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Sodastream International Ltd (NASDAQ:SODA)

Q3 2013 Earnings Conference Call

October 30, 2013 08:37 AM ET

Executives

Daniel Birnbaum - CEO

Danny Erdreich - CFO

Gerard Meyer - President, SodaStream USA

Yonah Lloyd - Chief Corporate Development and Communications Officer

Analysts

Wendy Nicholson - Citi Research

John Faucher - JPMorgan

Joe Altobello - Oppenheimer

Bill Schmitz - Deutsche Bank

John Anderson - William Blair

David Kaplan - Barclays

Gregory McKinley - Dougherty & Co. LLC

Jim Chartier - Monness, Crespi & Hardt

Scott Van Winkle - Canaccord Genuity

Philip Terpolilli - Longbow Research LLC

Operator

Please standby. We are about to begin. Good morning and welcome to the SodaStream International Third Quarter Fiscal 2013 Earnings Conference Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

And I’d now like to turn the call over to Yonah Lloyd, Chief Corporate Development and Communications Officer.

Yonah Lloyd

Thank you, Mary. 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’d 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 -- third 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 turn the call over to the Chief Executive Officer of SodaStream, Daniel Birnbaum.

Daniel Birnbaum

Thank you, Yonah, and thanks everyone for joining us today. It was another strong quarter as we continue to successfully execute against our primary objective of growing our installed base. For the fourth -- for the third quarter overall revenues of $145 million grew 29% over last year, led by strong gains in Western Europe and the Americas.

During the quarter, we sold directly to 1.2 million soda makers representing unit growth of 27% and revenue growth of 34%. At the same time, consumables revenue increased to 26%, fueled by gas refill units up 34% to a record 5.8 million and flavor unit sales up 7% to 8.3 million.

Third quarter EPS was $0.76 or $0.90 on an adjusted basis. As we’ve outlined before the global potential for home carbonation is estimated to be 260 billion at retail and this figure which is for soda and sparkling water is understated as it doesn’t capture the opportunity to leverage consumers desire to add bubbles to many of their favorite juice drinks such as Kool-Aid, Crystal Light, Country Time and Ocean Spray.

Our strategy to expand the share of this enormous market and create long-term shareholder value is straight forward, increase the number of households with a soda maker and drive usage to create a sustainable high margin revenue stream.

With our expanding line of innovative soda makers and flavors, I think consumers education efforts and increased availability of our offerings and partnerships, consumers are becoming increasingly attracted to the customization and convenience provided by our unique home carbonation platform. Our focus continues to be on our largest markets, which provide significant untapped penetration opportunity.

The U.S now representing 32% of total sales continued to generate solid growth during the third quarter with revenues up 36% versus a year-ago. This was primarily organic growth as we did not add material new retail distribution for the first time since we began our U.S market launch.

On a unit basis, soda makers increased 31% to 395,000 and CO2 refills increased 65% to 1.2 million. Flavors declined slightly to 2.1 million during the quarter, following strong pipeline in the first half of the year combined with inventory reductions at major retailers. To be clear, these were vendor wide inventory reductions not restricted to SodaStream.

On a Q3 year-to-date basis, unit growth has been strong, as soda makers grew 51% to 970,000 units. CO2 refills increased 77% and flavors were up 47%. With regard to third quarter sellout, NPD reported strong gas refill unit growth of 157% and flavor unit growth of 53%, confirming the results of our most recent annual consumer survey completed in May that shows consumers are actively using their soda makers.

NPD soda maker sellout was up 12% against a tough comparison to the strong selling period, following our launch at Walmart in late Q2 last year that was supported by end-caps in all in all Walmart doors.

For Q3 year-to-date NPD reports excellent unit sellout growth of 265% on gas refills, 139% on flavors and 47% on soda makers. In the U.S., we now sell a range of soda makers from the $79 Jet to the $199 Penguin with the award-winning source at $99. This diversity of price points, product features and styles now gives us the ability to offer a strong value proposition to a much wider audience and strengthen our retail relationships via better product segmentation.

Just this month we launched Source in two colors in all Kohl's and Macy's doors with their top doors launching in three colors. Also this month we added Revolution into all Bed Bath doors and top Best Buy doors. In 2014 we'll continue to upgrade our portfolio at retail including our new Play soda maker which incorporates the same snap-lock technology built into our higher priced Source and Revolution soda makers.

Consumers purchase our soda makers to enjoy sparkling beverages. Therefore, innovation in our favor portfolio will fuel sales growth not only in consumables but also in soda makers. We now offer over 60 flavors in the U.S. including 15 co-branded SKUs following the launch this month of three Ocean Spray flavors. This figure will continue to grow with the introduction of our new Happy Hour Cocktail Mixers in Q4 as well as 10 new co-branded SKUs with the launch of Diet Ocean Spray, V8 Splash, EBOOST and Cooking Light early next year.

As we look ahead in 2014 we look forward to leveraging the powerful brand equities of these co-brands with joint consumer promotions in to our merchandizing and advertising. For example, this holiday we'll be launching the TV commercial that features the well known characters of Ocean Spray's TV campaign. We are also expanding our syrup portfolio with the launch this month of SodaCaps for consumers who want the added convenience of a simple, single served consistent dosing system.

SodaCaps are just now getting shelved at Bed Bath & Beyond, mechanized on fully incremental shelf space and supported by their most prominent retail market and vehicles. We believe SodaCaps could deliver not just incremental flavor sales but also additional soda maker sales by attracting consumers and potential partners for whom such dosing convenience and consistently is a key factor in their decision to embrace home carbonation.

