SodaStream International Q4 2015 Review: Bottom In Sight?

Summary

SodaStream beats lowered expectations.

Sales and earnings decline with gross margins contracting greater than 200bps.

New flavors not proving to lift results.

The numbers still don't add up.

New machines coming as former machine iterations prove irrelevant for household penetration growth.

SodaStream's (NASDAQ:SODA) results came in pretty much as I forecasted in the Q4 2015 period. In my coverage publication from the Q3 2015 period I stated the following:

The U.S. results were pretty terrible once again in Q3 2015 and I would be of the opinion that the results will be equally as poor in Q4 2015 when compared with the same period a year ago unless the company engages itself in a home shopping channel "Today's Special Value".

SodaStream didn't disappoint investors or myself who had modeled for a continued decline in both earnings and revenues YOY and with gross margins following suit during the 4th quarter of 2015. Fortunately, even while showing declines across the board, the company managed to beat very low expectations in delivering $.24 a share in earnings that beat estimates by $.07 a share. In kind, the company reported revenues that declined by 10.7% YOY to $112.94mm and against analysts' estimates of roughly $110mm. It is very important for investors to understand that the $110mm in revenue expectation was the result of significantly lowered expectations that was offered by SodaStream on the last earnings call. Prior to SodaStream issuing this forecast, analysts had modeled for the company to exhibit a low-single digit to flat revenue quarter to end the year. Essentially, SodaStream managed to lower the bar just enough to jump over it.

Without showing any significant improvements during the 4th quarter or FY15, SodaStream results have become normalized to relatively low levels. But even with these continued low levels of unit sales and total net sales, the company has guided revenues to be flat year-over-year. Akin to the company's revenue forecast for the Q4 2015 period, they may have lowered expectations for FY16 just enough to leap over this bar. That sentiment, however, will be challenged by the company throughout the year.

What Drove Results:

While results were slightly better than expected on the top line, the declines were largely driven by continued selling pressure around the globe. In addition to selling pressures the company was once again significantly impacted by foreign currency exchange rates and restructuring charges.

In terms of regional results, CEMEA was the best performing region for SodaStream with regional sales falling only .5 percent. The Americas region was down 19.3%, Asia Pacific was down 16.8% and Western Europe was down 5.4 percent.

With regards to individual product segment sales, SodaStream exhibited its slowest growth for CO2 refills since the company IPO back in 2011. CO2 refill sales rose 7% while machine sales fell 24% and flavor unit sales fell 8% during the 4th quarter of 2015. Lastly, but certainly not least, gross margins declined by greater than 200bps during the quarter and mostly due to foreign currency exchange rates that also diluted revenues by greater than $11 million.

While SodaStream lowered A&P spend once again and during the greatest selling season that came with new product launches, G&A expenses rose. Pay for performance?

General and administrative expenses were $12.4 million, or 11.0% of revenue, compared to $9.4 million, or 7.5% of revenue, in the fourth quarter 2014. The increase was mainly due to $2.1 million of share-based payment expenses related to the stock options granted to our Chief Executive Officer in December 2015 and a reversal of share-based payment expenses in the fourth quarter 2014.

Western Europe:

After having expanded into another 1,000 doors in Western Europe during the Q3 and Q4 2015 period, sales continued to climb on a constant currency basis for the region as reported by the firm. With that said, the pace of sales growth has slowed significantly in the second half of 2015 for SodaStream. For the quarter and full year, SodaStream Western Europe sales grew high single-digits on a constant currency basis.

As I've had difficulty squaring the Western European results for SodaStream, and expressed those difficulties in the past, I'm equally unable to square the most recently reported results. Here is what the company had to say with regards to Western Europe sales during the quarter and for the full year.

Henner Rinsche - General Manager-Germany/Austria: So, in Europe, on a constant currency basis revenue was up pretty similarly in high single-digits in Q4 and in total year. In terms of the units, we've actually had in both total year and quarter four a double-digit decline on Sparkling Water Makers and a double-digit growth on gas refills and a decline on flavors. So basically the fourth quarter and the total year were somewhat similar with a little bit of an upward trend in fourth quarter.

And I was not the only person troubled by the highlighted results that showed double-digit declines for the largest ticket price item SodaStream sells, followed by continued declines in flavor units for the region. The average selling price for a sparkling water maker in Western Europe runs roughly 95 Euros. If SodaStream was to exhibit high single-digit sales growth for the region with sparkling water makers down double-digits and flavor sales also falling, CO2 sales would have had to show extreme growth in the region. But the numbers don't square up to that summation either if you take what we see reported, only growing total CO2 sales 7 percent. And that is with the next largest market, the Americas showing a flat YOY CO2 sales quarter. As I've articulated in the past, the math just doesn't add up with regards to SodaStream's dissemination. The gap between Western Europe sparkling water maker sales and CO2 sales pricing is $80 per unit. In order to fill the gap in declining sparkling water maker sales, the company would have to execute 6 additional CO2 refills for ever unit decline in sparkling water makers. But that doesn't even get the company square with regards to additional declines from flavor unit sales. Keep in mind with this mathematical equation we are just trying to get flat sales, while SodaStream states they grew sales high single-digits in the region for the quarter.

