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Executives

Yonah Lloyd - Executive Director, Corporate Development and Communication

Daniel Birnbaum - CEO

Daniel Erdreich - CFO

Gerard Meyer - President, SodaStream USA

Analysts

Joe Altobello - Oppenheimer

Jon Andersen - William Blair

John Faucher - JPMorgan

Bill Schmitz - Deutsche Bank

Tony Brenner - ROTH Capital Partners

Jim Duffy - Stifel Nicolaus

Jim Chartier - Monness, Crespi and Hardt

Mitch Pinheiro - Janney Capital Markets

Greg McKinley - Dougherty

SodaStream International Ltd. (SODA) Q2 2012 Earnings Conference Call August 8, 2012 8:30 AM ET

Operator

Good day. My name is Matt and I will be your conference operator today. At this time I’d like to welcome everyone to the SodaStream International Second Quarter 2012 Earnings Conference Call. Today’s call is being recorded. All lines have been placed on mute to prevent any background noise. (Operator Instructions) Thank you.

I will now turn the call over to Yonah Lloyd, Executive Director of Corporate Development and Communication. Please go ahead sir.

Yonah Lloyd

Thank you, Matt. Welcome everyone. This morning’s call will consist of prepared remarks from our CEO, Daniel Birnbaum. We filed the 6-K this morning which includes the press release and financial tables along with the CFO commentary document and a supplement slide presentation featuring business highlights. These are also available at our IR website and on your new IR App. Present as well are Daniel Erdreich, our CFO; and Gerard Meyer, President and General Manager of our U.S. Subsidiary. Following Daniel’s remarks we will open the call for questions.

I’d like to remind everyone that certain statements will be made during today’s conference call which are forward-looking within the meaning of Securities Laws. Due to the uncertainty of this 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 of 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 projection or forward-looking statements made today. For more detailed information about these factors and other risks that may impact our business, please review the paragraph in this morning’s press release that begins with the words, ‘this release contains’.

And now it is my pleasure to the turn the call over to the Chief Executive Officer of SodaStream, Daniel Birnbaum.

Daniel Birnbaum

Thank you for joining us today. We are very pleased to share with you our second quarter results. During this quarter we saw strong top line growth from both soda makers and consumables reinforcing the validity of our business model and our potential to achieve mass market appeal.

To start, sales increased 49% to $103 million representing the highest quarterly revenue in company history, marking the first time we crossed the $100 million. The revenue increase was driven by growth across all regions, highlighted by triple digit growth in both the Americas and Asia-Pacific and double-digits growth in Western Europe.

In terms of product segments, both soda maker and consumable revenues increased 49% with soda maker unit sales of 764,000 and all time record highs for gas refills and favors of 4.2 million and 7.2 million units, respectively.

Within the Americas, the U.S. had a fantastic quarter. Sell-in and sell-through of soda makers and consumables were strong fueled by both new and existing distribution channels and increase marketing investment.

Soda maker unit sales in the U.S. were up 63% from a year ago, which is acceleration from recent quarters aided by the pipeline filled to Wal-Mart in May. More importantly this sell-in was followed by strong sell-through in Wal-Mart. We win this similar sell-through results of soda makers with other key retailers, driven in part by a heavier A&P spend than included a run of TV and radio leading into Fathers Day.

The consumables side of our business experienced strong growth in the U.S. with unit sales of CO2 refills and flavors up 93% and 148%, respectively. Demand for our flavors including core flavors such as diet cola and energy continues to grow along with our user base. At the same time the launch of our Country Time and Crystal Light cobranded flavors has exceed expectations, which along with the recent expansion of our partnership with Kraft to include Kool-Aid gives us added confidence in the incremental revenue potential of co-branding relationships.

The strong balanced growth we achieved in the U.S. during the second quarter is evidence we are successfully executing on our dual strategy, penetrating more households to create a larger user base and generating increased activity among existing users.

