SodaStream International Ltd. (NASDAQ:SODA)
Q2 2016 Earnings Conference Call
August 2, 2016 08:30 AM ET
Brendon Frey - IR, ICR, Inc.
Daniel Birnbaum - CEO
Daniel Erdreich - CFO
Henner Rinsche - President, SodaStream Europe
Doug Pritchard - President, SodaStream, North America
Akshay Jagdale - Jefferies & Company, Inc.
Jonathan Keyport - Deutsche Bank
Good day. My name is Jenny and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the SodaStream International Second Quarter Fiscal 2016 Earnings Conference Call. Today’s call is being recorded. [Operator Instructions] Thank you.
I'd now like to turn the call over to Brendon Frey of ICR.
Thank you, and welcome, everyone. Present on the call today are Daniel Birnbaum, CEO; Danny Erdreich, CFO; Henner Rinsche, President of Europe; and Doug Pritchard, President of North America. Following the prepared remarks, we will open the call up to questions.
Early this morning, we filed a 6-K, which includes the press release and financial tables, along with the CFO commentary document and a supplemental slide presentation. As a reminder, our presentation dealing the company’s growth plan, which will be referenced during today’s call, is still available on our IR Web site.
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 assurances 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 or 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’ll make reference to certain adjusted financial measures. The reconciliation of these adjusted measures to the most directly comparable IFRS measure can be found in the Company’s second quarter earnings release, which is posted on the Company’s Web site. 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.”
It is now my pleasure to turn the call over to Chief Executive Officer of SodaStream, Daniel Birnbaum.
Thank you, Brendan, and welcome to everyone on the call with us today. Our second quarter results are further validation that the strategic course we outlined in our growth plan in October 2014 is on track.
There were a number of highlights that indicate consumers are responding to our repositioning of the SodaStream brand around sparkling water and that our efforts to build a stronger organization and more efficient organization are benefiting profitability.
Starting with our financial performance. Revenue increased 17% to $119 million, which was an acceleration from the 10% growth we reported in Q1. Importantly, we experienced double-digit growth in each of our four geographic regions during the second quarter.
Meanwhile, operating income grew at a significantly faster pace than revenue, increasing 102% to $9.2 million fueled by substantial operating expense leverage on higher sales and a 40 basis point improvement in gross margin.
This translated into the second quarter diluted EPS of $0.37 and $13.7 million in free cash flow. I would note that our second quarter results included a one-time non-cash impairment charge of $2.3 million, mainly related to the intangible asset of our professional business which we’re deemphasizing and restructuring.
From a product perspective, the results were also very positive. Sparkling water maker unit sales increased 30% to 637,000, our largest quarterly increase in sometime. This accelerated rate of growth is a good indication that new consumers are responding to our marketing campaigns, aimed at increasing household penetration. At the same time, flavor unit sales increased 18% to 6 million as our new line of better for you mixes is gaining awareness and traction with consumers.
Finally, gas refill unit sales grew 9% to an all-time quarterly record of 7.5 million, generating over 400 million liters of SodaStream beverage consumed during Q2. Of these 400 million liters, 87% or 350 million liters was non-flavored sparkling water. This is further validation as the consumer is embracing our healthy water positioning.
The combination of existing and new consumers using our home carbonation system is strengthening our position as the world's largest sparking water brand. What’s especially encouraging about our second quarter performance is the fact that many of the trends mentioned above occurred in most of our markets around the world.
We saw double-digit growth in all four of our regions, Western Europe, The Americas, Asia Pacific, and CEEMEA. And we’re starting to see positive contributions from both new and turnaround markets to go along with continued growth in many of our more established markets.
In Western Europe, sales increased 14%, led by the 18th consecutive quarter of double-digit growth in Germany where sparkling water maker and gas refill unit sales were both up more than 20%, expanding this market position as our largest market worldwide. The product, marketing and distribution strategies we’ve deployed in Germany continue to drive increased household penetration and high margin recurring revenue.
The same is true in Switzerland, one of our oldest more established markets. For Q2, both sparkling water maker and gas refill unit sales increased strong double digits. In France, we continue our efforts with our distributor partner to reposition the brand around availability of sparkling water.
We see positive sell-out on gas, which indicates that the user base we established during our first few years in France remains loyal and active. However, we’ve yet to reignite household penetration through sales of sparkling water makers which will challenge growth rates during the back half of the year following higher machine sell-in during the first half, as we were up against a low base.
