SodaStream International's (SODA) CEO Daniel Birnbaum on Q2 2014 Results - Earnings Call Transcript

SodaStream International Ltd. (NASDAQ:SODA)

Q2 2014 Earnings Conference Call

July 30, 2014, 8:30 AM ET

Executives

Brendon Frey - IR

Daniel Birnbaum - CEO

Scott Guthrie - General Manager, Americas

Danny Erdreich - CFO

Analysts

John Faucher - JPMorgan

Wendy Nicholson - Citi Research

Joe Altobello - Oppenheimer

Bill Schmitz - Deutsche Bank

Jon Andersen - William Blair

Phil Terpolilli - Longbow Research

Tony Brenner - Roth Capital Partners

Jim Duffy - Stifel

Akshay Jagdale - KeyBanc

David Kaplan - Barclays

Greg McKinley - Dougherty

Operator

Good day. My name is Tina and I will be your conference operator today. At this time, I would like to welcome everyone to the SodaStream International Second Quarter Fiscal 2014 Earnings Conference Call. Today’s call is being recorded.

I would now like to turn the call over to Brendon Frey, please go ahead.

Brendon Frey

Thank you, and welcome, everyone. Today’s call will consist of prepared remarks from Daniel Birnbaum, our CEO; and Scott Guthrie, our General Manager, Americas Region. 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 is Danny Erdreich, our CFO. 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 the 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. 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

Thanks, Brendon, and welcome to everyone joining us. This is the first time someone other than Yonah has read the Safer Harbor language at the start of our earnings call. As many of you know, Yonah recently left SodaStream to take a similar role with Mobileye, an Israeli-based automotive safety company that recently filed to go public on the New York Stock Exchange.

I want to take this opportunity to thank Yonah for his many contributions during his four years with SodaStream. We wish him all the best.

Now, to the second quarter. Our performance was similar to the first quarter as we delivered solid results outside the U.S., partially offset by continued softness in the States. Overall, revenue was $141 million and earnings per share were $0.43. Our performance was highlighted by record gas refills, coupled with solid soda maker and flavor unit growth in Western Europe, Asia Pacific, and CEMEA.

In total, gas refill units increased 17% to a record 6.5 million, flavor units increased 9% to 9.3 million, and soda maker units were down 16% to 785,000. This equates to the equivalent of 1.1 billion cans of soda generated by SodaStream worldwide during the second quarter.

Excluding the U.S., which is currently going through a turnaround, revenue increased 20% with gas refills up 20%, flavor units up 21%, and soda maker units up 4%. These figures are a good indication of the strength of our business outside of the U.S. and of the potential of home carbonation system worldwide.

Looking specifically at the U.S., the softness was mainly attributable to our demand creation efforts, which were not as effective as expected, combined with the fact that most retailers are still carrying excess soda maker inventory.

For the quarter, compared to the same quarter last year, gas refills increased 7% to 1.3 million, flavor units decreased 11% to 2.7 million, and soda makers were down 55% to 139,000.

While these numbers were disappointing, there are some underlying trends that paint a clearer picture of the state of our current business and some key learnings from the second quarter that leave us optimistic about our future prospects in this large and important market.

First, according to NPD sell-through of gas refills, which we believe is the best measure of consumer usage, was up 28% in the U.S. for the second quarter, underscoring that consumers who own a SodaStream remain active.

Second, while soda maker sell-in and sell-through were negative for the quarter, down 55% and 31%, respectively, those figures include home-shopping events in the year-ago quarter, which we chose not to repeat against this year. Excluding home-shopping, sales were still down, but nowhere near published levels. Sell-in was down 15% and sell-through declined 16%.

Third, we clearly have the opportunity to improve consumer demand by focusing our messaging and utilizing tried and tested media platforms. While we still have work to do when it comes to improving our product and marketing strategies, which Scott will outline in a moment, I believe we’re making progress towards getting soda maker sales back into positive territory and re-accelerating household penetration in the U.S.

In Western Europe, revenue increased 14% to $78 million, marking the 19th consecutive quarter of double-digit growth. Success in our largest and most established region comes from years of building brand awareness, improving execution, and honing our message of the consumer benefit that best resonates with each individual market and developing a strong message around it that drives consumers to purchase.

Germany is a great example of how we’ve built the business or, in this case, rebuilt the business. When I joined the company in 2007, Germany, a market that SodaStream has been operating in for decades, was in a period of decline due to a lack of product innovation and virtually no consumer marketing. As a result, the brand fell out of favor and lost its lifestyle positioning. We installed new local leadership and did a great deal of consumer research in order to better understand how we could win with the consumer and expand our share of the carbonated beverage market.

We found that Germans most enjoyed convenience provided by our system. SodaStream represents a great alternative to lugging heavy bottles of carbonated water home from the supermarket. We developed, tested, and introduced an ad campaign called Perfect Water Without Schlepping (Foreign Language) that highlights this consumer benefit.

At the same time, we simplified the product offering by reducing the number of soda makers to just two; the glass bottled, higher priced Crystal, and the award-winning, more accessible plastic bottled Cool soda maker. The response to these actions has been terrific.

Germany, a market where 85% of our consumption is sparkling water, has been growing 20-plus-percent per quarter for the last year, and active household penetration moved up from 3% in 2009 to 6% today with plenty of runway for continued growth. I want to congratulate our team in Germany, who like their national soccer team, are world-class.

The formula has been replicated in other markets like Finland where the convenience of SodaStream, as well as our environmental benefits are central to our consumer messaging. Household penetration in Finland is currently north of 20% and still expanding with consumers using our system equally for making sparkling water and flavored beverages.