Western Europe posted solid gains with second quarter revenue up 25% or 17% excluding the benefit from the convergence to direct distribution in the Nordics which occurred in the first quarter of 2012. We continue to experience healthy demand in our established markets led by Germany and the Nordics. The fact that these large established markets are helping drive growth in our oldest region is further validation of our brand and products and underscores the sustainability of our business model.

In newer markets like France and the UK growth is coming from both soda makers and consumables as we’re penetrating more household and generate more user activity much as we are doing in the U.S. We did experience softness in Italy during the second quarter; our distributor who manages a range of products besides SodaStream is experiencing some difficulties.

As we did with the Nordics in Q3 of 2011, we are monitoring this distributor closely and are exercising conservative exposure practices. Overall, our business in Western Europe has continued to perform very well despite recessionary headwinds evidenced by first half growth of 35% or 43% excluding Italy.

In Asia-Pac the successful launch of SodaStream in Japan late last year has been followed by strong consumer demand. Strong growth in Korea, New Zealand and Australia also contributed to the 234% increase of this region which now represents 10% of our business up from 4% in Q2 last year.

This CEMEA region posted a small gain in the second quarter as our check distributors started to resume a more normalized buying pattern following the large inventory positions they held coming out of 2011. More importantly sell-through rates in the Czech Republic have remained strong, highlighted by growth of 28% for soda makers and 58% for CO2 refills demonstrating that consumer demand has remained robust over the past year.

Our distributor has worked down inventory to more appropriate levels ahead of the holiday season and we expect sales in the Czech Republic and throughout CEMEA to improve even further in the back half of this year.

Now to our outlook. Based on our better than anticipated second quarter results, we are raising full-year guidance. We now expect 2012 revenue to increase 40% over 2011, up from our previous guidance of 33%, to over $400 million of revenue this year. We are also raising our bottom-line outlook and now expect full-year net income to increase approximately 55% over 2011 up from our prior guidance of approximately 50%. This guidance assumes approximately 5.6 million of stock-based compensation expense and an effective tax rate of approximately 8% for the full-year. We are confident that our expanded retail network, increased marketing investment and new product pipeline has us well positioned for continued success in the third and fourth quarters.

Looking to the future, we are very excited about the growth prospects that we believe exist for our business around the world which will help us achieve a greater share of the beverage industry. This excitement stems from several key initiatives planned for the second half of this year, beginning with our product pipeline.

Later this year, we are introducing a handful of new products that we are confident will enhance the appeal of home carbonation. The response from retailers and media to the revolution, our first automatic soda maker and to the elegantly designed source soda maker has been tremendous. We are also confident that SodaCaps our new dosing system will resonate well with those consumers looking for the convenience of the single dose method for adding flavor to our carbonating bottles. As we materially evolve our portfolio with these new generation product, we are closely managing our capacity and inventory pipeline, particularly for soda makers.

In anticipation of the demand fluctuations that often results during such a transformation. Our brand is undergoing a transformation beyond the new product that I just mentioned. To-date our marketing efforts have been focused primarily on in-store demonstrations, PR and targeted programs meant to cultivate brand ambassadors and amplifier message.

In the next phase of our growth cycle, we will introduce a new creative advertising campaign which leverages our broad retail distribution of over 55,000 locations worldwide. This new branding campaign will start in the U.S. where we now have product on shelf at over 13,000 doors.

In closing, we are delighted with the results of this quarter and look forward to the rest of this year. Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) We go first to Joe Altobello with Oppenheimer.

Joe Altobello - Oppenheimer

Just couple of quick question, I guess first on Wal-Mart you mentioned that the U.S. machine unit growth was 63%; could you give us a sense of what that look like excluding the pipeline for Wal-Mart?

Daniel Birnbaum

If you exclude pipeline filled to Wal-Mart and to do justice to that type of a model, you would also want to exclude pipeline fill to new retailers last year during this quarter and those were Bon-Ton and J.C. Penney, U.S. is up about 60% in Q2.