Our focus on the consumer and our commitment to growing this category to increase marketing and advertising has translated into tremendous retailer support for Q4 and beyond. Our retail partners are attracted by the incremental revenue and profits they can derive from tapping into this $60 billion carbonated beverage business and are actively seeking ways to increase their share of our growing category.

For Q4 we have plans in place for expanded permanent space and product assortment as well as high visibility, display and retail advertising vehicles. Just this week Best Buy launched its holiday TV campaign and our Source soda maker was a featured item. This unsolicited product placement is evidence of our brand heat among not just our consumers but also our retail partners.

Retailer cooperation isn't limited to bricks and mortar but includes online as we continue to build our product assortment and marketing efforts with our retailer websites. Earlier this month, we launched on Amazon with a range of our soda makers and consumables. As we look to 2014, we are encouraged by our discussions around more shelf space, broader assortment and integrated marketing campaigns with our retail partners.

The same tactics we are deploying in the U.S. are delivering tremendous results in Western Europe. For the third quarter revenues increased 44% led by growth in Germany and France, our two largest markets in the region and an increased contribution from Italy following our acquisition of the distribution rights late last quarter. In each of our markets we're dedicating time and resources to study consumers to determine their needs, create solutions and execute strategic game plans.

In Germany and Austria, for example, we're tapping into the consumer insight of providing a great alternative to the cumbersome sparkling water category with our no sipping [ph] campaign that now includes TV spots and is resonating well with consumers. And in Italy we are in the early phase of implementing an integrated selling and marketing program behind the messaging sparkling water just the way you like it. Our initial A&P investment was effective of driving sell-through giving us added confidence that this market is poised for a turnaround now that it's receiving the necessary attention and resources.

In our two smaller regions, CEMEA and Asia-Pacific, where we have a greater percentage of distributors versus direct distribution, our results continued to be mixed. CEMEA posted a 4% revenue increase in the third quarter while revenue was down 21% in Asia-Pacific due to continued struggles in Japan. We're disappointed that our Japanese distributor is not properly supporting the brand with marketing investments and retail expansion. We remain optimistic about the potential for SodaStream in Japan and we're evaluating the best options for this business going forward. Meanwhile our other Asian markets continue to perform well led by Australia, New Zealand and South Korea.

Now to our outlook. Based on our third quarter results and current visibility, we are reiterating our full year guidance for an increase of 30% in both revenue and adjusted net income. On an IFRS basis, net income is projected to increase approximately 23% over 2012 levels while adjusted EBITDA is projected to grow 38% in 2013 over last year. Our effective tax rate is projected to be approximately 10% compared with an usually low tax rate of 1.7% in 2012.

With regard to fourth quarter net income, it's important to note that a portion of A&P expense shifted out of the third quarter into the fourth quarter. Also the strengthening of the Israeli shekel against the U.S. dollar over the past three months has put additional pressure on Q4 profitability. Looking ahead to Q4 we are well positioned heading into our busiest selling season. We have great plans in place with our retailers and brand partners around the world to leverage our momentum and celebrate our innovation to become one of the most popular gifts of the holiday season. 2013 will be another milestone year for SodaStream.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We'll take our first question from Wendy Nicholson with Citi.

Wendy Nicholson - Citi Research

Hi. This lowdown in the North America market I think has some folks concerned and so I guess there are two questions. First of all, is there anything that's new or different today relative to what you thought about the business in May that makes you less confident about reaching $1 billion in sales in 2016?

Daniel Birnbaum

Not at all. Nothing has changed since our last call or since the Investor Day that we had earlier this year. We're on track to deliver on the $1 billion in 2016 or before.

Wendy Nicholson - Citi Research

And there wasn't – I mean I know what you said, the organic – this is the first quarter where you had this plain organic growth. There was no meaningful incremental distribution that you haven't gotten that you had hoped to get that would have helped you get there. Do you know what I'm saying?

Daniel Birnbaum

No, we're not. It shouldn't mix any accounts for Q3, but remember that we had significant distribution increases even in Q1 and Q2 of this year. And gas specifically in the U.S. we added 2,300 doors in each of those quarters. There is, as we all know, there's still more distribution to be added in the U.S. and we will secure it already in Q4 and beyond. But in Q3 it's not that we had a miss. We're on track, on plan exactly where we want it to be.

Wendy Nicholson - Citi Research

And then my last question is just on the inventory side, the big step up there. How much of that was planned and is associated with the Italian distributor issue as opposed to some other issue? And as that unwinds, I assume you're going to bring that down, is there going to be negative leverage as you absorb that inventory? Thanks.

Danny Erdreich

The Italian inventory was – now the current inventory is approximately $6 million and there is not anything to be added in this regard. The Italian business is as we said in the last call contributing approximately a couple million dollars with additional revenue to the second half of the year. But all goes as planned with the Italian distributor now in Q3 and ahead for the next quarter.

Wendy Nicholson - Citi Research

Got it. Thank you very much.

Danny Erdreich

Thank you.

Operator

We'll take our next question from John Faucher with JPMorgan.

John Faucher - JPMorgan

Thanks. Good morning, everyone. I want to talk a little bit about the composition of the consumables growth in terms of the relative strength of CO2 versus flavors. As you look at the tracking data that you take a look at, are you seeing a slightly different composition of the volume in the U.S., more CO2 maybe less flavor growth? Can you put some context around sort of what I would argue as a disappointing flavor number in the quarter relative to CO2?