In France, it is still early in the brand’s growth cycle, but we believe the fun and excitement that SodaStream provides the whole family is what’s led to strong adoption of SodaStream out of the gate and to 4.1% household penetration within six years of launching. Here we have three markets where we discovered different individual consumer benefits important to these markets, each which has delivered fantastic growth in a relatively short period of time. We think we can apply these learnings successfully in the U.S. in the months and years ahead.

Before moving on, I wanted to provide an update on our strategic partnerships, beginning with Samsung, which continues to expand distribution of their carbonated refrigerators powered by SodaStream to new markets in Europe, including Germany, France, U.K., Austria, Sweden, Finland, Denmark, Norway, and more recently, to Russia and Slovakia.

In addition, Del Monte became our first flavor partnership outside the U.S. We are producing a line of high-quality, great tasting flavors that are now on shelves in the U.K. and in Italy. During the second quarter, we began shipping the first KitchenAid Soda Makers, powered by SodaStream, to retailers in the U.S. and Canada, and will be expanding availability of this great looking product to Western Europe and Australia in the back half of the year.

Finally, we are pleased to announce that we recently signed a strategic partnership with Groupe SEB, the leading worldwide manufacturer of small domestic appliances and cookware under several innovative brands such as All-Clad, Krups, and Tefal. We are now the official gas supplier for their Tefal home soda maker, which will initially be launched in Europe later this year. This is a great vehicle for further strengthening our gas franchise.

All of these strategic partnerships are further proof that SodaStream is the platform of choice for leading brands who want to successfully participate in the fast-growing home carbonation category.

Turning to Asia-Pacific where revenue increased 13% to $12.2 million due mainly to the ongoing strength of Australia. This is a market where we have new leadership that is executing extremely well, particularly when it comes to retail and consumer engagement.

Our in-store presence with accounts in Australia is as strong as any market in the world. Our point-of-sale materials, combined with creative marketing efforts, do a great job highlighting our premium brand position and the benefits of our system, including consumer empowerment, which has proven to be the most attractive feature of SodaStream in Australia.

In CEMEA, revenue jumped $4.3 million or 71% to $10.4 million as the Czech Republic continued to rebound following last year’s challenging market conditions, while newer markets like Poland have started to make inroads establishing distribution and contributed towards second quarter performance.

I’m now going to turn the call over to Scott who will discuss the Americas in more detail.

Scott Guthrie

Thanks, Daniel. It’s a pleasure to be on the call. It was a challenging quarter in the Americas, due primarily to ongoing soda maker headwinds in the U.S. Americas revenue was down 14% to $41 million, compared to $47 million last year. Internally, we expected consumer demand to accelerate as the quarter progressed driven by additional shelf space, price actions, marketing programs, and new product launches.

While the launch of our seasonal hotspots in approximately 1,500 Wal-Mart doors contributed positively to our second quarter results, they were not as impactful as we had planned. At the same time, our demand creation efforts did not fuel sell-through across the remainder of our retail network to the extent that we had anticipated, and that is the root of our current challenges in the U.S.

Our recent demand creation efforts have focused on value and that message is clearly not resonated with consumers. We have now provided a compelling reason to buy a SodaStream machine as we’ve done in Germany with our No Schlepping campaign or, in Finland, with our environment message.

Our system offers several consumer benefits such as value, convenience, empowerment, environment, and health and wellness. Through the years, we’ve touted each benefit through various mediums in order to reach different consumer groups, and until recently had success converting early adopters. We believe at this point in our life cycle that we must hone in on the most compelling consumer benefit if SodaStream is to take the business from early adopters to the next level and accelerate household penetration in the U.S.

What we found is that health and wellness is top of mind with consumers, and it’s clearly the leading megatrend in the U.S. when it comes to carbonated beverages. You don’t have to look any further than Big Soda to know this is true.

CFE volumes continue to decline as consumers are finally taking a stand against traditional packaged soda and are seeking better solutions for them and their families. Clearly, consumers are fed up with nine teaspoons of sugar per can of soda and the use of artificial sweetener, Aspartame. With healthier, more natural, less caloric flavors, SodaStream is the solution, and this will be the main focus of our consumer messaging in the U.S. and Canada in the back half of 2014.

In addition to communicating our health and wellness position, we must, of course, be sure our product delivers on this promise. We are actively working on launching new flavors that contain healthier ingredients, including natural sweeteners, such as Stevia, Monk fruit and others.

To that end, in select European markets, my counterparts recently introduced the SodaStream Free, our newest line of flavors that are lightly sweetened and contains 40 calories per eight-ounce serving, which is less than half the calories in an equivalent portion of Coke. The consumer response has been extremely encouraging.

In Finland, Free now represents approximately 20% of our flavor sell-through volume after only eight weeks at retail, which bodes extremely well as we get set to launch Free in the U.S. during the back half of the year.

We are also growing our current distribution and are getting ready to roll out additional retailers in premium grocery and convenience channels that will help reinforce SodaStream status as the premium, yet accessible healthy lifestyle choice in the beverage category.

Going forward, we are confident that we can get both our machine and consumables segments back on track by doing a better job of clearly communicating the key health and wellness benefits of our system to new potential customers and leveraging our existing and new points of distribution to drive accessibility.

I’ll now turn it back to Daniel.

Daniel Birnbaum

Thanks, Scott. As you just heard, there is a lot underway to turn our U.S. business around, and while we’re confident these actions will have a measurable impact on our future performance in the U.S. and our ability to grow household penetration, it will take some time for these initiatives to be implemented and take hold. In the near term, we expect sales trends for soda makers to remain challenging in the U.S. during the second half of the year.

Based on current visibility, we have decided to adopt a more conservative outlook for the year and now expect revenue to increase approximately 5% over our 2013 revenue of $563 million compared to our previous expectations of approximately 15%.