Joe Altobello - Oppenheimer

So, it looks like it was just pretty similar. In terms of the sell-through, it sounds like you are seeing some pretty good results there, you got some end caps at Wal-Mart, are you doing in-store demo there as well?

Daniel Birnbaum

Well, we are testing them right now but that’s not the way Wal-Mart usually promotes a brand, but we did get a placement in an ad circular in early June, we have the (inaudible) that are in all of the 2900 doors and that are going to stay there through spring of 2013, and we have a full range of product on shelf over there. We have 30 syrups, 2 bottle SKUs, 2 soda maker SKUs and now we also have a gas exchanges on shelf at Wal-Mart. They came in about four weeks after the roll out in May. So, in late June the gas started appearing at Wal-Mart. So, that’s a good level of support and we are working on a program with them to ensure that we also have a strong holiday with Wal-Mart, activity that could be digital, circular support and possibly in-store demos.

Joe Altobello - Oppenheimer

And how does the gas exchange at Wal-Mart brought any additional retailers into that program?

Daniel Birnbaum

I don’t think there is cause and effect on that, but we are at the same time talking to other retailers to do a controlled expansion of the gas exchange and those retailers that are not yet doing that program, and we will keep you posted as soon as we have some information on that.

Operator

We go next to Jon Andersen with William Blair.

Jon Andersen - William Blair

I guess I wanted to ask just another company who was trying to get a toe hold in home beverage carbonation in the U.S., I think discussed last night that it's largely withdrawing your plans to withdraw its efforts from the market. I just wanted to get a little color from you, I mean does this say anything about the opportunity for home beverage carbonation in the U.S. or is it that company specific thing on their end.

Daniel Birnbaum

We were often asked about the (inaudible) in our business whether it's intellectual property or manufacturing knowhow or the existence of install base. It's the first mover advantage on the exchange program and we constantly tried to explain that this is what this company has been doing, it's SodaStream for 100 years and this is all we do. We don’t have another business. We have engineers that have been working on this for 35 years or better. So, I think what we are possibly experiencing with a competitor in this case and I don’t know often time any competition, it's just another illustration of how difficult it is to get into this business.

Jon Andersen - William Blair

Okay, no reflection on the near medium term outlook for the market so.

Daniel Birnbaum

Not at all. I think as far as the potential the market that’s fairly will establish in the traction that we are experiencing in the U.S. it's a different execution, we had a different strategy and we have traction not only in the States but many other markets around the world. So, we are completely confident that this has no reflection on our promise to capture serious share with beverage industry.

Jon Andersen - William Blair

Just one more guys. As you kind of rolled out to a number of high profile new retail accounts here in the U.S. Wal-Mart being most recent. Can you talk a little bit about how your business has performed in some of your earlier accounts? I’m thinking department stores, bed, bath & beyond. And you think you will get the same kind of support around the holiday this year from those earlier accounts, I know you had quite a bit of support in the past both [in prints] and in store, but with the evolving distribution I’m just wondering how that, you see that playing out?

Daniel Birnbaum

Most retailers don’t love competition, but we are exercising a product segmentation strategy that’s a key part of our strategy which enables retailers to shine even in the face of competition where supporting the brand with strong marketing and very focused marketing efforts which enabled the retailers to grow even in the face of our expansion strategy. And it's playing out well. We have full support of our retailers, I don’t know of thing the retailer that we have lost, national account that we have lost even in light of this expansion. And our brand spans across a broad spectrum of retail segments from club stores and mass all the way to (inaudible). And this is unprecedented. I don’t know another brand that spans that that type of the [stay]. As far as the outlook for the holiday, right now we are working on those plans with the retailers and we are allocating our resources to ensure that we will anniversary last year.

Jon Andersen - William Blair

One more maybe for Danny. Did I may have missed this, did you specify what the ad spend was in the quarter and the outlook for the year?