Daniel Birnbaum

Hi, John. I think that we have to look at the business; I’d say within context and look at all the metrics of what’s going on whether it's NPD and our sellout data, look at inventory bills; look at what retailers are doing to correct their inventory. So part of the decline in Q3 was due to the U.S. where flavor sales were down 2.6%. They were up 47% year-to-date despite the small decline in Q3, so very strong first half. By the way rest of the world syrups are up 10% for Q3, but the reason for the decline in the U.S., I’d say, there are several things to consider. The sell in was impacted by retail inventory management especially in the U.S. Retailers are rebalancing their inventories and it's not related to SodaStream and specially and SodaStream following the strong sell in during the first half. So there is that retail adjustment and it is material. A certain large U.S. retailer told me last week that they have slightly over-shopped on their inventory management of SodaStream and they’re slightly under-stocked right now. So that’s one data point to consider. Another one is Q3 last year included more distributor sales in general. So we were 31% versus 20% for Q3, and as we’ve said typically distributor take products earlier than direct markets -- our direct markets do. So some of the syrup sales are pushed from Q3 to Q4, okay that portion. And then if you look at NPD the flavors still remained strong in Q3, it's up 57% over last year and that’s in this case an important metric to look at. So for all these reasons and knowing our sales and marketing plans we do expect flavor unit sell in to accelerate in Q4 and we don’t see an indication of a material issue here.

John Faucher - JPMorgan

Okay, great. And then, can you talk a little bit about sort of the manufacturing plans going forward in terms of how you’re feeling about the capacity coming online, your CapEx plans et cetera just that, do you feel like you’re going to be able to source a larger percentage of the inventory internally this year; can you just sort of walk us through that?

Daniel Birnbaum

I’ll ask Danny to take that.

Danny Erdreich

Hi, John. Well, our plans in terms of, well you know that the main capacity expansion is our new facility that we’re moving right now into southern part Israel. Our plans to have it up and running in full, in early 2015 did not change. We’re on track to achieve this plan. Until then as you can see from our balance sheet we’re supporting the sales needs, the revenue needs for the quarters to come by holding a higher level of inventory that will support us going forward. As for our plans on CapEx, we planned on having more this year and we’ll probably shift a little bit, it's definite we’ll shift a little bit to next year. We will see only in terms of investments -- in cash investments on the approximately 60% of the plant investment this year and the rest will shift into next year, but it doesn’t impact in any way on the timing of closing the facility and having it up and running. Obviously when we’ll have it up and running we’ll need less inventory and we’ll be able to support all our capacity needs as we see them right now in our plan to, in our track to in the role to achieve the $1 billion in 2016.

Daniel Birnbaum

And when Danny says closing the facility he obviously means opening up the facility which we are still targeting to have an open door there by the end, before the end of this year and gradually see the margin effects of that. Well we will maintain a certain balance of dependency on subcontractors as we are growing our capacity so dramatically, our demand so dramatically but -- and also we want to maintain that type of flexibility so that we can always lean if necessary on a subcontractor if there’s going to be a upward fluctuation in demand we’ll be able to service that.

John Faucher - JPMorgan

Great. Thanks.

Operator

And we’ll take our next question from Joe Altobello with Oppenheimer.

Joe Altobello - Oppenheimer

Hey, good morning guys. I guess, I’ll just start with the facility. Could you remind us what your CapEx budget numbers in total was for this year and what the expected gross margin impact of that facility will have next year?

Danny Erdreich

Yes, if you recall Joe, we’ve had at plan we shared with you our plan to overall invest this year in CapEx approximately $70 million -- between $70 million to $75 million this year. We will eventually make only 60% of this overall and the rest will shift to next year. As for the additional gross margin that this will contribute we indicated when this will be fully up and running we’ll add approximately 200 basis points to our gross margin but this will not be next year. This will be to the full extent starting 2015.

Joe Altobello - Oppenheimer

Okay, but the plan comes on in phases, so I thought the first phase would have helped 2014, is that not the case?

Danny Erdreich

Yes, of course it will be, we’ll see a gradual models [ph] of the facility up and running and we’ll some improvement in 2014 with -- in this regard, but I suggest we’ll speak about this maybe when we’ll provide the plans for next year in our next call.

Joe Altobello - Oppenheimer

Okay, fair enough. And then in terms of Japan obviously you guys mentioned it has been a bit of a disappoint there; any thoughts of taking over distribution at this point?

Daniel Birnbaum

Well, you know the pattern by now. If we have a market where the distributor is unable to fulfill our growth expectations and execute on our strategies and we will look at a change in the structure of the market, so that’s where we are at this point in time. We cannot accept that a market as big as Japan where we have consumer adoption as positive as we’ve seen early on is executed anything but with excellence. So, we’re evaluating our next step.

Joe Altobello - Oppenheimer

Okay, great. Just one last one if I could; this is the first quarter I guess in quite some time where Western Europe growth actually out shift Americas growth, so as you look at our models going forward, is that the pattern we should continue to see that, that Western Europe should exceed Americas growth going forward?

Danny Erdreich

I think well obviously the U.S. is the leading market going forward and what we think longer term the U.S. will continue to lead the growth. We are very happy to see Western Europe growing as well. And I think we’d like to see both of them running head-to-head. We will more likely change from quarter-to-quarter and we’ll see how this develops. In the longer term obviously the U.S. will lead the growth. In certain specific quarter we could see that Western Europe is growing ahead of the U.S.

Joe Altobello - Oppenheimer

Okay. Thank you.

Daniel Birnbaum

I think one of the lessons Joe that you can see coming out of this quarter is that, first of all from a strategic standpoint at SodaStream we’re not abandoning the established markets and we’re not focusing exclusively on the U.S. even though the investment community tends to do just that. We see tremendous growth potential in many markets around the world particularly in Western Europe and we’re excited about them. And it's encouraging to us also that even after you’ve been in a market for decades you still are able to generate growth of 40% or more in this category because even there we’re just scratching the surface and the potential of the run rate is huge.