With respect to regional performance, we now expect the Americas to decline in the low-teen range with our other three regions still projected to grow in the mid-teen range. In terms of quarterly breakdown, the weighting of second half revenue should be similar to last year’s Q3 and Q4. For the full year, gross margins are still projected to be similar to 2013 levels of approximately 51%.

Based on lower revenue projections, partially helped by a $13 million reduction in A&P expense compared to our previous outlook, full-year EBITDA is now expected to increase approximately 5% over 2013 levels, down from 11% previously. Net income is projected to decrease approximately 5% over 2013 levels compared to our previous outlook for growth of approximately 3%.

Excluding the impact from the changes in FX, including a stronger shekel versus the U.S. dollar and weaker currencies versus the U.S. dollar such as the Australian and Canadian dollar, EBITDA is now projected to increase approximately 17%.

While 2014 is providing to be a challenging year for our U.S. business, I think it’s important to remember that Western Europe, Asia-Pacific, and CEMEA, which together represented over 70% of Q2 revenues and an even greater percentage of Q2 profits, are all performing well. At the same time, we are not losing sight of the huge opportunity in the U.S. and continue to be very confident in our ability to expand household penetration and establish a large and active user base in the U.S.

Health and wellness is increasingly playing into U.S. consumer lifestyle choices, including almost all of their food and beverage purchase decisions and no one is better positioned to own the healthy carbonated beverage market than SodaStream.

The consumer is driving the transformation of the beverage industry and it’s the innovators that have the freedom to shape the future as we are not tied down by the past. It’s definitely an exciting time to be involved in the U.S. market.

To close, I want to share some exciting news. Our factory in southern Israel is now operational with over 200 employees working on-site, primarily assembling soda makers. Moving forward, we’ll be rapidly expanding the workforce and the factory’s range of capabilities and we look forward to benefiting financially from the improved efficiencies and cost savings that will come once the new factory is fully up and running in 2015.

Operator, we’re now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from John Faucher, JPMorgan.

John Faucher - JPMorgan

Why don’t you to talk a little bit about the comments in the U.S. and how we should view sort of the long-term profit outlook there? Obviously, you’re going to be changing the advertising strategy, is this the one where you say there’s going to be need to be continued longer term investment that’s going to keep the margins from looking more like the margins on the rest of your business, or is it something where you say -- you obviously - we have a little bit of opportunities now what we thought and you are more willing to drive some of that margin improvement as you shift demand more into the consumables, the retail flavors et cetera?

Daniel Birnbaum

John, before I hand this over to Danny, good morning to you, I just want to make a general comment. This is a case of quality over quantity. It’s really about getting the messaging right and we’re excited about what we’ve discovered and the opportunity around health and wellness, and now we need to execute with tremendous focus and creativity to use the precious A&P money we have in a very effective way, but then if you want to comment more specifically, please do.

Danny Erdreich

Yes, I think, John, this is the answer. It’s not that we are taking the direction of savings on A&P in this way sacrificing the longer term. We’re just aiming to be more focused and more efficient and create better ROI on each dollar we spend on A&P and this is really the direction.

John Faucher - JPMorgan

And then, I guess a more general question, how should we view the sort of glide path to better profitability in the Americas segment then? What’s - as we look at it because obviously your margins there are going to - sounds like they are going to continue to be dramatically below the rest of the business, but is there some sort of foreseeable future where you can see margins getting more normalized in the Americas or is it going to be a long time?

Danny Erdreich

Well, first of all the U.S. and the Americas are profitable, they’re making profits now, and we obviously have the ability to increase profitability in the U.S. and reach the level that we see in other regions. We’re still in growth mode in the U.S. We’re still selling relatively high portion of soda makers in this country and the region, and as long as we are growing, profits are going to be under other regions where we have higher rate of consumables.

But in the longer term, we obviously aim to reach the same level of profitability that we have in other regions and you know we have markets that are providing us more than 25% operating profit margin after, of course, more years in action in the U.S., but there is no reason why the U.S. won’t be under that.

Operator

The next question comes from Wendy Nicholson, Citi Research.

Wendy Nicholson - Citi Research

Two questions, first on, are the things that are happening in Israel today representing a potential risk to your supply chain and what are you doing to sort of mitigate that to the extent things deteriorate? And then, second thing, the decision to pull back from QVC in the second quarter, it strikes me that that’s a very effective channel to convey the health and wellness concept without a lot of incremental marketing dollars, so can you talk about your rational there and what your outlook for the QVC channel is for the back half? Thanks.

Daniel Birnbaum

Hi, Wendy. I’ll ask Scott to address the QVC question and then I will come back to the general situation in Israel.

Scott Guthrie

Wendy, QVC has been a great partner and certainly a terrific medium and platform to tell consumers about our products. What we found, without getting too far into the equation, was it just wasn’t the right economic deal for us at that point in time and they’re very transactionally based retailer and partner, and we’re looking to comp different things that have been done in the past and we just didn’t feel like we had the right economics in place, or for that matter, the right story.

So not to say that we won’t do business with them again, of course we will. We value their partnership and we believe that they will be an important component of our business, but as with any deal particularly when it’s transactionally based, it’s got to be the right deal for us to execute with them.

Daniel Birnbaum

Regarding the situation in Israel and whether or not it reflects the risk to the supply chain, I will take this opportunity, first of all, to thank all of those among you who have expressed concerns for the safety of our people here at SodaStream and Israel. I appreciate that very much.