The Nordics is another market that’s in the midst of implementing our growth plan. The combination of new leadership and a more compelling consumer proposition centered on convenience is starting to show signs of growth.
Shifting to The Americas. Revenue increased 12%, led by another strong performance in Canada. In the U.S., we returned to growth as the hard work over the past 18 months to reposition the brand around sparkling water has started to take hold with consumers responding positively to our new product line and messaging.
Sales of sparkling water makers and flavors accelerated versus recent trends driven by the strategic investments in A&P and improved presence at retail, both contributing to consumer demand. For the quarter, sparkling water maker unit sales in the U.S increased 42%, flavors grew 28%, and gas refill declined 2.7%.
The U.S now represent 17% of our total sales. Following a successful test in Q1, in May, we rolled out a national TV advertising campaign in the state called Love your Water. The spot highlights the consumer benefit of healthy hydration with our system based on the proven fact that consumers with SodaStream at home, drink 43% more water every day.
We were pleased with the return on our marketing spend as sparkling water machine sell out accelerated from double-digit declines early in the year to positive growth in the weeks following the launch of the TV spot. This included double-digit sell out in our largest accounts for the month of June.
As a reminder, the goal of our advertising is to sell more machines and increase household penetration, which in turn leads to more active users and high margin recurring revenue from repeat purchases of our consumables. In addition to developing the right marketing message in the U.S., our other top priorities have been improving our presence at retail and continuing to make our CO2 exchanges more accessible to the U.S consumer.
First, on improving our presence at retail, we continue to test at Whole Foods and are hoping to gradually expand in early 2017. We're also having good discussions with additional retailers, both traditional and online about potential new distribution.
Second, with respect to increasing the accessibility of our gas refills, we’re in the process of redesigning our home delivery FIZZ CONCIERGE program based on learnings from the initial test to make it simpler and more cost-effective for consumers. At the same time, we're continuing to explore additional gas only retail distribution including drug and convenience channels.
Now to Asia Pacific, which was our fastest growing region in the quarter with sales up 44%, now representing 11% of global business. Japan is on fire. Our highest gross market with sales nearly doubling from a year-ago led by a 100% plus increase in sparkling water maker units.
After a slow start with our original distributor partner, SodaStream is taken off under our control, as Japanese consumers have started to gravitate to our home carbonation system, including for making whiskey soda, an incredibly popular drink in the country. Japan is still a small market for us, however, recent results along with the appointment of a new country manager whose background includes managing espresso in Japan, has us very excited about its long-term potential. Also in Asia, we’ve appointed a distributor in Korea, who received his initial pipeline shipment during Q2.
Finally, CEEMEA, sales were up 32% in the second quarter continuing the growth momentum from Q1. CEEMEA's results were fueled by solid gains in sparkling water maker, flavor and gas refill sales to our Czech distributor, as well as solid growth in Israel.
In summary of our four geographic -- of our four geographies, we are proud that we are seeing double-digit growth in each and every one of them. On a group level, A&P was $18.1 million which was 15.2% of revenue and in line with our plan. In addition to TV advertising in select markets, our investment included targeted PR, social and digital activations and several unique cross communication campaigns, all with the objectives to enhance our brand awareness and sparkling water positioning, build brand [indiscernible] and ultimately drive consumer demand and household penetration.
We're especially proud of our Heavy Bubbles campaign and our Keurig Kold activations, which generated 1.3 billion and 900 million impressions respectively during Q2. In addition, our Island of Peace Corporate Responsibility Campaign has garnered an exceptional 4.7 billion impressions since its launch in Q1.
We recently introduced our latest brand innovation The Beer Bar of, which we're testing in Germany and Switzerland. Now that we have the capability to utilize our platform and technology to transform ordinary tap water into fresh and delicious beer in seconds, we're collecting learnings in order to evaluate whether and how to play in the exciting homemade beer category.
The initial test has been met with unexpected enthusiasm and demand which has led to stock out at retail. We're excited by the initial response and following our learnings, we look forward to gradually broaden Beer Bar distribution next year.
Last month we hosted Analysts and Investors, in Israel and toured our Lehavim plant. From speaking with several of the attendees, it sounded like the group was impressed by the scope of our internal capabilities. The technology and engineering know-how we have amassed in our new facility is not only driving productivity gains and expense savings, its providing an even greater moat around our business and setting the Company up for a bright future.