Joe Altobello - Oppenheimer

Very good point. Thank you, Daniel.

Operator

And we’ll take our next question from Bill Schmitz with Deutsche Bank.

Bill Schmitz - Deutsche Bank

Hi, guys. Can you just -- get a little bit more granular on Europe, because it was pretty good growth-on-growth and so kind of like what you did to kind of drive that great growth, was it maybe distribution; how much of it was sort of pre-shipment at Christmas, that kind of thing and then I have a couple of follow-ups.

Daniel Birnbaum

Hi, Bill. In Europe what we’re doing is we’re executing a strategy of positioning our benefits to the consumer in a locally appropriate way. So, it's not one benefit to all consumers around the world. To one it might be schlepping, the other might be consumer’s environment and other might be health and wellness. And we’ve focused in three markets in Western Europe for Q3, Germany, France and Italy. Italy was a turnaround story. We launched a campaign there. It was actually not only TV it was integrated, consumer focus campaign, telling the Italian consumers that they can have their sparkling water just the way they like it; because in Italy if you go into any store you will see three levels of sparkling water; high, medium and light and sometimes a fourth level. So the benefit of SodaStream being -- allowing the consumer to customize the level of carbonation is an important benefit in that market where consumption is so great of sparkling water. Then in, and we did that campaign as part of our re-launch in Italy when we took the business back. In Germany we did a no schlepping campaign, because Germans buy their sparkling water in bottles and that’s all they drink. About 80% of water consumption in Germany is sparkling water. They don’t drink the regular still or tap water. So, over there the relevant benefit is no schlepping. We did a TV campaign in Germany and it worked fantastically. By the way we piloted that test first in Austria, okay. So we’re not going to go ahead and launch a big campaign unless we feel confident that it can work. And France is executing brilliantly and getting more shelf space at existing retail. To your question there is no new material retail pipeline and there's certainly no stopping of anything of inventory ahead of holidays. This is very progressive, systemic growth and it's very focused on the consumer and not even on the trade, first of all on the consumer. Bill, I expect that growth with continue into Q4 and beyond.

Bill Schmitz - Deutsche Bank

Okay. That's very helpful. And then just on the U.S., can you just talk about where your display activity is going to be versus last year? So obviously you're super prominent Bed Bath, I just want to see if that's still in? And then QVC has been a great customer and like the last couple of months I think as relatively new customers, so did the trend of QVC continue? And then just maybe some of the split activity of both Walmart and Target for the holiday season?

Gerard Meyer

Hi, Bill. It's Gerard. Yes, we're set up for a very good Q4 in terms of merchandizing display activity. Bed Bath as you mentioned as you've already seen in the stores we've got incremental shelf space, permanent space for SodaCaps, for the Revolution machines, for some other new flavors including Ocean Spray. So it's set up with a lot more space in Bed Bath. We've got more space, secondary space that we didn't have a year ago in Target planned. We've got secondary space in Walmart planned. We were off the end-caps but we're going to have other secondary space location there. Frankly every one of our retailers, we're launching Macy's, Kohl's, all these guys and we're set up for a very good season in terms of our shelf space. I'm very optimistic about where we're going in the USA including 2014 because retailers are really embracing the category. So we're excited about that. In QVC and HSN we're working through the plans. It's not a big – it's almost a very little part of our business in Q3 and we're looking forward towards the plans to – we believe there's a lot of potential there, it's got to work for both of us in terms of the margins because there is margin challenges there. So we're working to that level. We feel that opportunity for QVC and HSN and that includes by the way a lot of our new co-branded flavors and syrups which we think is going to be very well embraced and to a great potential.

Daniel Birnbaum

Actually in Q3 we had more home shopping programs and we're working through the path of consumer offerings…

Gerard Meyer

For both HSN and QVC, correct.

Daniel Birnbaum

Bill to your question about how the U.S. retailer is responding to SodaStream and how we're positioned into Q4, I can tell you that when I go and meet our key account in the U.S. and not only in the U.S. but I hear enthusiasm and commitment to expand our partnership, there are hungry to grow with SodaStream and they understand that it's incremental business and it's exciting and it provides a soft benefit for the associated food environment and it's a healthy brand. And what we're seeing is a commitment to more open to buy and to more [indiscernible] and to more displays and trade features. We even see a desire and in practice we've seen coop TV advertising with big retailers, we've seen Walmart do that about a month ago. They want us to provide in-store demonstrations and TV monitors and more shelf allocation, it's a hunger for our product. And I can tell you that coming from companies like Nike and Procter & Gamble never have I experienced this type of enthusiasm from retail partners.

Gerard Meyer

And one more point. We don't buy this space, okay. When Best Buy gives us unsolicited support, they're doing that. When Walmart says that we're a momentum brand and they mention that in their investor meetings that's Walmart doing that. So there's a lot of great enthusiasm coming.

Bill Schmitz - Deutsche Bank

And the reason I asked is that I'm a heck of a time trying to model the geographic segments because with any given quarter, they fluctuate so dramatically and then I look at the comp for the holiday this year, I think U.S. comp is like 96.8 or something. So I just wonder like should we sort of boost [ph] up Western Europe and take Americas in terms of the growth because just for the base period differences, you know what I'm saying because it's really hard to kind of get the model correct just given the growth of this cycle?

Gerard Meyer

Well, right now you see that it was an exceptional quarter for Western Europe and as for the rest of the year and for Q4, I understand that we want to see out there the breakdown of revenue between Western Europe and the Americas. I think in general you can assume as always a strong Q4 in the U.S. and I think [indiscernible] we can share with you now.