Daniel Erdreich

Yes, if you look at the CFO commentary you will see there is a section about selling and marketing expenses. Overall the ad spend was approximately 18% of revenue this quarter and as for the outlook for the rest of the year, we said last time and we continue with it that we expect A&P to be approximately at the same level of last year maybe slightly higher as a percentage of revenue.

Operator

We will go next to John Faucher with JPMorgan.

John Faucher - JPMorgan

I know you talked a little bit about the Italian distributor issues and I guess can you talk a little bit about the general consumer environment you are seeing over in Europe, whether you are seeing trade down into your products or whether the price point in the soda makers is too high, is the economy sort of struggle. And then also you talked about the Czech Republic issue in the past couple of quarters. Do you think were passed that completely at this point in terms of just trying to model that out over the next couple of quarters.

Daniel Birnbaum

The consumer (inaudible) we are experiencing in Western Europe is actually solid, other than Italy, if we neutralize the effect of Italy, we have strong growth in Western Europe and we were hearing from our retailers there that there are no strong indicators that would suggest otherwise. So, no signs of concerns there for us right now, Italy is an isolated situation. I think it's related as much to the economy as it is to the particular situation at our distributor has right there which we are working through as I mentioned earlier. But an important indicator that we look at is to assess whether market is stable and what’s really going on is the gas exchange situation. Because they are less fluctuating based on seasonality, they do but less than syrups for example, there is less issues of inventory and pipeline. And we see that in Europe there is solid growth of the gas exchange program, and by the way even in Italy, in Italy we had double-digits gas exchange growth in Q2 which we really reinforces the fact that it's not a consumer situation so much as it is a particular distributor situation in Western Europe.

As far as the Czech distributor goes, they turn the corner and the fact that they are in much more normalized inventory situation right now, so we can expect to see some orders for and we already have forecast for what is for the rest of this year from Czech Republic. And I’d say that, that distributor in a way that it works, even though we are only a small part of their business, they do [white goods] in the Czech Republic but as far as their inventory situation with us they are in almost normalized, almost completely normalized state, so from a modeling standpoint we should count them in almost entirely.

John Faucher - JPMorgan

And is that business growing from, I mean I’m assuming that business is still growing on underlying basis and this is just an inventory issue.

Daniel Erdreich

The business is growing not only due to inventory issues, we have sell-through numbers, sell-out numbers for our distributors and I can tell you that many of them are showing higher rates of sell-out numbers than our sell-in volumes to them.

Operator

We will go next to Bill Schmitz with Deutsche Bank.

Bill Schmitz - Deutsche Bank

Couple of first housekeeping questions, just what was the currency impact on the top line in the quarter?

Daniel Erdreich

The currency didn’t have much of an impact on the quarter; by the way you can also see there is section about this in the CFO commentary. We have the currency that was there that had the majority of impact was the Euro but the average exchange rate of the Euro during the quarter was 1.28 and it's pretty close to our conversion rate over with which we are using to convert 2011 numbers. So, there wasn’t really a major impact on the top line. On the expense side, we have the natural hedging, due to expenses in same currencies, euro and Israeli Shekel that are offsetting any change in the Euro and we also have of course hedging transaction that we had in place. So, overall there wasn’t any material impact of FX on the quarter.

Bill Schmitz - Deutsche Bank

And then other sort of housekeeping question before I get my real questions is, when you give us volume numbers or soda makers and consumables, are those restated for the way you are looking at it, where you are kind of excluding the [spare canisters] from the starter kit, so those have to be restated or the numbers that are in the deck associated with the conference call the right ones.

Daniel Erdreich

No, all of the numbers they are going back are restated to reflect this per cylinders within the gas refills.

Daniel Birnbaum

Let me explain Bill, we are not restating the cylinders and starter kit. The cylinder that’s in the starter kit is not considered a gas refill. It's part of the starter kit. What we did restate is the spare cylinders on the shelf at retail which is a separate item comes in a cardboard box.