To summarize the quarter, we achieved strong and balanced growth across the business. We delivered double-digit sales growth in each of the four regions and double-digit unit growth in both sparkling water makers and flavors. In addition, our all-time record high gas refill sales strengthen our leadership position in sparkling water and indicate the efficacy of our growth strategy.
Below the revenue line, we expanded gross margins and meaningfully leveraged expenses, even as we increased our A&P investments as a result of higher sales and increased efficiencies from the consolidation of our manufacturing and warehousing operations to our new facility.
Looking ahead, following our second quarter performance, we now expect full-year revenue to increase high single digits compared to 2015. As a reminder, we are up against tougher comparisons in the second half compared with the first half. At the same time, we won't repeat the same level of sales to our distributors in France, Korea, and the Czech Republic during the back half of the year.
With regard to our gross margin and A&P expectations, we're now forecasting a 250 basis point lift in gross margins in 2016 compared to Q4's run rate of 48%. A&P is still expected to increase roughly to 15% of revenue versus 13.2% of revenue in 2015.
With the increase in projected revenue, we now expect operating income to increase approximately 45% over 2015, excluding restructuring charges and net income to increase approximately 3% compared to 2015 due to the $6 million financial gain from currency hedging that we recorded in the first quarter of 2015. Excluding this 2015 benefit, net income is also projected to grow at 45% this year similar to operating income.
CapEx For 2016 is still expected to be approximately $25 million compared to $54 million in 2015, while D&A is now expected to be similar to last year.
To close, we're pleased with the improved results we've been able to deliver during the first half of 2016. We're committed to build on our recent accomplishments to deliver consistent growth and improved profitability over the long-term. I’m confident that we are heading in the right direction.
Jenny, we're now ready to take questions.
Thank you. [Operator Instructions] And we will go to our first question from Akshay Jagdale of Jefferies.
Q - Akshay Jagdale
Hi. Good morning.
Can you hear me?
Yes, we can, Akshay. How are you doing?
Okay. Good, good. Sorry, I couldn’t make it to Israel, but it looks like the trip went well. I just wanted to ask about the install base. What do you estimate the install based to be now? And what’s the trajectory? I mean we’re back in into about $8.9 million globally down slightly, but just curious to know what your research is telling you?
Hi, Akshay, it's Danny. We at the install base, we indicated the end of 2016 was $9 million households. We’re now up slightly. I would estimate an addition of 200,000 to 300,000 users that joined the system.
Okay. And then just in terms of the sustainability of the growth. I mean, can you help us understand how much of the growth this quarter and maybe in the first half is sort of getting the channels ready with the new rollout etc versus ongoing sort of. So is there any channel sell that we should be thinking of in terms of the sales growth this quarter?
With the exception of the sales to some of our distributors namely the French distributor, the Korean distributor and the Czech distributor, where you can see there’s some pipeline or seasonal buying ahead of holiday and late summer. The growth is very solid, it's demand driven and it's not push growth, it's all pull growth.
So those distributors, what do you say roughly they were contributed to growth this quarter roughly?
Well, they comprise about 14% of our revenue in general. So you can kind of figure out that they’re not -- the lion share of the growth but they do have a relative plan, and they’re going to actually because of their strong H1 we expect a softer H2 in those markets.
Okay. And just in North America, can you give us an update on the U.S. specifically. I know you called out Canada is being strong. But can you just give us a sense of where you are in the U.S. the total strategy and sort of how is the rollout going right now in terms of number of stores etc? Thanks.
Sure. Actually we have Doug Pritchard with us here as well as Henner Rinsche. So, I’m going to ask Doug to address, and give some color for what’s going on in North America.
Absolutely. We’re very pleased with the U.S. and the overall North American performance. We’ve seen a good turnaround in our machines through Q2, and are seeing positive growth on machines for the first time in a while in our markets. We’re very, very pleased that we feel that with the advertising that we put on air with Love Your Water, that consumers are acting very positively to hydration messaging, and feel that we’re certainly heading in the right direction with growth on machines.
Okay, great. I’ll pass it on. Thanks.
[Operator Instructions] And we’ll go next to Jonathan Keyport of Deutsche Bank.
Hi, guys. How are you?