Daniel Birnbaum

I'll add another point. If the Americas are about 30% of our total [indiscernible] we believe that that they will represent about 50% of our growth moving forward. And then take into consideration the seasonality that the U.S. has a stronger holiday season and it's a subsidiary market, so it should be reflected in Q4 while distributor markets in Europe for example, an important distributor market will be France, another one the Czech Republic. So those markets typically will have some of their holiday activity in Q3. So that might help you with some of the model.

Bill Schmitz - Deutsche Bank

That's super helpful. And then just one last quick one is Blaze [ph] product, I think it was Blaze, what's the price point?

Daniel Birnbaum

So you mean the Play?

Bill Schmitz - Deutsche Bank

Yes, the Play sorry. I thought you said Blaze.

Daniel Birnbaum

The Play is an entry level price point soda maker which is going to be priced at $79 and €79.

Bill Schmitz - Deutsche Bank

Okay, great. Thanks so much, guys.

Operator

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

John Anderson - William Blair

Hi. Thanks for taking the question. I had a question on advertising spending. As you kind of noted last quarter that would be up quite a bit in third quarter, was up about $6.5 million. Was that kind of in line with your expectation? And I think you said that you expected ads to be up about 8 million in aggregate in the second half of the year which would imply a significantly smaller increase in the fourth quarter and I just want to for modeling purposes understand if that's still kind of the best assumption at this point?

Daniel Birnbaum

Well, we did shift some of the ad spent into Q4, so we'll see that. But nevertheless our top line results for Q3 were as expected. So that's where we landed and for that reason I'm also pleased with the results of our advertising that we've done. Some of the additional spend which is about 7 million, almost 7 million that we did in Q3 was directed towards Italy. A chunk of it was directed Italy and Western Europe in general, Germany and about half of it was directed to the U.S. But overall it was not a very aggressive advertising quarter. We're saving some ammunition for Q4.

John Anderson - William Blair

Okay, that's helpful. Just a question again on CapEx that's come up a couple of times. I think earlier in the year, might have been Q1, Danny you had mentioned or guided to about $50 million in CapEx for the year and you've done about $25 million, $26 million year-to-date. Should we expect that to increase quite dramatically in the fourth quarter?

Danny Erdreich

John, first of all if you recall on the Investor Day I gave an overall estimate for the year of approximately 70 million including – the 50 million was the expulsion [ph] of the new factory but there are other investments still taking place right now in the company. So we see that it will be lower this year. We'll only invest 60% of it this year and therefore you shouldn't expect anything exceptional in Q4.

John Anderson - William Blair

Okay, great. Just one kind of longer term question around carbonation technologies kind of in general. Do you see kind of as you look out two, three, four years kind of the refillable kind of gas cylinder as the kind of predominant form factor or how are we thinking about maybe the form factor may change and/or kind of the way that the carbonation function has performed in the home, that'd be helpful? Thanks.

Danny Erdreich

To be clear contrary to rumors that are floating around, we at SodaStream believe that the way to get high carbonation is out of a compressed CO2 chamber and not any chemistry or other stuff that's going on there. And I said by high carbonation, carbonation worthy of a cola. And that is where we are. We are always looking at other possibilities but this is where we are from a technical standpoint and consumers certainly are not interested in chemistry at this point in time. They want clean, natural, easy. As far as chambers that are not returnable, kind of one-way cylinders, they exists, they're expensive. I don't think the consumer needs to be there right now. They're less environmentally friendly but as the category leaders we are aware of these technological advances, we're sensitive to them. If there is an opportunity to offer the consumer a one-way cylinder that makes sense, then we will do that. But right now that's not where the industry is headed and I don't think it will be there in the next few years.

John Anderson - William Blair

Thanks. That's helpful.

Operator

We'll take our next question from David Kaplan with Barclays.

David Kaplan - Barclays

Hi, everyone. I just want to know how should we think about the mix of sales going in to next year as your competitors your JV partners start entering the machine market there? I mean, clearly growing market where you guys control the CO2 distribution is of course a good place to be. But when we think about the refrigerators and we think about the KitchenAid and we think about the Breville’s, we think about some of those who aren’t JV partners of yours who are also expecting to launch some 60 liter CO2 products in 2014. What is that you guys are focusing on, I guess, both from marketing perspective and also from an advertising perspective as you’re leg up in the market and then like I said how should we think about that mix going forward?

Daniel Birnbaum

It’s too early for us to comment on next year. But I can tell you directionally growth will continue to come from our core business in Western Europe and the U.S. As far as competing products, I don’t really call them competing products, they’re complimentary products. All the competitors -- the serious competitors are entering this category in the United States are working with SodaStream, we’re enabling their entering into this business. We’ve announced their brands, whether it’s a KitchenAid and the Samsung which you are aware of and there is others. So we welcome these, we want them, we want more consumption -- we want more normalization of the category and a kitchen should not be complete if they don’t have a soda making device in it and I don’t really care if its from KitchenAid or Breville or SodaStream, because at the end of the day our gas is our gas and that’s where we’re so strong and where we’re leading and we have such a fantastic mote [ph] not only in the U.S., but worldwide. So that’s how we look to the future and that’s why we welcome partnerships and we don’t call them competition.

Gerard Meyer

Just on top of that David, the household penetration is still quite low. There is so much upside opportunity not only in the U.S., but worldwide. That the entry of competitors as you call them more as Daniel has said complimentary products that we’re supporting is clearly something that we see as opportunity for our growth, otherwise we wouldn’t establish those relationships. It will be growth of the category, which will directly lead to growth for SodaStream.