Bill Schmitz - Deutsche Bank

So, if I bought (inaudible) I bought the extra separate spare canister and that will be considered not a starter kit but consumable.

Daniel Erdreich

No. The cylinder in the starter kit is not the consumable.

Bill Schmitz - Deutsche Bank

Exactly.

Daniel Birnbaum

Bill, I suggest that you actually go out and do it, buy a kit and then you will really know for sure.

Bill Schmitz - Deutsche Bank

I already have one. So, also the pricing in a quarter, it looks like there is a big delta between some of the volume numbers and the sales number, so was that like a big ASP increase, you can talk about maybe the average selling price trends year-over-year.

Daniel Erdreich

We moved to 75% direct selling compared to 58% direct selling in Q2 last year. So, the ASP is higher because we are selling much more direct now.

Bill Schmitz - Deutsche Bank

And then you were cash flow positive this quarter, I mean will the company be cash generative from this point forward. So, will you generate cash every quarter from this point out?

Daniel Erdreich

We are looking at our focus for the year and we expect to be excluding the acquisition and other exceptional items that we had during the year, we expect to be cash positive this year. The business for itself was a healthy business that creates positive cash flow. So, we expect to be positive this year.

Bill Schmitz - Deutsche Bank

And then can you talk about the year-over-year increase in advertising and like where it's been spent and how you see that playing out for the balance of the year?

Daniel Erdreich

We are actually using more or less the same plan as we had last year, last year if you remember we had 16% of revenue allocated to A&P and the majority of it went over to the U.S. and we are looking at the same level of spending this year, again the majority goes to the U.S. we expect to have for example this quarter about 50% of our A&P was is in the U.S. and as we move to fourth quarter this rate will even increase.

Bill Schmitz - Deutsche Bank

It looks like the sell-in at Bon-Ton and J.C. Penney last year was the same as the Wal-Mart sell-in, I think you said it would be up 60% ex both of those, is that actually correct?

Daniel Birnbaum

What I did in response to John’s question or Joe’s question rather was, if you isolate pipeline any pipeline to a new retailer which is not consumer purchases, it's not recurring artificial. So, we take out that pipeline to Wal-Mart for Q2 of this, then we take away pipeline from Q2 of 2011 and looking at 2011 the pipeline was to new retailers and we expand it to then, and it was Bon-Ton and J.C. Penney. And I’m talking about the revenue, then if you eliminate those revenues from both years then we see growth in 60% in revenues [in states].

Bill Schmitz - Deutsche Bank

This I think the reported U.S. was on 63, and then ex the new distribution both quarters it was 60, so doesn’t it mean that Bon-Ton and J.C. Penney was the same as Wal-Mart, is that math work or am I missing something?

Daniel Birnbaum

The reported U.S. revenue increase was 97%.

Bill Schmitz - Deutsche Bank

I’m talking about just soda makers. Why did you say soda makers are plus 63 and I think you said ex-Wal-Mart it was plus 60?

Daniel Birnbaum

No, we are talking apples and oranges, so on revenues I’m revenues, total U.S. revenue growth was 97% excluding all pipeline filled with 60%. As far as the soda maker units we don’t report our soda maker sales to Wal-Mart but I can tell you directionally that they were positive across the board in the United States.

Bill Schmitz - Deutsche Bank

Okay, you won’t tell us what the soda maker percentage increase would ex the new distribution next quarter, I mean was it.

Daniel Birnbaum

We never disclosed unit sales by retailer and that’s what that number would mean.

Operator

(Operator Instructions) We go next to Tony Brenner with ROTH Capital Partners.

Tony Brenner - ROTH Capital Partners

I have two questions, first, I wonder if you would discuss a little bit the progress you are making in the away from home market and what your plans are to step that up a little bit?