Yes, thanks again for having us in Israel. I just wanted to ask about -- I remember you guys mentioned a bunch about how Japan was going to be, maybe not a focus market but definitely somewhere you’re going to kind of ramp up efforts, and I mean there’s a pretty good growth bump this quarter. I just wanted to know if you could give us, I mean in Asia-Pac. I was wondering if you’d give a little more detail about how you see Japan playing out and you mentioned that would be like a little bit of softness for the back half in Korea, but if you could sort of give like maybe like a year down the line or two years down the line about how you think Asia is going to play out, how the push is going to work? I would appreciate that.
Okay. Well, you see Japan is one of those markets that we believe is a strategic market. It's kind of high. It's hard at this point early in the game to put a cap on where we think it's going to go. We do know that we know how to reach 20% household penetration in a market as we have proven in the Nordics. And in Japan we’re not yet even in 1% penetration. So it's really an execution play. Right now we’re testing some TV executions. We’re working with a celebrity who we will announce shortly over there. He’s a well known character within the Japanese market. Today we’re announcing our new Country Manager, who used to run Espresso in Japan. The team is on sight, the regulatory is cleared. Now it's time to step on the accelerator. So I can’t give the number for where we’re going to be, but Japan is going to be a player for us in the next year and beyond.
Okay. Thank you. And you guys see it picking up to like an America’s level, do you think you can -- and in terms of just revenue, not necessarily penetration, anything like that. Do you think it will pick up to and they’re like how, do you have a timeline maybe that how fast you think you can get there?
Well, the population of Japan is just, it's a bit over a third of the U.S. But I think that we’ll start seeing some competition here among markets like Japan, Germany and possibly the U.S. should be kind of competing for the lion share of the sales here. It will be a good competition. Now again, it's hard to project what we think the numbers will look like in Japan. It's such an anomaly over there and the usage, the application of our product is still very interesting and unique being that they both drink a little bit of sparkling water, but they’re also very into Whisky Soda and we bring a great benefit to the Whisky Soda application because our soda or sparkling water in this case is the strongest sparkling water of any brand in the world, which makes the Whisky Soda the strongest Whisky Soda as far as bubbles go. So we know that that's extremely appealing to Japanese right now, and it’s hard to put a number again on where we’re going to be, but it's going to be a good competition among our top markets.
Great. Okay. Thank you.
[Operator Instructions] And we will go to a follow-up question from Akshay Jagdale of Jefferies.
Hi. Thanks for the follow-up. Just wanted to get a little bit more into details on the U.S. Can you give us a sense in terms of the number of doors you’re in now? I know there was a little bit of a reset I have you at 12,500 doors. But give us a sense of where you’re on doors and what the plan is for the year?
Yes. The actual doors we were having in U.S around 10,000 and it's been very steady over the last year or so. So -- and I think we had a number while ago, it's said about 12,000, but we’re at 10,000 stores -- doors in the U.S.
And is the plan -- so in the U.S. is the plan to increase the number of doors over the next couple of quarters or are we just improving the quality of the assortment within the stores?
Yes. Actually both are a priority for us. Improving our presence within our existing retailer is always a key priority in making sure that the consumer understands the offering that we thought at the stores that we’re in. But expanding distribution in a number of doors beyond that is also critical for our business and we’re currently in talks with a number of retailers both in bricks and mortar and online to expand our distribution over in the next sort of while and through 2017. And as we finalize those details we’ll certainly release those to the market and give everyone an update on how we’re doing. But it's certainly a big priority of ours.
And just one for, Danny. In terms of non-advertising SG&A, there was a significant reduction which is good to see that, can you give us a sense of the sustainability of that and I’m guessing if results continue to inflect positively like they are, is there going to be some sort of reset to management comp that we should be thinking about and if so, what could be the timing of that?
Well, first of all, I’ll give you the casual -- general numbers to you and everybody. The expectation is that for other selling expenses, non-A&P and not the marketing part to be approximately 19% of revenue which is under the 20% we had last year. And then G&A, right now we expect to be -- is expected to be approximately 10% of revenue, the last year it was 11.5%. So, these are the numbers we’re projecting right now. If anything changes, we’ll update.
Okay, great. I’ll pass it on. Thank you for taking the follow-ups.
And it appears there are no further questions in the queue at this time. I’d now like to turn the conference over to Daniel Birnbaum for any additional or closing remarks.
Thank you, Jenny. I’d like to thank everyone for joining us today, and we look forward to updating you all on our continued progress during our Q3 call in November. Have a great day.
And that does conclude the call. We’d like to thank everyone for your participation. You may now disconnect.
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