It is true that we are going through a very visible and uncomfortable conflict right now where there are rockets that are flying around the country. Thankfully the Iron Dome is doing a fantastic job at shooting, I think, each and every one of those rockets that were aimed towards populated area, such that not one of them fell in any of the regions. So mostly we’re subject to these alarms where our people in the factories and the headquarters go to a safe area and then within a minute or two after that they get back to work.

Our three facilities have had these alarms, but I can tell you that we’ve not lost a single shift, we’ve not missed a single shipment, and there is something here in the resilience of the people who are either it’s a matter of getting used to this unfortunate reality or it’s just not giving up and continuing to do what we need to do. We don’t stop.

From a business risk standpoint, I don’t think there is any increased risk for production that’s going on in Israel vis-a-vis any other place in the world and whether it be China or the U.S. or Europe where we also have facilities, and we also have enough flexibility to be able to cover for each other on most product lines.

So I would sum by saying, no increased risk here, only the perception that you might see by watching TV, so maybe watch less TV and come visit us here in Israel by the way, if you come, you’ll experience and you see the production in action and this nation of incredible people who just don’t give up.

Operator

Our next question from Joe Altobello with Oppenheimer.

Joe Altobello - Oppenheimer

First question, just going back to the U.S. for a second. Obviously, you are shifting the advertising focus here towards health and wellness, but how quickly can you make that pivot, and when do you expect we’ll see some of those ads focusing on that concept? Obviously, you’ve got Free coming out in the second half in the U.S. from a product standpoint, but how quickly can you pivot the marketing effort there?

Daniel Birnbaum

Hi, Joe. First of all, we did include some images of the Free line in the 6-K that we filed, so you might take a look at that and get a sense for the natural element in this product line. We are launching that very soon. I’ll let Scott get more specific in a moment. As far as the messaging goes, we are still developing the details of the messaging.

The initial media will probably be around digital and also public relations activity. We’ll also be working with Scarlett Johansson in communicating that message, but I’ll let Scott be more specific about the timing of the rollout of both the product and the messaging.

Scott Guthrie

Sure. So we have over 10 SKUs that have been launched this fall that will allow us to platform and amplify the health and wellness message. The reality is we’ve been transitioning into that message for the last month or two and in fact here on our website you can see some of the elements of how this campaign is going to shape up. It’s certainly a natural feel and a natural look to our products, and we believe with our launch of the 11 SKUs coming this fall that we’ll have a great opportunity to amplify this across social media and other mediums.

Joe Altobello - Oppenheimer

And then, just shifting gears a little bit to holiday. Obviously, it’s still July, so it maybe a little bit early here to think about holiday season, but when do you guys start to discuss shelf sets for holiday, and would expect an expansion in shelf space this year?

Daniel Birnbaum

The reality is it’s an ongoing conversation, but probably was held in earnest back in March at IHA with our core retail partners. So these shelf sets that are being discussed or being implemented now were being formulated back in February and March. So we continue to move forward on those plans and obviously each retailer has got a subset of circumstances going on, but all are actively engaged and trying to figure out how to grow their business and I can say unequivocably that our partners are very engaged in the category right now.

Joe Altobello - Oppenheimer

Are you encouraged with the shelf space that you’re seeing?

Daniel Birnbaum

It’s not that we lack shelf space, we just need to - we need improve our throughputs on those, and I don’t think we’re any different than any other consumer product out there. We need to be improving our turns at every piece of space that we have.

Joe Altobello - Oppenheimer

Just one last housekeeping, the A&P spend for this year, you mentioned that’s going to be down from your previous budget, could you give us a number of what you’re expecting this year to spend?

Danny Erdreich

We can be specific on the second half. The second half is going to be very much the same as the second half last year. It was approximately $50 million in the second half.

Operator

Our next question from Bill Schmitz with Deutsche Bank.

Bill Schmitz - Deutsche Bank

Can you just talk if there is any plans in place to offset the really difficult comps in Europe in the back half of the year, because you had like 40% something plus growth, there is a lot of distribution in France. So is there anything sort of discrete plan to accelerate growth after this really high growth rate? And I have a follow-up, if you don’t mind.

Danny Erdreich

Bill, it’s simple, we are just growing in all our markets and to do with the consumer not to specific activities in Europe, and the description Daniel gave for Germany is really describing what’s happening with the consumer. We now have 6% household penetration and we are growing. So it’s not to do with a specific plan. We just have -- we right now see the orders coming in all the regions and we think growth that’s baked into our guidance is resulting from that.

Bill Schmitz - Deutsche Bank

Is sell-through and sell-in, are they pretty equivalent in Europe?

Daniel Birnbaum

Yes.

Bill Schmitz - Deutsche Bank

And then, the new price points in the soda makers, have you guys found do you think the magic price point yet for the machine, especially in the U.S. because I know it’s pretty big right now, but there obviously is a much lower price model out there, so if you’d just comment on that, I’d appreciate that.

Daniel Birnbaum

If anything, I think this last quarter as we’ve seen that price isn’t our core issue. In fact, if you are following a lot of the initiatives we had going on, they were very price focused, and we didn’t get the lift that we had expected, and then some follow-up research and obviously our experience with some value strategies indicate to us very strongly that it’s not a pricing issue.

We have a very great group of machines and we need to do a better job of highlighting both the machines and the message around why consumers need and want to buy our products and it has very little to do with price.

Operator

We’ll take our question from Jon Andersen with William Blair.

Jon Andersen - William Blair

I think I understand the rational for the refocus around kind of the health and wellness message in the U.S. and that can see how that can help. I’m just also wondering if you see -- if there is a desire or perhaps a need for machine innovation, the way -- we thought about the way that soda makers function, the gas refills, the dosing process, are you happy with that or do you see innovation coming in that area and/or the need for maybe a bigger brand partnership on the flavor side to kind of drive end demand or consumption and that would be I guess complement the health and wellness positioning, but I’m curious if you thought about that and have a desire or see a need for that as well?