Daniel Birnbaum

We have UL certification for our Italian made products (inaudible) we place them in several test locations during the second quarter and we are evaluating now the product performance relative to the consumer and also building the support network to service this, because it's a different ball game. So, that’s where we are, so we are still in test mode, that’s for the U.S. elsewhere we are already selling these products in different markets of the world, and overall it's still not a material part of the business and we expect it to grow overtime, but we don’t want to focus our entire attention on this segment.

Tony Brenner - ROTH Capital Partners

Are you referring to food service model or an office model?

Daniel Birnbaum

Initially restaurant and café type of model, food service as well, and not at this stage an office model but we have the technology to do that. We just didn’t exercise the sales strategy to go ahead and make that happen at this point in time, but we have the ability to provide office solutions as well.

Tony Brenner - ROTH Capital Partners

And second, what’s the reason for the lower projected tax rate, the 8% and is that an applicable rate going forward beyond this year?

Daniel Erdreich

Right now we are working in a lower tax environment, we are part of a program of Israel which tax rates for companies like ours are going to go down from 10 to 6% overall tax rate during the next two years. We also have lower tax rate in our Swiss companies and we also have approximately $40 million of tax losses that we can utilize. So, with the combination of all of these we are seeing lower effective tax rate. This will be the situation for I say the near to mid future. And going forward in the longer term we expect to see tax rates increasing as our U.S. business is growing, then we will see probably numbers that are higher and going into mid teens.

Tony Brenner - ROTH Capital Partners

Right, but for 2013 that 8% is applicable?

Daniel Erdreich

Well, we would be more or less in the region of 10% and little (inaudible).

Daniel Birnbaum

The advantage of some tax provisions that we are able to release as a result of some discussions we are having with authorities in different places, so that really gave a tax benefit that will not recur beyond or will not materially recur beyond 2012.

Operator

And we will go next to Jim Duffy with Stifel Nicolaus.

Jim Duffy - Stifel Nicolaus

The economics of distribution conversion have been phenomenal, the Italian distributors, is that a business you would think about bringing direct or I guess and are there other things in the pipeline where there is opportunity to convert distributors?

Daniel Birnbaum

Well, I guess that would depend on whether our Italian distributors speaks English or not, but the answer is that much like our strategy with the Nordic distributor where we reach the conclusion that we would better service the market if we would control it. It looks like the Italian distributor is also in a position where they might not be able to service the market or the long haul. And we would be considering taking over that business. I can’t say at this point in time that that’s something that’s in the works, but at some that would be an obvious opportunity for us probably in the short to medium-term unless they are able to turn around the situation very quickly.

Jim Duffy - Stifel Nicolaus

And then Daniel is that part of the strategy on a go forward basis you see distributor conversions or they are really one-off?

Daniel Birnbaum

They are one-off because I’ll tell you, I’ve come from companies where (inaudible), so I realize the opportunity in that, but we have so much to do, and so much opportunity with our wholly owned market especially the U.S. We don’t need to acquire growth, we need to just execute with excellence. And that’s what we are committed to doing, but if we see an opportunity with a distributor in a market that’s a good market or that’s a strategic market and Italy is a good market then we will execute that and we will manage that. But we are not actively seeking this as a strategy.

Jim Duffy - Stifel Nicolaus

The Asia business about 9 million quarterly run rate growing in size, can you maybe help us understand the order of importance of the countries?

Daniel Birnbaum

There are several interesting markets in Asia that were tapping into now, Japan obviously being kind of the most interesting of them, even from a population standpoint and income standpoint. And also their early (inaudible) to our business model is very exciting for us. It's a distributor market and we are working over there to gradually expand into new trade channels, for example, moving from department stores into consumer electronics and such. So, that’s a very interest market. Other markets that are very interesting are Korea, and it's a large population more than 40 million people there with growing disposable income and at culture of drinking soda. So, that’s a market that we have seen nice double-digit growth in the last quarter as well. And then we have in the Pacific zone, Australia and New Zealand which are very interesting as well. Although they are smaller from a population standpoint and market potential standpoint, but they both exhibited double-digits growth for us as well and all of that together explains why we have seen 234% growth in the second quarter of Asia-Pacific and I do expect Asia to continue to grow as a percentage of our total pie in the next few quarters.