David Kaplan - Barclays

Okay. I mean, right to be fair I did, I called them competitors/JV partners, because they’re -- you do have both of those, but -- now just one more follow-up question if I can, if we can go back, I know there has been some questions about this already, but if you can go back to A&P spend, it seems like there was a nice focus and it helped in Europe during the third quarter and I know you guys kind of laid out in the previous conference call after last quarter how you expect A&P split. But are you seeing a significant ROI on every dollar spend on advertising that may be its making you think that although I know Daniel you’ve said in the past how proud you’re that of the advertising spend that you spend in a year, some of your larger competitors spend that in a day. Are you thinking that may be ramping that up might make sense at this stage of the game, particularly in the United States?

Daniel Birnbaum

The answer is yes, but we will only do that if we’re convinced that the impact of TV or whatever advertising vehicle we choose will have a good ROI. And just a word on how we’re thinking about marketing. We unlike traditional marketers who really look at the budget and think that the budget is going to drive sales, we’re more looking at the quality, of the content, the messaging and right now we’re at that stage of a brand which is graduating from infancy into maturity. And to do that from a marketing standpoint to close the gap between trial, which is 1% or 2% in the state all the way to awareness, which is close to 40%, it’s a huge gap, how do you close that gap? You do something that’s called normalization. You turn the category into a normal category. Everyone has to have it is okay, its not just some specialty or god forbid a niche or a gadget, it’s a normal everyday kitchen appliance and everyday beverage and its right for everyone. So that’s the challenge we’ve right now and money won’t solve that. But the quality of our messaging will solve that. How we look at retail, monster displays, the right premium retail locations that displaying our product, 60 flavors on shelf, partnerships powered by SodaStream and of course messaging and celebrities talking about it, that’s the space we’re in more so than, okay how much monies that we have to take out of our -- out of our pocket. But that said, once we have the formula tight and we feel good about it, we will not hesitate to accelerate spending.

David Kaplan - Barclays

Okay. That’s it from me. Thanks, guys.

Daniel Birnbaum

Thank you.

Operator

And we will take our next question from Greg McKinley with Dougherty & Co.

Gregory McKinley - Dougherty & Co. LLC

Yes. Thank you. So sorry to beat a dead horse here, but on CapEx -- so it sounds like it’s going to be lower than the initial plan of 70 million this year. I’m wondering may be could you just give us a number what will that be, will it be 50 million, 60 million? And then can you help us understand why the push out in that project?

Danny Erdreich

Well I said Greg its -- we’re going to spend eventually approximately 60% of it this year. The shift is just a prioritization of investments within our current plan and I also said just to remind you -- I also said that the overall plan is to have the factory open as early 2015 and we don’t catch on this regard. So it’s just a shift of activities and more jobs within our investment plan that the change in this shift approximately 40% of the plant investment of this year into next year.

Daniel Birnbaum

Let me put it in layman terms. We are not going to buy the machinery until the platform and the infrastructure is in place. So it’s that type of timing, but if you look at the project over the two years that’s going to take to build this thing from A to Z, it will be to put the investment we anticipated.

Gregory McKinley - Dougherty & Co. LLC

Okay. And so you’re saying 60% or -- that you’re basically saying 60% of the 70 million that you projected will be CapEx this year?

Danny Erdreich

Yes, that’s the general plan.

Gregory McKinley - Dougherty & Co. LLC

Okay.

Danny Erdreich

Again, timing that’s (indiscernible) …

Gregory McKinley - Dougherty & Co. LLC

Yes, so secondly can you talk about little more on Western Europe? Was there -- I know you’ve launched the source there I think in some of those markets in July, were there particular products that stood out or contributed to that growth or would you just say it was general market growth broadly?

Daniel Birnbaum

I think it was the brand that grew not a product, because in each one of the markets it was a different product that we highlighted. So therefore it’s just -- it’s really the brand and the brand concept and not a particular soda maker model or syrups. And if I look at the three major leading markets, each one would be a different soda maker that led the growth.

Gregory McKinley - Dougherty & Co. LLC

Okay. Okay. And then can you just give us a big picture perspective on -- in your major geographies, how do you guys feel about inventory channel positions versus point of sale trends as you head into the holidays. Do you feel like inventories are where you want them to be or are there couple of markets where they’re either wider or heavier than you would care for them to be?

Gerard Meyer

Well, in general obviously we are working in 45 countries. So some of them hold -- may hold the lieu too low inventory, some may hold little more. But in general, we believe that our retailers and obviously our markets, our distributors are holding the -- are planning and holding the sufficient inventory to open Q4. We also have orders in place for them as planned. So in terms of inventory management, I feel very comfortable about our position in this regard.

Daniel Birnbaum

One unusual situation is Italy. You remember the transition into Italy. Right now we’re selling inventory that we acquired from the distributor and we’re not taking full margin on that inventory. We are only taking the portion so that we don’t double account profit; we are only taking the margin on that inventory which is the distributor margin.

Gregory McKinley - Dougherty & Co. LLC

Yes.

Daniel Birnbaum

It will take us until about the end of this year to work through that and then we will have the full credit of margin sold from Italy starting early next year. Other than that, I also can’t think of anything that’s unusual. I think the inventory situation worldwide is good getting into the holidays and there is nothing unusual.

Gregory McKinley - Dougherty & Co. LLC

Okay. And then finally Asia, so we saw some maybe fits and starts initially with getting the doors in Japan rolled out on time, then it seemed like may be there was some improvement in that -- in the June quarter. What are some of the specific problems that you’ve encountered? Is it truly just distributor operational or is it retail partner permitting, I know that’s been an issue in the past?