Daniel Birnbaum

Jon, you’ve known us long enough to know that we have a very robust pipeline of innovation. We’ve always had, and we still do. Since the last few years, we’ve launched the Source with a snap and lock and the LEDs and the new design, the award-winning design. By the way, the Source has now more than 20 product awards, more than any other kitchen appliance, including Espresso worldwide.

The Play was launched as take-down to the Source without the LED, but less expensive and now with silent valve, so you don’t have the noise and an order list, as well as the snap-lock model. We have the new bottle. We have the caps delivery system and multiple flavor partnerships et Cetera. There is more of that coming, but given the fact that we are now efficiently in a competitive situation where we have a competitor who is coming out there challenging our leadership in this category, we will be more selective in sharing long lead time ahead of launches, the details, the specifications of our innovation.

I hope you understand that, but you can, rest assured, that we have new innovation coming in the area of soda makers, in the area of dosing, including single-serve dosing and various other partnerships that we are working on right now, but it’s too soon to announce.

Jon Andersen - William Blair

Dan, you mentioned the factory in Israel is now, the new factory is now operational and you look forward to the efficiencies that that should provide in 2015. Can you talk a little bit about the efficiencies that new plant will provide, and how that -- in terms of kind of timing and magnitude, that will be helpful from a modeling perspective. Thanks.

Daniel Birnbaum

I’ll ask Danny to take that. Just before he does, I just want to mention that in the 6-K we did include some pictures of the factory realizing that not all of you can come to see it right now. What you see in the pictures, there are several different halls, some are in construction and some are already active. So we have more than 200 people working in the facility as we speak and will be shifting more production lines into that facility, and Danny can speak to the details of the savings that we’ll see there.

Danny Erdreich

Jon, right now, just to give you a general understanding of what’s going on with that, all our plastics injection molding is done by subcontractors. We are not producing - we are not doing the plastics manufacturing ourselves.

The first benefit of this factory is it will bring plastics injection molding in-house. We are working right now through several locations in Israel and across the world. Well bring most of them into - to work under one roof, and with this, we’ll be saving tons of transportation between factories and between locations. So, we estimated in the past that this will provide us at least 200 basis points additional gross margin and at this stage, this is still the estimate.

Jon Andersen - William Blair

And does that happen in 2015 or does that happen beyond that?

Danny Erdreich

I think you will see it more in the back half of 2015 and to full extent in the year after.

Jon Andersen - William Blair

Just a couple of quick housekeeping, the Wal-Mart hotspots, did that benefit soda makers selling in the quarter, and if so, to what degree? And then, the other housekeeping is, in terms of U.S. door count, do you have kind of a current door count, I think Scott talked about some expansion, distribution expansion later in the year, what do you think the door count will be at year end?

Daniel Birnbaum

So, Jon, in terms of the hotspots, we did see an increase, we saw double-digit increase across all our product lines with the hotspot. What we didn’t see, unfortunately, was increases in our business in non-hotspot stores, so, as you know, we weren’t in every Wal-Mart store, so we definitely saw a situation where there was some great increases and not necessarily the same type of performance in the non-hotspot stores. So there is clearly -- I spoke to what was going on in the rest of the business.

In terms of the store count, we have a forecast internally, I’m not going to reveal it today because I think there is a lot of things that hinge around it, specifically we are doing tests in the third quarter that maybe larger store counts in the fourth quarter. We have several retailers that we’re working with and just trying to work out the exact -- the right environment for our product lines.

As you know, with a lot of these changed, just because you have distribution, it doesn’t mean you should take every last one of them, it has to be the right demographics, the right store area, what have you. So we’re carefully selecting with our retail partners those stores that we can go into, but we will be in more stores than we are currently in now going into the back half.

Operator

We’ll take our next question from Phil Terpolilli with Longbow Research.

Phil Terpolilli - Longbow Research

I just want to build off of that last question real quick. So though doors you are talking about in the back half of the year, that includes some doors in the grocery channel primarily?

Daniel Birnbaum

Yes, grocery and convenience.

Phil Terpolilli - Longbow Research

And I guess, when you are thinking about that going forward, would you expect that to kind of build in the 2014 or sorry 2015 now?

Daniel Birnbaum

That’s exactly right. We are going to take the seasonality and use that as an opportunity to work with the retail partners and then build from there going into ‘15.

Phil Terpolilli - Longbow Research

And I just had one more question, kind of building on an earlier topic, but the revised marketing message you are working on in the U.S., are you modeling that that will actually accelerate soda maker kit growth in the holiday quarter in 4Q or is that something that maybe takes a little bit longer for that message to build with consumers over time?

Daniel Birnbaum

I think we’re trying to do both. I think that when you’re selling our system, it’s both the machine and the beverage. Clearly, the beverage is the hero and the health and wellness outcome of the purchase, but both need to be considered and part of the messaging.

Phil Terpolilli - Longbow Research

Then just one last one if I could, just any update on kind of the streamlining effort for the soda maker SKUs in terms of maybe consolidating that, that would be helpful. Thanks.

Daniel Birnbaum

We are continually bringing our SKU line down. Clearly, we’re introducing Play, but we’ve been slowly winding down our inventory of older machines, and our expectation is over the course of the next six to 12 months is to get a lot out of our older machines and highlighting the Play and Source and some of the other new machines that are coming in the New Year.

Operator

Our next question from Tony Brenner with Roth Capital Partners.

