SodaStream International LTD. (SODA) released quarterly results that once again beat expectations on top and bottom line. For the 2nd quarter of 2013, the company reported earnings of $.60 a share on revenues of $132.4 million. These results represented greater than 33% earnings growth YOY and 28.5% revenue growth year-over-year. Net income increased 36.1% to $12.9 million compared to $9.5 million in the second quarter 2012, and adjusted net income was $15.8 million compared to $10.9 million in the second quarter 2012. The company initially guided gross margins to be 54% for the balance of 2013, however in the first two quarters of the year the company has managed to achieve gross margins of 54.5% in Q1 2013 and 54.3% in Q2 2013. Now let's take a look at the regional breakdown to see how SodaStream achieved such strong results:
Geographical Revenue Breakdown
Three Months Ended
June 30, 2012
June 30, 2013
In Millions USD
Central & Eastern Europe, Middle East, Africa
It should be recognized by investors that in spite of the outsized pipeline build from Wal-Mart (WMT) in Q2 2012, SodaStream still managed a sizeable YOY revenue increase in the Americas, with less regional expansion than that which was provided by Wal-Mart last year. This identifiable metric outperformance clearly demonstrates the consumer demand for the at-home CSD market which will be further evidenced in some quick math later in this article. It has been recognized by Capital Ladder Advisory Group that SodaStream expanded its retail distribution in the United States and Canada by adding the following retailers during Q2 2013: 425 Office Depot (ODP) doors, 400 Kroger (KR) hypermarket doors, P. C. Richards & Sons 60+ doors, 228 doors in Staples Canada (STPL), 200+ Alco (ALCS) doors, 30 BevMo! doors (additional 60 doors may roll out later this year), 190+ BJ's Wholesale doors and a few more independent retailers. We estimate the U.S. expansion in the Americas to be roughly 2,000 doors or points of sale.
In addition to new retailers, SodaStream continues to grow its sales in existing doors through notable product expansion or sku expansion. Many retailers added various flavors during the quarter and have adopted the CO2 exchange program like Best Buy (BBY). SodaStream now boasts over 13,000 CO2 exchange locations in the United States. This growth in CO2 exchange locations serves to further create a greater barrier to entry in the product category as well as increase the convenience factor for consumers while simultaneously creating greater retention rates for the company. Other retailers like Hyvee, P.C. Richardson & Sons and Bed Bath and Beyond (BBBY) recently added the 130 liter CO2 exchange to their existing 60 liter CO2 exchange program. On the conference call to investors, SodaStream's Gerard Meyer, President of SodaStream USA, noted that the firm anticipates rolling out the 130 liter gas exchange to more retailers in the coming quarters.
Another factor which served to increase dollars per existing retail door during the quarter was the introduction of the Source soda maker at many retailers. The Source debuted during the 2nd quarter for $129.99 which gave the company a higher selling price point at participating retailers on a year-over-year basis. In late May, however, the Source saw a price reduction as SodaStream was able to effectively take some of the production cost out of the equation. In our official report ahead of Q2 earnings, Capital Ladder Advisory Group outlined the following to:
- CLAG has confirmed with management that the price reduction was in-line with this stated objective and that the price reduction would have no impact on gross margins in the quarter. SodaStream's management is quoted in the following text: "We said it would go down to the price we had initially announced in the press release last year once we can afford to do so, and this is now the case".
While some speculated about the price reduction of the Source soda maker and whether or not this would affect gross margins, our quarterly preview understood that there would be no impact on gross margins from this price reduction.
SodaStream has clearly demonstrated that its growth is not dependent upon new doors. In the U.S. SodaStream's growth was driven by soda maker units up 60%, flavor units up 45% and gas refills up 71%. This extreme growth reflects strong brand momentum resulting from the effectiveness of SODA's consumer and retail marketing programs, positive word-of-mouth from the growing community of SodaStream enthusiasts and a strong reception to the company's product innovations as noted by CEO Daniel Birnbaum.
Turning our attention to Western Europe, SodaStream grew sales in the region by 26% with notable outperformance in France and Germany. France and Germany have demonstrated higher growth rates even though the company has managed a household penetration rate in each respective country of greater than 4%. In France, SodaStream is now entering the grocery and drug channel with accelerating growth in CO2 and syrups. Germany is benefiting from an ad campaign that originated in Austria and is proving effective in Germany with retailers noticeably changing SodaStream product placement to take advantage of the consumer awareness. We have also been tracking amazon.com France and amazon.com Germany results over the recent quarters to gauge demand in the regions.
In the Asia-Pacific region, SodaStream has regained its momentum, growing sales roughly 9% YOY as the company resumed shipments during the quarter to Japan and managed to expand into 500 new doors. SodaStream has plans to grow into another 500 doors in the remaining half of 2013. In the Asia-Pacific region, SodaStream believes it can triple the doors in Japan YOY and grow into new markets such as India. We don't think SodaStream will stop there in 2013 as we believe the company may also add Malaysia and Hong Kong to its regional distribution list in the coming quarters.