Daniel Birnbaum

No. We did have a challenge getting the door count up, because in Japan regulation requires every single store, not every single account at a headquarter level, but at the store level to base -- to go through the process on the paperwork required to be able to carry our HAZMAT cylinders and exchange them. It's a very paperwork intensive regulatory situation. That said that's not an excuse for not doing it and not stepping on the accelerator there. We have about 1,000 doors in Japan or less and that's not acceptable in a country of 123 million population. And of course the marketing spend has not been sharp enough, the PR is very light. We have less than 1 million PR impressions a month, it's just not acceptable. There has to be a change over there and I'm not going to appear to draw a beautiful picture. Our execution in Japan is not acceptable and we have to correct it, but it is not indicative of a problem with the Japanese retailer or the Japanese consumer. And we will correct this.

Gregory McKinley - Dougherty & Co. LLC

Yes, okay. Great, thank you. And then just the last question. I think you added some distribution I believe in Kroger maybe a couple other accounts in Q3. What's your door count in the U.S. right now?

Gerard Meyer

Our door count in the U.S. right now is about 16,000. We actually shipped Kroger and Office Depot and P.C. Richards at the very end of Q2 but we actually showed us in Q3 for the shelf space in Q3.

Gregory McKinley - Dougherty & Co. LLC

Thank you.

Daniel Birnbaum

Thank you.

Operator

We'll take our next question from Jim Chartier with Monness, Crespi & Hardt.

Jim Chartier - Monness, Crespi & Hardt

Good morning. I'm curious how much more marketing investment you can make in Europe going forward to keep the strong momentum going?

Danny Erdreich

Jim, it's Danny. We don't do the specific investment of each of the items in each of the regions. In general we are obviously allocating the majority of our A&P to the U.S. and in Europe we like our A&P spend. Our A&P budget for the year is not changing and just as we said before, most of it or the lion's share is going to be allocated to the U.S.

Jim Chartier - Monness, Crespi & Hardt

Okay. I believe last quarter you said advertising spend would be up $8 million in the back half of the year, is that correct?

Danny Erdreich

Correct.

Jim Chartier - Monness, Crespi & Hardt

And it was up $6.6 million in third quarter.

Danny Erdreich

Yes.

Jim Chartier - Monness, Crespi & Hardt

So how much – I think you said that there was some shift at the fourth quarter, I mean how shifted into fourth quarter? Was all that incremental plan for third quarter then?

Danny Erdreich

[Indiscernible] direct answer on the direction here in this regard, what we said about A&P for the year was that it's going to be slightly under the rate of A&P to revenue we've had in 2012. The 2012 A&P to revenue was 17%. You can assume that it will be slightly less and we didn't specify the exact number. And you know how much we did in A&P in this quarter we said was approximately $22 million, so the rest of the majority should be in Q4.

Daniel Birnbaum

There's about a 2 million shift from Q3 – almost a 2 million shift from Q3 into Q4.

Jim Chartier - Monness, Crespi & Hardt

But that's not different from what you were planning three months ago.

Daniel Birnbaum

For the back half, it's not.

Jim Chartier - Monness, Crespi & Hardt

Okay. And then what's going on with the Nordics, you haven't talked much about that recently?

Daniel Birnbaum

Yes, the Nordics are growing versus last year, so they're actually getting a turnaround following the acquisition of the distributor there a couple of years ago almost. There's not a lot to say otherwise I would say, but it's growing and it's on track. It's not outstanding and it's not lagging. It's just a good growth, solid growth market, so a lot of potential there by the way and especially in markets like Finland. Sweden is more mature than Finland and Norway, but Finland is performing exceptionally well within that cluster of countries. And Denmark and Norway are also doing very nicely.

Jim Chartier - Monness, Crespi & Hardt

Okay. And then the Play looks to be at the same price point as to Jet, how are you going to position those two going forward?

Daniel Birnbaum

Well, we're dealing with that right now. It's a little bit too soon to say. We believe that over time the design equity of SodaStream will be around the design concept of the Source soda maker. And the Play resembles that. The Play is basically a takedown or a reduced feature to reduced price of the Source. So ultimately our whole range will look like that. But we still have to work through the details and see how we evolve into that situation because the Jet is a great soda maker and it's really a working horse right now. So we want to retain its place within the range. And we're still dealing with that transition.

Jim Chartier - Monness, Crespi & Hardt

Are there any thoughts to go below that $79 open price point on machines?

Daniel Birnbaum

Eventually we will have much less expensive soda makers as we get into mass market. Part of the pack of being a mass market product is having price points that are more achievable. My dream is to have a $49 price point. I think if we had that price point at Walmart we would be selling a tremendous amount of soda makers and we need to build another factory. But we're not there right now and we have so much runway ahead of us that we have to take it one step at a time. We also don't want to erode pricing and profitability in the category too fast and we do want to preserve the lifestyle positioning of this category and not be too cheap in perception too fast. But to your question, yes, we do want to afford the consumer less expensive price points so that they can enter this category and get into the business of soda making at home.

Jim Chartier - Monness, Crespi & Hardt

Great. And then finally the non-U.S. portion of the Americas looks like it's been relatively lumpy the last three quarters growing 10% plus or minus with the U.S. or being 10% less than what the U.S. has grown from quarter-to-quarter. So how should we think about that going forward?

Daniel Birnbaum

Well, it's a portfolio of countries. We're in Canada and Brazil and Colombia and Chile, some of them are growing better, faster than others. I can say that Canada is performing very well, exceptionally well while the Latin American markets are lagging. But when you have a lagging market that's as big as Brazil [indiscernible] potential and we need to also allocate some focus and attention to it as we've done with other markets such as Italy.

Jim Chartier - Monness, Crespi & Hardt

Great, thank you. Best of luck.