Tony Brenner - Roth Capital Partners

Two things. I wanted to get into that SKU aspect, as well -- I know you talked about a reduction on SKUs earlier, but looking today on your website for the U.S., there are 11 different models available with, at times, pretty small differences between one or another or maybe just a cosmetic differences, and as I go into different retailers no carries 11 and most only carry two or three, and those two or three are different in Wal-Marts than they are in Bed Bath, for example, if I were a consumer looking to buy a soda maker, frankly I’d be totally confused just to what to buy, so when you talk about a SKU reduction, just how extensive a reduction will there be and do you think that’s hurting your sales?

Daniel Birnbaum

So there is no question that having a simpler selection has proven to be successful in other markets and we have been working against that objective in the Americas, and specifically to the U.S., I think you’ll find if you did a count that there were four or five at least machines less in retail than we were even a few months ago.

The website is just helping us sell down the last bits of the units that we have and when they sell down, we won’t be replacing them. You’re absolutely right that messaging has to be clear around what each one of these machines does and we believe that getting down to a smaller count, so when you walk into a mass retailer, you’ll see one unit or one machine and when you go into a high-end specialty you will see a different machine and they will have some different elements for each one of those machines and different consumer attributes.

It’s an ongoing process. We won’t be done in January either. We’ll have - we’ll be continually working not just to get our machine count, but also against flavor count and making sure that we have the right SKUs out there and the right optimization around them.

Tony Brenner - Roth Capital Partners

One other question, once the new factory in Israel is fully up and running in 2015, how many manufacturing facilities will the company at that time still be operating?

Daniel Birnbaum

Tony, we’re going to have a flexible infrastructure here so that we can make that decision closer to the time depending on our capacity needs. If we don’t need multiple facilities, we will be able to concentrate production more in this one major site. If we will need additional capacity, we will use multiple sites, but we’re deferring that decision to a later time.

What’s clear and what we’re going to focus on is getting up to speed those manufacturing disciplines that will save us the most money in the short term, and as Danny mentioned earlier, the primary one is the plastic injection one, which right now, all of it is done out of house, and because of that, we have to the tune of 9,000 truck legs between our factories or our among our factories right now in Israel every month, 9,000 trucks legs.

We want to eliminate both the fees that we’re paying to the sub-contractor and those transportation fees so that we can assemble the machine on the same site where we inject it. That can be done earlier rather than later probably in the early part of 2015, Q1, Q2 of 2015, but at that time we’ll see how much flexibility we’ll need in our manufacturing driven again by capacity needs.

Tony Brenner - Roth Capital Partners

So nothing will be closed initially, is that what you’re suggesting, Daniel?

Daniel Birnbaum

We’ve not made that decision yet.

Operator

Our next question from Jim Duffy with Stifel.

Jim Duffy – Stifel

Two questions, first the $13 million reduction in the A&P expensive versus the previous outlook, can you talk about how that budget change splits by region?

Danny Erdreich

We do provide -- we don’t usually provide the exact breakdown of the expenses, but as always, you know that the Americas is still getting, especially in Q4, the lion’s share of the expense and the cost. What I can say at this time, it will be slightly less the U.S. than slightly more into other regions, still with the Americas being the largest market with A&P in the holiday season.

Jim Duffy - Stifel

So most of that reduction comes out of the U.S. market, is that accurate?

Danny Erdreich

The U.S. market is the big spender on A&P in Q4 when we are taking money out, it’s coming from this region obviously.

Jim Duffy - Stifel

And then, a question on the consumables volumes in the U.S., Scott, maybe this is appropriate for you. Seasonally one would think the second quarter will be stronger than the first quarter for usage, but your U.S. CO2 refills unit number was actually down sequentially. Given that’s your best measure of usage, that doesn’t look so hot relative to the cumulative number of units sold in the U.S. and even the units sold in 2013, is there some sort of explanation to why that’s not a stronger number and then what does that tell you about the U.S. market in usage of the machines?

Scott Guthrie

I think there is a couple of is going on here. First and foremost, the sell-in number versus the sell-through and the sell-through was dramatically higher than the sell-in, and really what that’s a reflection of is, we’re still working with partners out there, retail partners that are still figuring out gas and figuring that component out.

It’s not easy to do, it’s a hard demand plan, and I think what you’re seeing in Q2 is just that. As they work through their demand ladders and work through their forecasts, there’s a few guys who got cut short and clearly we’re going to work pretty hard to try and rectify that, but that’s a situation where we definitely had less product out there than what demand was indicating. So there’s a few things that sort out through there, but we have no hesitation around the fact that compound of our business is still very strong.

Jim Duffy - Stifel

And then, final question on the new manufacturing facilities, what’s the output capacity of these facilities? And then, should you not need the capacity of multiple facilities, what’s the cost implications of exiting the legacy facilities?

Daniel Birnbaum

This facility infrastructure is designed for just above 7 million soda makers. We use that as a metric and everything else follows, the gas carbonators and the other components. As far as moving the other facilities, we have some approval already for Israeli government, assistance around the capital expense for this new factory and we’ll apply that assistance in the event we need to relocate not only a full factory but even equipment. We’re not going to buy equipment if we already have it in one factory and all we have to do is shift it, so we’ll do that before we go ahead and build capacity we might not need.

Danny Erdreich

As for the cost of exiting, just to clarify, we’re, first of all, talking about shifting production from subcontractors and, as Daniel said, we’re right now not thinking about exiting other facilities, so obviously there is no point on discussing the cost of exiting these facilities.

Operator

We’ll take our next question from Akshay Jagdale with KeyBanc.

Akshay Jagdale - KeyBanc

First question is just a housekeeping question, of the 55% decline in the soda maker sales in the U.S., if you exclude Wal-Mart, what would that number look like?