On a less enthusiastic note, SodaStream's sales fell in the CEMA region by 27% or $2.3 million. The region continues to feel the pressure of economic woes from several regional countries like the Czech Republic and Slovenia. On the other hand, SodaStream is seeing growth in individual countries like Russia and Poland which CLAG forecasted last year would be major new and growing markets for SodaStream. Fortunately, the CEMA region does not represent a large portion of revenues, but as economic conditions improve in the region, results should fare better. What is most relevant regarding the results in the CEMA region is the consumer take-away or the sell-out of consumables in the region. This identifiable factor proves that the product is well-received by the consumer in spite of troubled economic conditions that the Czech distributor is faced with. Retailers in the region are carrying very little inventory and ordering for rate of sale and not necessarily to hold inventory. This creates obstacles for the Czech distributor servicing the regional retailers because orders come in slowly and undersized, forcing the distributor to wait to order their product from SodaStream International: The retailer orders from the Czech distributor and the Czech distributor orders from SodaStream International. If the order from the retailer isn't big enough, the Czech distributor has to wait for additional orders to come in from other retailers before ordering a large amount from SodaStream. This can adversely affect the ordering cycle from one quarter to the next. But getting back to the end-user, the consumer. In the Czech Republic, SodaStream noted on the quarterly conference call that CO2 sell-out was up 52% YOY, proving the consumer continues to use their SodaStream products.
In terms of major announcements, SodaStream did purchase the Italian distributor during Q2 2013 as we had expected them to do. The acquisition is expected to impact revenues by roughly $2 million in the back half of the year, but have virtually no impact on earnings.
The biggest disappointment on the earnings conference call was how the analysts seemed to focus so heavily on the A&P spending YOY. In spite of the consistent cadence of A&P spending year after year, the analysts still view this as a focus point in the overall analysis of the company. If anything is easier to predict about SodaStream, it is the cadence of A&P spending.
The company's initial A&P spending guidance at the beginning of the year was offered to be lower, as a portion of revenues, in FY13 than in the previous year. It has also been recognized by the analysts that in Q2 of 2013 the company spent less on advertising, as a percentage of revenues, than it did in the previous year. This has afforded the company the opportunity to spend more on A&P in the back half of the year than it did in the previous year while still maintaining its original budget for full year A&P expenditures. On the conference call, CFO Danny Erdreich reiterated this point by stating the following in response to an analyst question: "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".
As outlined by SodaStream's management team, not much has changed in regards to the cadence of A&P spending, but the focus on A&P spending by the analysts seems to underscore their disregard of consumption rates for SodaStream products and the apparent year-round nature of the business. The sell-out data clearly validates SodaStream's timing with respect to A&P spending, but this year's focus on Q3 A&P spending is representative of a more normalized business associated with the timing of soda maker sales, back to college shopping and flavor syrup sales. Last year, the company pulled forward some of its A&P dollars into Q2 in order to support the Wal-Mart launch of SodaStream products. This is not a necessity this year.
So let's take a look at the 2nd quarter U.S. machine sales data offered by SodaStream. In the U.S., SodaStream sold roughly 312,000 soda makers in Q2 2013 compared to 195,000 in Q2 2012. This seems like a very strong YOY performance now doesn't it? So how exactly did SodaStream achieve these results? As noted earlier, the company has accepted new distribution orders for Office Depot, P.C. Richards & Sons, BevMo!, QVC and Kroger during Q2 2013. If we accept the pipeline build in machine unit orders for these new retail partners and small independent retailers not named during the quarter was around 40,000 units, and add this to last year's machine unit sales of 195,000, that brings our total to 235,000 machine units sold. The difference between 235,000 units and 312,000 recognized units sold in the quarter is 77,000 machine units. 77,000 machine units sold during the quarter represents SodaStream's organic machine unit sales growth YOY. What we are identifying by performing this mathematical operation is the difference between results from new distribution and organic sales. The organic sales growth in machine unit sales is staggering and demonstrates further the effectiveness of SodaStream's advertising campaigns and the heightened awareness of the SodaStream product line that certainly has identifiable and measurable staying power. Just to be cautious, add another 10,000 units in pipeline build orders for the quarter and bring the total up to 50,000. Now our organic growth was 67,000 machine unit sales. You can be as generous as you want with the pipeline build quite frankly and still have witnessed an extreme example of organic growth in the quarter for machine unit sales. The myth or theory that SodaStream can only grow alongside new distribution has been completely debunked simply by looking at a singular market and a singular metric. Fortunately, this rings true in nearly all SodaStream markets around the world.
Last, but certainly not least is guidance. SodaStream has stayed true to firm and expectedly raised guidance for the full year once again. Based on second quarter results and current projections for the remainder of the year, the Company is raising its outlook.
- The Company now expects full year 2013 revenue to increase approximately 30% over 2012 revenue of $436.3 million, up from its previous guidance of 27%.
- The Company now expects full year 2013 Adjusted EBITDA to increase approximately 38% over 2012 Adjusted EBITDA of $61.1 million, up from its previous guidance of 36%.
- The Company now expects full year 2013 Adjusted net income, which excludes share-based compensation expense, to increase approximately 30% over the Adjusted net income of $50.0 million reported in 2012, up from its previous guidance of 27%.
- The Company expects full year 2013 net income to increase approximately 23% over 2012 net income of $43.9 million, up from its previous guidance of 20%.
In conclusion, the rumors surrounding poor NPD June results, the company trying to sell itself and Pepsico (PEP) making a bid to buy SODA were all untrue even though the company did not offer to discuss these rumors on the conference call with analysts and investors. The results speak loud and clear that SodaStream is not a fad in any way and that the company is witnessing record level sales for its products. The company is demonstrating its personal confidence in the business through continued acquisitions and a continuation of increasing guidance.