anything that could be?

Danny Erdreich

All the information that we have on sell out data is that it resembles very much our sell in numbers. So there isn't anything that justify to any different movement there.

Yonah Lloyd

It's Yonah. There could be two. One is Japan where, last quarter, we held back some shipments because they had a delayed rollout into the electronics appliance chains but they just recently completed that roll out and they went from 500 stores to about 1,000 stores. It might take a quarter until they move the inventory and resume proper orders that will reflect the sellout.

So that's one area we are watching closely. And of course, Italy, where we just took over the market and hit it with a big thing with an advertising campaign. So we obviously have to normalize the inventory in that particular market. It might take a couple of quarters. I am not going to be seen in any of the big markets including the U.S.

Greg McKinley - Dougherty

No, just Danny mentioned, so that one is from 500 stores in Q1 to 1,000 during Q2. Can you just remind us what's left to be accomplished there?

Daniel Birnbaum

A few hundred more stores that are rolling out, as we speak, every day. In Japan you don't rollout chain-by-chain, you rollout location-by-location. There is paperwork to be done in every single store related to the cylinder, the hazardous material certification. So that's why it is kind of a gradual rollout. But yes, there is a few hundred stores remaining there. The upside in Japan is really not so much in the retail distribution but more coming from the consumer marketing, the effectiveness and the amount of money that we will be investing in creating demand in that market.

Greg McKinley - Dougherty

Okay, thank you, and then maybe just a quick reminder, how many total U.S. doors are you in today? Then as we look at the second half, maybe just recap any additional important product line. So we know SodaCaps might be delayed this year but just a refresh on that, please?

Daniel Birnbaum

As of the end of the Q2, we were just over 15,000 doors. Actually, as of today, we are in closer to 16,000, if you include the recent rollouts to Office Depot, P.C. Richard and BJ's. We will be adding more doors selectively for the fall. In terms of new products, we are planning on launching red version of our plastic Source into retail in several accounts in the fall. We will also be launching Ocean Spray in Q4.

We have started already the launch of the dishwasher safe bottles and that's going to continue to stand into Q4 and our Revolution Machine, that is doing well, but it's not the only great machine we have. Revolution has been another one and that's going to be expanding also in Q4 into quite a few more doors. One more thing is, we will be adding 130 liter cylinder into some more retailer doors as well and of course SodaCaps, which Daniel mentioned. That's going to be a Q4 launch selectively.

Operator

We will take our final question from Scott Van Winkle with Canaccord Genuity.

Scott Van Winkle - Canaccord Genuity

Thanks. Good quarter. Most of my questions has been asked, but just a couple of follow-ups on inventory. I think you talked about Italy maybe selling through some inventory having to work through. Is that referring to the $10 million of inventory you took on with the acquisition or more in-store?

Danny Erdreich

No. The $10 million that was taken as inventory is the increase, the main item of increase in inventory that we see in the accounts.

Scott Van Winkle - Canaccord Genuity

No. I was relating to, in the last question there was commentary about working through inventory in Italy. I was just wondering that was inventory in-store or that $10 million?

Daniel Birnbaum

Scott, can you explain the question again. We want to be clear on it.

Scott Van Winkle - Canaccord Genuity

Sure. So, I recognize that the $10 million inventory increase from the acquisition in Italy. I thought in the last question maybe I heard it incorrectly that you were talking about some, the question was about destocking and you mentioned Italy and that destocking answer, so I was wondering if destocking meant that distributors' inventory or more inventory in-store in the Italian market?

Daniel Birnbaum

Yes. It's the distributors' inventory that we took possession of and we need to normalized, but we don't think it's a lot of inventory by the way because the market potential in Italy, we believe, is great. So, once we re-launch and it's actually kind of, it is a re-launch in this market, because we have been marketing dormant for a couple of years there pretty much, so we should be able to normalize Italy very quickly.

Scott Van Winkle - Canaccord Genuity

Perfect. Then I missed. There was some commentary about new retailers in the U.S. in the current quarter. I think BJ's was mentioned. I missed the other one or two that were renewed and you had talked about it I think on Analyst Day drug store distribution. Was that included in there?

Daniel Birnbaum

We also just recently launched at Office Depot into 425 of their doors and we also launched in the P.C. Richard which is sort of a Best Buy in the New York metro area. It's a very strong chain there. We will have some selective new distribution for the fall. Can't comment as we never comment in advance of where we are going to go, but we are going to continue to see some expanded distribution.

Danny Erdreich

Scott, the chains like drug and grocery are definitely on the roadmap, but not in this year.

Scott Van Winkle - Canaccord Genuity

Great. Thank you very much.

Operator

At this time, I will turn the call back over to the speakers for any additional or closing remarks.

Daniel Birnbaum

Thank you. Well, thanks everyone for joining us today. We wish you an enjoyable rest of your summer and the hope that you will also enjoy your refreshing glass of Sparkling Country Time Pink Lemonade from SodaStream and will speak again on our next earnings call. Thank you very much.

Operator

That does conclude today's conference. We appreciate your participation. You may now disconnect.

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