Daniel Birnbaum

I think it’s looking around [60%] [ph] down versus without the Wal-Mart piece in.

Akshay Jagdale - KeyBanc

And then, second more sort of strategic, given the weak results that we’re seeing in the U.S. soda maker sales, do you feel a stronger need today to have a more convenience-oriented machine out there in the U.S. market, and also do you feel more strongly now that you need larger brands to be part of the system?

Daniel Birnbaum

I’m not quite sure I’d follow on the convenience side of things, we know we are upgrading our machines with the introduction of Play and Source in the marketplace, so we know we have a better consumer experience, and in terms of our partners out there, we actually have more than we can get on the shelf, and so we are working very hard to make sure that all our partners have appropriate shelf space in their time in the -- as part of our consumer promotions.

So if anything, we have too many on our Play right now, it’s a good place to be and what we are doing now actively is we are segmenting those partners into the appropriate retail environments so that we have if a retailer skews a little differently to a partner that’s younger and more mass appeal, then we’ll make sure that partner is highlighted more versus something that may skew higher demographic women sort of thing, so these are things that we’re actively working through to make sure that our partners all get appropriate promotions out there in the market.

Akshay Jagdale - KeyBanc

So maybe I can clarify, so there is two products specifically that are going to one, I think is going to be out this holiday season, there’s a competing product, and another one that’s going to be out perhaps next year, both of which are promising to not have to do the CO2 exchanges, both of which are promising to have exact dosing capability which is friendlier for brands to join the system. So that’s really -- the question is are the results that you are seeing today and the consumer feedback you’re getting, do they in any way make you feel that perhaps you need a machine out there that’s also capable of doing similar things?

Daniel Birnbaum

Actually, here we have a philosophical difference with some other companies you’re referring to. The fact of the matter is that in Q2 we generated -- consumers purchased SodaStream to the tune of 1.1 billion cans. I don’t think 1.1 billion refreshment opportunities that consumers actually enjoyed SodaStream would suggest, but there is recent frustration with anything around their system whether it be the CO2 canister exchange or whether it be the lack of what they call exact dosing, which we consider to be an advantage to the consumer because we empower her to make her soda the way she wants.

So here there is a philosophical departure between us and say Coca-Cola or Green Mountain and we have to play this out. First of all, I’d love to see their product and I don’t know why it’s been delayed, but we want to see the product, we want to see that it works, because we can also tell stories. We need to see this product deliver a high carbonation product that the consumer wants and can afford and until such time, I don’t see the point in arguing which product is better.

Akshay Jagdale - KeyBanc

I feel the other way, I mean there is two divergent trends that you highlighted, one, in the U.S., there is a declining sales trajectory and outside the U.S., your business, like you alluded to, is doing really well. So what I’m really asking is perhaps you can talk to what are you finding out about the U.S. consumers that’s different than the rest of the world, because it seems like you’re bringing the playbook that you’ve successfully implemented around the world back to the U.S. with the flavor renovation, health and wellness, but just can you just give us some insights into what is the consumer telling you about the U.S. market that’s so very different than the rest of the world?

Daniel Birnbaum

Actually, we are bringing the toolkits or the manual from other international markets into the U.S. with the exception of enabling us the license to identify that one benefit that is most relevant to the American consumer and that might not be the same benefit that’s relevant to the Finnish our German or French consumer, and in fact it is not.

In Germany, it’s about schlepping and in Finland, it’s about environment, and in France, it’s about fun and enjoyment, in the U.S., it is about health and wellness. According to the Centre for Disease Control, 70% of Americans are obese or overweight.

We see the results of Coca-Cola and the rest of the beverage industry in the United States a decline in volume in 2013 of 3%, a decline of volume of the Diet in 2013 of 7%. Where more do we need to search to find out what is the right benefit for the American consumer.

We are determined to own healthy beverage and we are best positioned to do it because we empower the consumer to make it the way she wants and we have ingredients that are more natural and lower calorie and because we start with water, we start with water, nature’s gift, so we believe that that positioning is the positioning to focus on, and we think if that anyone has a problem right here in the future of the beverage industry and its position relative to what the consumer needs, it is not SodaStream, we just have to execute against this benefit.

Operator

We will take our next question from David Kaplan with Barclays.

David Kaplan - Barclays

A lot of stuff going on this quarter. So I want to start with actually what was my last question, at the end of the day your guidance model, your business model hinges on continued use by acquired customers, right, the whole razor-razor blade model. With the [indiscernible] that went on at the end of the year, the beginning of this year, the different channels that you guys tried, you guys hinted towards some differences in terms of why certain channels don’t work and it’s not about reaching customers, but it’s about profitability, and I also wonder is it also about reaching the right consumers, have you guys been acquiring the quality customers that you want that are going to keep coming back and keep using, particularly in the United States, keep using the disposables or the replaceable different items that are built into your model, that’s my first question, I’m just really curious around, is that an issue that you think you need to fix also?

Daniel Birnbaum

So I think the answer to that one David is that we are still seeing our gas in great shape. We know that our flavors well they haven’t grown to the degree that we’d like. We still see that it’s around messaging, and so we are absolutely actively trying to engage, you’re right, the right consumer and with the right message, and we believe that will give us the pathway to reinvigorate the machines.

David Kaplan - Barclays

And then on the new doors, a couple talked about those, are those doors going to have just machines or are we talking about machines, the flavors and bottles and CO2 replacement also?

Daniel Birnbaum

For the most part, we are talking full system, so gas, machines, syrups right across the board all in the same section.