Anybody who listened to the company's dissemination for Western Europe sales would have difficulty accepting these results as the analyst who questioned the company for the metric results stated the following upon achieving the dissemination.

Gregory J. McKinley - Dougherty & Co. LLC: Okay. But even with that you're still at high single-digit constant currency revenue growth?

Management Still Doesn't Know The Numbers:

I've expressed and evidenced with SodaStream's very own disseminations of metric numbers problems in the past. In a more recent article that questioned the company's identification for household penetration in its largest volume producing market I had the following to offer:

Germany only has a 5% household penetration rate? Something doesn't jive here! Back in 2013, the 1st quarter of 2013 to be precise, SodaStream outlined its HPR for each individual market of significance at the company's Investor/Analyst Day Conference in New York City. At that time, nearly two years ago, the HPR for SodaStream in Germany was over 4.2 percent. Now take a look at the following extrapolation from an interview given by SodaStream just last year in consideration of the rate of growth for SodaStream in Germany:

  • SodaStream continuing its success unabated and starts with another record quarter in the year of the Soccer World Cup: The leading manufacturer of water machines, SodaStream, scored in the first quarter 2014 compared to last year in Germany a sales increase of 54 percent. Growth will be fueled by the massively high sales of the award-winning water bubbler: After an increase of 104 percent in the years 2012 and 2013, revenues for the first quarter of 2014. Still further, by 123 percent. The syrups were playing a revenue growth of 48 percent. Time for the start of the World Cup there are the most popular varieties in the 12er syrup Party Pack to try.

Considering also that Germany has continued to grow through all of 2014 and into 2015, how can it possibly be that at even a moderation of the growth rate from 2013-2015, that the HPR of SodaStream in Germany only grew .8 percent? The math, like the math problem I have with the gross margin dissemination by the company, simply does not work. I retract that statement, it only works if the attrition rate over that time period were 80+%. And for that matter how could the company possibly keep finding new customers in an otherwise very mature market? There is no logic in the number disseminated and therefore my question remains, "Why doesn't SodaStream know the numbers"?

I can offer that there are two possibilities, at least, regarding the clear and evidenced issues with SodaStream's metric disseminations. First, they don't add up because they can't add up. Mathematics is finite and without grey areas. Secondly, SodaStream cares as much about appropriate metric dissemination as investors and analysts do for the company specific results (statement of opinion, but evidenced). I suggest the latter because U.S. investors have exhibited very little interest in the SodaStream story since the onset of 2015. The share volume activity fell to all-time lows in 2015 before the company was basically forced to dual list its shares for trading on the Tel-Aviv Stock Exchange. Even on the Q4 2015 conference call, less than 6 of the 13 analysts covering SodaStream participated on the call. Not enough market participants seem to care for SodaStream anymore and management seemingly feeds this perception. Take a look at the example question from the latest conference call below.

"What's your installed user base and in the United States?". The company stated the user base around the world totaled 9mm that, if true, would be a reduced user base of roughly 500,000 users on a year-over-year basis and per the company's 2014 annual filing. Additionally, SodaStream stated the U.S. installed user base was about 1.25mm users. A few things can be surmised by the dissemination of the installed user base by the company. One, the accuracy of the dissemination was "matter of factly" stated if you will. The company probably just pulled the 9 figure from recollection, but failed to recall the total 2014 dissemination of the metric being 9.5mm users. Another thing to recognize in the U.S. metric dissemination is that it's probably no coincidence that CO2 refills were exactly the same number as the company's dissemination for installed users, 1.25 million for the quarter. How convenient right?

I fielded at least a dozen calls regarding SodaStream's results yesterday and when asked about the metric dissemination I offered exactly what I've offered in this publication. "Who cares, because it doesn't appear that management does"? Clearly SodaStream's management isn't tracking everything for consideration and most investors have "wised-up" to this understanding by the end of 2014. And if the Western Europe numbers aren't…unreasonable enough, let's take a look at the second largest market for SodaStream, the United States.

U.S. Results Remain Poor:

Before discussing the continued issues regarding U.S. results, investors should understand that new products have done little to nothing for igniting consumer interest. I "warned" investors about the Play sparkling water maker that never caught on in the U.S. and likely has not attracted new users around the world, based on the sales results.

