It's not often that one authors an article, it becomes published and raises enough opinions, considerations and further discussion. In the case of my latest SodaStream (NASDAQ:SODA) publication, however, this was the result. In the article titled "SodaStream Annual Report: Failure Finds Awards", I touched on SodaStream's latest Annual Filing. Within the filing, investors were informed to the depth of the CEO's compensation and bonus potential. Prior to carrying forward with this article, investors should understand that over the last 2-year period, all efforts put forth by CEO Daniel Birnbaum to grow the company's revenues and earnings have been found wanting… to say the least. SodaStream's annual results have shown two consecutive years of revenue, gross margin and earnings declines. Most every other metric of consideration has also declined shy of CO2 units, which grew at their slowest rate of growth since the company went public in 2011.
With that said, what has drawn me to offer this latest SodaStream detailed publication is the SodaStream Annual Filing that seemingly allows the CEO to continue to fail, lead SodaStream to further net income contractions and achieve bonuses. Back in November of 2015, a bonus package was constructed for Mr. Birnbaum that would be to his great benefit should he spirit a strategic partnership that includes a $25mm investment in SodaStream. Below is the excerpt from the November 30 6 K/A filing that details the potential bonus package for SodaStream's CEO.
"A strategic investment" means an investment in shares of the Company by a third party who is not a director or officer of the Company or an affiliate of any of the foregoing, in a transaction or a series of related transactions, in the aggregate amount of not less than $25.0 million and regarding which, in the reasonable judgment of the board of directors of the Company, the identity of such investor or such investor would make a contribution to the prospects of the Company beyond the actual sum for the purchase of the shares of the Company. Shares issued or issuable pursuant to the exercise of a warrant (or similar security) shall not be counted for the purposes of the investment amount at the closing of a strategic investment for the foregoing purposes.
Grant of Options
Our shareholders are asked to approve, in the event of a strategic investment, a grant of options to our CEO, Mr. Daniel Birnbaum, to purchase 100,000 of our ordinary shares (the "Bonus Options"), provided that Mr. Birnbaum is serving as the Company's CEO at the time of the closing of the strategic investment. The date of grant of the Bonus Options will be the closing of the strategic investment (the "Bonus Options Date of Grant") and the exercise price will be the price per share paid by the investor at the closing of the strategic investment. The exercise period of the Bonus Options will be five years from the Bonus Options Date of Grant. The Bonus Options will be granted under our 2010 Plan and will vest over three years as follows:
But such a partnership, now 5 months in the hopefulness, has not come forth. And with that factual representation, the CEO's latest bonus package has seemingly undergone yet another addition or option. In addition to the CEO's bonus package previously agreed upon, the CEO has negotiated a deferral of his existing annual cash bonus plan. The deferral now more closely ties his bonus package to company performance and being able to achieve the company's vaguely stated metric goals for the fiscal year 2016. I characterize the FY16 metric goals as vaguely stated because SodaStream does very much the same in their Q4 2015 report, which offers no FY16 guidance. Please review the quarterly transcript for further consideration and understanding, as this is the best the CEO had to offer with respect to metric guidance for 2016:
While operating income, excluding restructuring charges will be similar to 2015 levels, net income will be lower due to the fact that we will not repeat the $6 million financial income gain from currency hedging that we recorded in the first quarter of 2015.
Excluding this benefit, net income is projected to be approximately flat year-over-year. CapEx for 2016 is expected to be approximately $25 million compared to $54 million in 2015, and G&A is expected to increase to approximately $20 million, up from $17 million this past year. And as I mentioned earlier, we expect to generate positive free cash flow in 2016.
This is not really meaningful or measurable guidance. To say the least it will be hard for any investor to value this type of guidance. Essentially the company is expecting further net income deceleration and increased marketing costs. Talk about a tough environment to operate from a CEO's point of view, sarcastically speaking. Negative income and increased spending, isn't that the way our Government has incurred the debt level it has accumulated. This may be just another reason that shareholder participation in SODA continues to exhibit new lows each and every quarter over the last 18 months. So let's take a look at the deferred CEO package as outlined in SodaStream's 20-F filing.
In April 2016, Mr. Daniel Birnbaum unilaterally notified us that 50% of the 2015 annual bonus amount to which he is entitled under the terms of the annual cash bonus plan for our chief executive officer and 50% of the bonus amount to which he is entitled under the Four-Year LTIP (together, the " Deferred Conditional Bonus Amount") shall be deferred and only be payable if we achieve a performance condition that our operating income for the year ending December 31, 2016, as disclosed in our consolidated financial results for the year ending December 31, 2016 on Form 6-K, equals or exceeds the targeted amount set forth in our annual budget approved by our board of directors (excluding expenses resulting from exceptional non-recurring events), provided that, notwithstanding, the Deferred Conditional Bonus Amount shall become payable in the event that, prior to the release of our financial results as aforesaid, he no longer serves as our chief executive officer, he suffers a disability, his death or a change of control in the company.