David Kaplan - Barclays

Also, I mean a couple of quarters back you guys were still shifting some inventory around and that ran into some costs that you weren’t expecting. Have you stopped shifting inventory that way or have you figured out whatever issues those were and learned how to solve those problems? And are you still moving those inventories, I mean there is a bunch of questions on the number of SKUs and the number of machines and the number of flavors and everything else you guys have, and at some point you guys did mention that you want to move out some of the older machines because you do have the Play coming along, what is that again, what does that do to the pricing that you guys are going to be - have in the market first of all? And second of all again going back to my first question, what do you think that means as far as the kind of customer that you’re going to be acquiring? My assumption would be that if they was going to be promotion around a particular machine because you wanted to end-of-life that so to speak in terms of -- on your inventories shelves that potentially at a lower price point, you’d be acquiring a lower quality customer potentially not someone who would come back and use it again, so how do you think about that?

Daniel Birnbaum

I can tell you that where we are introducing Play, we are very conscious of the notion that consumers will opt and trade down particularly if it’s not communicated appropriately, so they will go for that less expensive unit if there is not an interception of some sort of communication that allows them to understand what the benefits of that higher-priced machine are.

So we’re actively working through those types of scenarios so that we don’t have a conflict at the shelf for the consumers to try and deliberate through. That said, inventories are always lumpy and when you are talking 17,000 doors, it’s hard to get everyone of those stores right, but we also know as we -- some of these units and some of these machines that we are in the highest seasonality of the year. So we’ve got an opportunity to utilize that consumer demand and leverage it and really just tactically trying to work through where we have conflicts at shelves around some of the older machines.

Danny Erdreich

And then David you asked in the beginning if we are still moving machines from one location to the other, and this is increasing our costs. So just to remind you and all this was really a big issue in Q4, but right now it’s way less and we are constantly improving our demand forecasting and tools and mechanisms, and Yoram Evan, our new Chief Commercial Officer, is on it, and we’re bringing many tools to be more efficient in focusing and to have the right product in the right place and you can also see this in the level of inventory which is going down.

Operator

We have time for one more question from Greg McKinley with Dougherty.

Greg McKinley with Dougherty

Is there any way you can quantify how you would view the progress on inventory channel positioning in the U.S. now that you are through the second quarter versus where you maybe were entering the quarter? And then also, if you could talk about attachment rates, so we talked about sell-through in the U.S., how does that relate to your perception of the actively used soda maker base?

Daniel Birnbaum

In terms of quantifying our SKU rationalization, it’s pretty straightforward. When you walk into a retailer and seeing similar machines across that, that class of trade, we’ve gone from 14, 15 different machines down to six or seven and you see that at shelves that were - there maybe perhaps a color differentiation between similar retailers in the same class of trade, but you’re not seeing the proliferation of a whole bunch of different machines.

So the metric is pretty straightforward there, It’s we’ve got - we’ve brought that down and now you are seeing the class of trace start to have a little bit more resemblance of order and with that, our inventory levels both in the warehouse and at retail are also down.

Greg McKinley - Dougherty

And maybe just to restate it a little bit, I mean do you feel like as we headed into Q2 there was a thought that dealer or retailer level inventories were higher than were planned, how much progress whether it’s SKU rationalization or just dollars of inventory, they are entering, I’m assuming making buying commitments for the holiday selling season at this point, have they gotten a lot of that channel level inventory off their hands or I don’t know if there’s any way to quantify that?

Daniel Birnbaum

No there is. We measure weeks on hand everyday by retailer by segment and I can tell you we brought those weeks on hand down in some cases more than 80% across the board, certainly more than two thirds, so they’re easily quantifiable and something we are very focused on and making sure that the inventory at retail measures the consumer demand or matches consumer demand.

Greg McKinley - Dougherty

And then, you talked about CO2 sell-through, I’m wondering if you could maybe just talk about how that trend is in relation to your perception of the actively used soda maker base so we can get a sense of changes in attachment rate?

Danny Erdreich

Well, our base assumption is that - the base assumptions didn’t change. We assume that in the U.S. unlike other markets out of the gate as 40% are not coming for the first refill and for those that started refilling, we have attrition rates of approximately 30% of active users a year. This is, of course, unique to the U.S. and we believe it will go down to similar rates as we see in Europe, which are under 20% attrition rate.

Greg McKinley - Dougherty

And then, maybe just last question is there any way to quantify as you move from outsource manufacturing to your manufacturing campus, is there a way to articulate for us any change from sort of a variable operating costs from outsourcing as demand requires a fixed cost base so we get a sense for how much that P&L no longer moves with sales volumes, is that a big change in your perspective?

Danny Erdreich

Within our cost of sales, approximately 20% is fixed or let’s say the short term, obviously we can always reduce costs if we need to, so if 80% of cost of sales is variable, when we manufacturing in-house, this obviously gives us very high degree of flexibility.

Operator

That concludes the question-and-answer session. Mr. Daniel Birnbaum, I will turn the call back over to you for additional or closing remarks.

Daniel Birnbaum

Thanks very much. Just a follow-up on Greg’s last question, I want to share my sense on where we’re taking the product offering in the U.S. and everywhere as far as enhancing the attachment rates and the penetration rates worldwide, specifically in U.S., we believe that three drivers will do that primarily.

One is the user experience and more than anything taste. We are focusing on enhancing and improving the taste of our products. The second is the benefit and the communication of the benefit, and as we said, we are focusing on the benefit of health and wellness and we’re being creative in how to communicate that.

And the third is accessibility of the consumables and we are focusing on expanding the retail landscape and availability also through e-commerce of our products, so that consumers who already have a SodaStream will stay attached and continue to use and enjoy it every day.

I want to thank you all for your interest in SodaStream and we do look forward to speaking with you again on our third quarter earnings call. Have a great day.

Operator

This does conclude today’s conference. We appreciate your participation.

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