I have a Play unit in my home, covered with New York Yankee skins of course. This particular iteration of sparkling water maker that was introduced to the market in 2014, more broadly, has efficacy issues that haven't been fixed. The price point is also $10 above its entry-level predecessor, the Jet. For these two reasons if not others, the sales for the Play have been far less than hoped upon by SodaStream and investors. But here comes the Spirit sparkling water maker as suggested by SodaStream on its latest conference call. The price point for the Spirit has not been disclosed other than to suggest this iteration will also be an entry-level price point. I guess one could ask SodaStream, "What's the next mistake on your list of mistakes to tackle". Somewhat sarcastic I assert, but in eliminating the Jet which was the highest sales volume machine, the company did erroneously replace it with an inferior selling product and with those facts in full display there is not opinion in the matter. Hopefully the Play was a tool in "racing" the results to the bottom because if so it certainly did the job.

In the U.S., sparkling water maker sales volume totaled 115,000, flavor units totaled 1,122mm and CO2 totaled 1.125 million units. How does that compare to the results on a YOY basis. During Q4 2014, U.S. sparkling water maker units declined 72% to 192,000, flavor units declined 64% to $1.5 million and gas refills were down 3% to $1.1 million. Sparkling water maker units declined another 40% for SodaStream in the most recently reported period. This is just an awful number as it would appear, based on the total installed user base dissemination that for every single sparkling water maker sold around the world, the company actually loses that customer or an existing user. Sparkling water maker units fell another 40% for SodaStream. But with that said, here is what the head of the U.S. market had to offer on a positive note for investors.

Staying on product, during the second half of 2016, we will be launching our new generation sparkling water maker, the Spirit. This machine actually has the snap-lock functionality and a beautiful design at an entry-level price. We expect the Spirit to be an important vehicle in taking SodaStream to the next level of household penetration. While we've always cautioned from focusing on revenue per door, considering that we had 2,000 fewer doors in the fourth quarter than in the previous year because of our decision to execute - to exit, sorry, a few retailers, it is worth noting that our revenue per door actually increased double digits at our top-three customers during Q4. In fact, our top customers saw machine sales increase over 150% in the month of December alone.

Oddly enough, the company stated the Play was to be an important vehicle in taking SodaStream to the next level of household penetration. So much for executing on that objective. Furthermore, John Sheppard stated that revenue per door actually increased at the company's top three accounts during the latest quarter…machine sales rising 150% in the month of December alone. Sometimes you have to laugh at some of these disseminations offered by SodaStream. I say this because if you know the top three accounts on a YOY basis, you know the relative truth to this dissemination. You see, Costco (NASDAQ:COST), when SodaStream sells products into the retailer it is a top account. Why? Well because the company usually orders two pallets of 40 machines per pallet. Multiply that by what was realized to be more than 300 doors during the quarter and you have a top account for that quarter and on a YOY basis. Keep in mind that SodaStream DID NOT have this many Costco doors in the same period a year ago and you get this significant sales increase from the retailer. So if Costco only sold machines at less than 100 doors in stores during Q4 2014, but increased the door count to 300 doors, what do you expect? But how bad did sales have to be for the months of October and November around the country for the company to show such outsized sales in the month of December and still only increase sales by double-digits in its top three accounts for the quarter? Or do the numbers just not square up…once again? And how did SodaStream get back into those Costco doors after a 12-month absence? The company took a huge margin hit on the Play of course as I articulated in a previous article.

After having no distribution in the retailer for greater than a year and inclusive of Q4 2014, the retailer and SodaStream reestablished sales at over 100 Costco stores this holiday season. Why pick on the Play? Well, here is where the retailer and the Play further evidence how poorly the product has been received.

Costco and SodaStream offered the Play sparkling water maker for $59.99 during the holidays. In addition to this low price, SodaStream offered a manufacturers rebate worth $10 on the machine that brings the price down to $49.99. This was the lowest price in mainstream retail distribution during the season for the Play. While the sell-in for SodaStream, at roughly 40 units per pallet Xs 100+ stores is a strong order for the company, the sell through was typically weak and many units will have gone unsold coming out of the holiday season.

In taking this gross margin hit through the re-engagement with Costco, SodaStream was likely trying to boost sales for the quarter while growing household penetration rates in the United States. Job…remains undone! With roughly 90 days under his belt, John Sheppard hasn't stabilized machine sales unfortunately and even with new flavor units in the market place, sales for flavors continue to fall. Are the numbers low enough yet? That remains to be seen as the company will launch new marketing campaigns in the coming weeks and months. After reducing U.S. headcount in 2015, the company has added many new field merchants and account managers. Additionally, John Sheppard has added a seasoned marketing talent to the SodaStream team.

To lead and execute these marketing activities and anchor our brand behind an ownable health and wellness positioning, we bolstered our marketing team and recently hired Emma Froelich-Shea, a world-class marketing executive who joins us from Hain Celestial. Emma started just a few weeks ago, but is quickly learning the business and I am confident she'll make meaningful contributions to the brand.