Daniel Birnbaum

Thanks a lot.

Operator

We'll take our next question from Scott Van Winkle with Canaccord Genuity.

Scott Van Winkle - Canaccord Genuity

Thanks. Basically all my questions have been asked. If I could just ask a follow-up on the recent talk about Japan a couple of questions ago, how significant is Japan as a percentage of that Asia-Pacific and you talked about Korea, Australia, New Zealand being up with all of the decline driven by Japan?

Danny Erdreich

The maturity of the decline naturally in Japan was really the main market in this region and it came unfortunately not so material at this point in time. Right now where we see other markets like Australia and New Zealand and Korea, this has been very well in this region but [indiscernible] in Japan as Daniel described mainly due to issues related with the strength of the distributor is only in this region [ph] down eventually. It's mainly Japan now and Japan is our challenge to fix going into next year.

Scott Van Winkle - Canaccord Genuity

Great, thanks. And if we think about distributed markets after the repurchase of Italy last quarter, can you give us a rough percentage of sales that self distributed versus third parties?

Danny Erdreich

Yes, distributors are right now standing at only 20% of revenue and now with 80% and more actually going through internal sales, distributors are less material.

Scott Van Winkle - Canaccord Genuity

Great. Thank you very much.

Danny Erdreich

Thank you.

Operator

We'll take our last question from Phil Terpolilli with Longbow Research LLC.

Philip Terpolilli - Longbow Research LLC

Hi, guys. Good morning. Just two quick questions and I appreciate all the color this morning. Can you talk about the ad campaigns you've done around consumables? I think on the last call you mentioned, you started to do ad specific campaigns around them. Just trying to understand how the consumers have reacted to these versus what you've expected?

Gerard Meyer

Yes, this is Gerard. The campaigns we've done is not around consumables, I mean we certainly mention our Kraft products but it's still about the category in the system and it's just saying, hey, now you can use the SodaStream to bubble up your Kool-Aid and Country Time and Crystal Light which we'll continue to do things like that. But the focus is household penetration. Including consumables in the campaign is really targeted as the normalization strategy, because the big brands that I grew up on and I know and love are partnering with this thing, SodaStream and its probably okay. And that’s really what’s driving this association with brands like Kool-Aid, Country Time to select and you’re going to see pretty soon a campaign with Ocean Spray, which is -- it’s a beautiful campaign and it uses their equity, their talents, their [indiscernible] and we’re very excited about that. It’s really taking the partnership to the next level and all in that with the purpose of normalizing the category of home soda.

Philip Terpolilli - Longbow Research LLC

Okay. That’s helpful. And then just one last question related to the inventory draw downs. I guess two parts. One, I’m trying to understand why its just flavors that are being drawn down by the retailers. Can you help we understand that? Then I have a follow-up.

Daniel Birnbaum

You mean the inventory adjustment?

Philip Terpolilli - Longbow Research LLC

Right. Why the soda makers aren’t being drawn down as well by the retailers?

Daniel Birnbaum

Well, I think they are. Gerard, may be you can give some highlight -- specific highlight into what’s going on in the U.S. inventory reduction.

Gerard Meyer

Yes, I think it’s across the board. It’s not just flavors, I think flavors is a stronger part of it, because the number of SKUs they’ve right and concerns about expiration dates and all that. I mean, machines that have an expiration dating, but it’s across the board. In flavors by the way I think Daniel mentioned that in the first half we had a lot of pipeline. The Kool-Aid if you may recall we only introduced in Walmart at the end of last Q4, where we then proceeded to roll it out to all of our accounts during the first half of the year. Same thing we put with Lemonade, which is actually the biggest Crystal Light flavor and that was also introduced in the first half. So there is the pipeline as well.

Daniel Birnbaum

In some cases the inventory reduction on soda makers were so extreme that I personally experienced in my retail towards that they were occasion where I could not find the soda maker on the shelf. So -- and that of course would impact the NPD performance, because the consumer can’t buy a product that’s not on the shelf. So yes, the inventory reduction was across the board not only on the flavors.

Philip Terpolilli - Longbow Research LLC

Okay. Yes, I’m just trying to understand too and I guess the second part of that question I think you mentioned earlier NPD data was up about 12% for soda maker sales for 3Q, it shift I think just over 30% in the U.S. So why that maybe destocking may not continue in the 4Q or if you’re kind of expecting an acceleration in soda maker growth maybe from the incremental advertising spend, just trying to understand that?

Daniel Birnbaum

Well, one important fact is to remember the base. The NPD sellout growth rates for Q3 are lower than Q2 because Q2s comparison included three months of Walmart in 2013 versus only one month in 2012.

Philip Terpolilli - Longbow Research LLC

Got it. Okay. And then just one last thing if you don’t mind, just remind us again what percentage of the business you think flows through the track data versus non-tracked? Thanks.

Gerard Meyer

In the NPD sellout data, we don’t break that out, but there are a few key retailers that are not of ours, that are not in NPD such as Bed Bath & Beyond and Costco. And then we’ve almost a 1,000 independent stores, but we don’t specifically break out the split.

Philip Terpolilli - Longbow Research LLC

Okay, perfect. Thank you.

Daniel Birnbaum

Thank you.

Operator

And that does conclude today’s question-and-answer session. I’d like to turn the call back over to the speakers for any closing or additional remarks.

Daniel Birnbaum

Well, thank you everyone for your time. I’d like to take this opportunity to wish you all a great holiday season and I can guarantee you that it will be even better if you enjoy SodaStream cranberry soda during these holidays. Thank you very much.

Operator

And that does conclude today’s conference. Thank you for your participation.

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