The question I propose after reading this deferred bonus potential is, "Has the BOD considered the CEO may be leaving SodaStream?" Furthermore, should the CEO consider an exit given the operational standards put forth alongside failed initiatives now 2 years in the making? So now that I have offered two questions I will finish this portion of my narrative by stating Daniel Birnbaum is now "on the clock". I expect the CEO to leave the company within the next 12-month period.
The situation and state of affairs at SodaStream has been in need of a qualified, transitional leader for some time now. It has become apparent that current leadership is not equipped to handle an international business generating sales in over 47 countries. The company can't even find the ability to accurately disseminate quarterly results that find their issued math plausible. Ever wonder how exactly SodaStream accounted for all those returned flavors that had been held at retail and distributorship partners? Let's just consider, it may have been at the time SodaStream's 2014 USA President left the company that the inventory was accounted for…but at what value? SodaStream flavors exhibit a shelf life or expiration date. Once returned and found out of date, they are absolutely worthless and must be accounted for in this manner at $0 per unit. Is it possible that SodaStream went through Q4 2014 and most of 2015 without a SodaStream USA President because somebody desired to account for the expired inventory with some monetary value? Is it possible? And if not, where did all those write-downs that occurred through 2015 come from. It certainly wasn't machine units or CO2 units based on return to vendor tracking receipts. By itself, Kohl's (NYSE:KSS) sent back thousands of unsold, expired flavor syrups. And to that point, let's take a look at SodaStream's Annual Filing that denotes its retail partnerships in the Americas:
ACE Hardware Amazon.ca Amazon Bartell Drug Company Bed Bath & Beyond Best Buy BJ's Canadian Tire Costco Crate and Barrel ECS CofeeEl Palacio de Hierro Fred Meyer Home Depot Home Hardware Home Outfitters JC Penney Kitchen Collection Kitchen Stuff Plus Kmart Kohl's Kroger Le Gourmet Chef Liverpool Linen Chest London Drugs Lowes Canada Loyalty One Meijer Office Depot PC Richards Personal Edge Planet Organic Sears Shopko Sobeys West Staples Sur La Table Target The Bay Walmart Wegman's Water Depot Williams Sonoma.
The "cut and paste" feature utilized by SodaStream ignores the fact that SodaStream products are not sold by the following retail stores and haven't been for several quarters: Sears, (NASDAQ:SHLD), Kmart, Kohl's, J.C. Penney (NYSE:JCP) BJ's, Office Depot (NYSE:ODP) and Crate & Barrel. These are just the basic expectations with respect to accurate dissemination from a publicly traded company; disseminate factual representations of your business operations and business partners. If readers/investors recall, I had difficulty squaring SodaStream's issued results in the past, inclusive of their most recent Q4 2015 results. Here is what Europe's President had to say about Western European results during the Q4 2015 period:
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."
The dissemination didn't make sense to me with the understanding that U.S. CO2 units grew alongside the "double-digit" CO2 growth in the largest contributing region of SodaStream's business, Western Europe. And this, as the totality of CO2 growth slowed to roughly 7% YOY. Here is what I offered investors concerning this matter back then.
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 were 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?
Fortunately for SodaStream, not enough people or financial institutions care about or for the company anymore. If you can't disseminate accurate information then what's the point of investor or analyst participation. SodaStream, during its peak growth cycle, had 12 sell-side analysts covering the company, but now they are lucky if even 4 participate quarterly. Oppenheimer was the first to drop coverage in late 2013. It's been downhill ever since. The company isn't even covered in the broader media lately.
SodaStream has now gone through 3 different SodaStream USA General Managers/Presidents in the last 2+ years. During the period for which the company took the greatest amount of write-downs, there was a noticeable absence of a President to manage the USA business segment. The CEO positioned himself as the market leader for which results deteriorated even further. And yet, in spite of all the departures and failures as the CEO of SodaStream…more bonus potential and bonus revisions.
I have 2 SodaStream machines and go through 1 CO2 cylinder every 6 weeks or so. I buy 3-4 flavor syrups every 6 weeks as well. I love the product, the business concept and the potential for the product to be as disruptive as it should have been and to date. But mismanaged assets and poor executive leadership stemming from the helm of the Company must be addressed for greater investor consideration. My previous publication noted within, sparked private conversation that led to disturbing discoveries centered on SodaStream's leadership. Unfortunately, I'm only able to hint at the issues in this article publicly while hoping a turnaround for the company is at hand and will be represented in the upcoming quarterly results.
I certainly hope that SodaStream finds itself a strategic partner with an accompanying investment that rockets the share price higher. Haven't these investors suffered enough already under the existing CEO's leadership that has been found wanting for sales and earnings growth. Remember, SodaStream's CEO forecasted $1bn in sales by 2016. Well here we are in 2016 and the company can't generate even half that forecast. Since selling my SODA shares in 2014, I can't find an investment in shares of SODA to be viable. Certainly the stock can move higher and as I've stated I do hope that is the case, but for all of the company's shortcomings it may prove more advantageous for investors to consider other investment vehicles until SodaStream shows it is capable of change and that change is favorable and lasting.
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.