I'm sure Emma brings with her an abundance of ready-to-drink, personal care and retail experience, but unfortunately like her superior, nowhere in her resume does she exhibit the ability or knowledge regarding marketing or selling sparkling water makers. Not a stitch of understanding in this regard and as her predecessors have come to understand before her, ready-to-drink marketing is not akin to sparkling water maker marketing. Let's just hope for the company's sake, that the numbers ARE indeed low enough to show improvement so as to be able to take credit by SodaStream USA's new management team.

Home Delivery for CO2:

Another question I'm always asked about regarding SodaStream is the CO2 distribution network and home delivery of CO2. For this question, I generally offer, "Who cares?". Here's the problem and SodaStream's management is at the root of the problem mind you. See, SodaStream has been chasing any positive growth drivers they can find to disseminate to investors, new and potential investors. These are the investors who don't know the history or relevancy as to what SodaStream disseminates and offers as to what is a meaningful growth driver. So with that said is residential delivery of CO2 a meaningful growth driver? The answer is clearly and irrefutably NO! Is it a great addition to the business model, certainly it is as it adds a layer of convenience and application for usage. But even with that the use of home delivery for CO2 was never widely used resource for the installed user base which has been at a stand still since 2013. SodaStream has literally not grown its user base by more than a couple basis points in the last 2+ years. Just awful! "Oh Seth you are just bloviating nonsense"! Really, you think so? Let's take a stroll back to 2013 when the Department of Transportation changed or transfered the liability for HAZMAT goods transporting.

The day the ruling was disseminated by the DOT to the public, shares of SODA tumbled roughly 8%, as investors feared that SodaStream's results would be dramatically curtailed due to the DOT dissemination. With the stock cratering, SodaStream's former Director of Communications and Corporate Development Yonah Lloyd called me directly to give me the facts regarding the DOT changes in regulation/policy and how they affect or potentially affect SodaStream. Essentially,, the DOT decided that because residence were not HAZMAT certified, the liability for the transportation of SodaStream CO2 cylinders to and from residential areas would no longer rest with the DOT. Without the DOT accepting this liability, the carriers i.e. UPS (NYSE:UPS), Fedex (FED) and such would have to accept the liability should something go wrong with the transportation of SodaStream CO2 goods. Well, this wasn't deemed acceptable by these parties and as such residential delivery was halted in the United States.

What I learned from my conversation with Yonah Lloyd was that the ruling was actually favorable for SodaStream for a couple of reasons. Firstly and most importantly, less than 2% of all United States CO2 exchanges were being done via residential delivery and disposition. Less than 2% people! Secondly, SodaStream wants the consumer to go to the store to do their CO2 exchange, they want the customer to shop the shelves and potentially purchase other SodaStream goods, like flavors and bottles. This is part of the lure SodaStream promotes with potential retail distributors. "Act as a CO2 exchange agent and the customers will come inside the store".

So over the last 2+ years with most every aspect of the SodaStream business faltering with regards to sales and earnings, the company reaches for anything positive, even what has proven to be of little significance like residential delivery and pick up of CO2 goods. I'm not suggesting that home delivery of CO2 isn't a value-added proposition for the company; I'm simply positioning its relevancy. But if you don't believe Yonah Lloyd or myself, just visit amazon.com (NASDAQ:AMZN) to understand just how little home delivery and e-commerce business the company does in the United States. Only a few of the company's consumables are available for Prime Service delivery, mostly traditional "soda" flavors and machines. I repeat, soda flavors and machines. Sparkling water flavor company huh? Even the installed user base is trying to tell the company the new positioning isn't desired. This feedback is at the very least being taken into consideration as the company is bringing back some of its traditional flavors like Fountain Mist and Caffeine Free Cola. On behalf of the installed user base, thank you kindly for listening and taking action SodaStream!

I do have concerns as to the SodaStream partnerships and why we have not seen any of the company's co-branded products distributed to date other than the Skinny Girl products. With that said the company will be offering new flavors going forward that include green tea, energy and coconut. Being that SodaStream sells concentrates, the coconut offering is interesting as coconut doesn't exist as a concentrate, but rather actual water. So I'm very interested in the ingredient composition for this flavor offering. The company has suggested verbiage of interest as well on the conference call for this product, suggesting its usage as a still beverage.

As always and as identified by SodaStream's CEO in the Q4 2015 press release, SodaStream remains a work in progress. Furthermore and as always, I hope to see Whitney Tilson's erroneously positioned investment in SODA made whole in the future. And for those investors who still believe that Pepsi might acquire SodaStream at some point, why did Pepsi just sign a deal with SodaStream's "competition" in the commercial market? Bring on the Mix sparkling beverage maker. This will be on my counter-top!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.