Jim Duffy - Stifel Nicolaus

And so the countries as you spoke about them, is that representative of their relative revenue contribution at this point?

Daniel Birnbaum

I don’t think that would be the ranking of them, because Japan is still young, so it's still small and I’d think that due to the heritage and time that we have been in Australia, that would rank the most important market in that region.

Jim Duffy - Stifel Nicolaus

And then Danny, question on the marketing spend, I know there has been a lot discussion around this on the call thus far, but within the U.S. you have given us directionally the number. How you plan to allocate between co-op, in-store, media spend etcetera, any change in the strategy from years passed, in particular I’m curious about the level of in-store demos.

Daniel Erdreich

As Daniel mentioned, we are increasing let’s say the media spend on account of below the line spend, and there we are moving into more general marketing campaigns, which will go on media on account of the local store activity.

Jim Duffy - Stifel Nicolaus

Wal-Mart began doing refills in June, is that correct or was it July?

Daniel Erdreich

We started shipping them in mid to late June and may start it appearing on the shelves in early July, mid-July.

Operator

We go next to Jim Chartier with Monness, Crespi and Hardt.

Jim Chartier - Monness, Crespi and Hardt

The first question on guidance, revenue growth increases more than the net income growth which implies the margins might be little bit lower than you previously expected. Can you just give us little more color on that?

Daniel Erdreich

Just continuation of our policy and this is a growth year, another growth year for SodaStream in the U.S. and we are seeing A&P as the most the best investment we could make in the market and right now the additional gross margins and gross profits that we are creating from the growing revenues, we will allocate to a great degree to an additional A&P spend in the U.S. which will provide us very high return in the years after with the additional consumables and then soda makers and the establishment of the category.

Jim Chartier - Monness, Crespi and Hardt

And then Italy can you give us an idea about how big that market is, what the impact was on second quarter results and what you expect the impact will be on third quarter and fourth quarter?

Daniel Erdreich

Italy is not really a material market for us in terms of the overall business, it represent some level of revenues within Western Europe and then Daniel provided just growth indication that’s what in Europe excluding Italy which was 43% for Western Europe. But overall going forward we didn’t include these they have very substantial market in our portfolio.

Jim Chartier - Monness, Crespi and Hardt

And Japan, what kind of door growth should we expect for the second half of this year relative to last year?

Daniel Birnbaum

Well, we expect to add several hundred doors in Japan, I don’t know yet exactly how many, but somewhere between 2 and 400.

Operator

We will go next to Mitch Pinheiro with Janney Capital Markets.

Mitch Pinheiro - Janney Capital Markets

Could you guys talk about the number of retail locations that you expect to have by year end in the United States?

Daniel Erdreich

Right now our distribution in the U.S. is further marching in most of the retail locations that we planned on being during the year now with Wal-Mart on board. So, we don’t expect any material increase in additional retailer to be added during the rest of the year.

Daniel Birnbaum

Nothing significant but there will be small bump in the back half of the year.

Mitch Pinheiro - Janney Capital Markets

Can you provide estimate of your U.S. install user base?

Daniel Birnbaum

We do that on an annual basis, typically at the end of the year we did that the Q4 call for last year, because there are so many dynamics that are fluctuating quarter-by-quarter and affecting those type of modeling that we do it over a longer period of time looking backward, but an indication that we can look at now is the CO2 refills that are growing nicely in the States, 700,000, that’s up 93%. And when you combine that with the strong machine sales that we have had in Q2, 195,000 machines that’s up 63%. So, those are positive indicators that the household penetration is growing solidly.

Mitch Pinheiro - Janney Capital Markets

And obviously your strong consumable performance certainly underscores perhaps improved stickiness, but are you seeing attachment rates or some measure of regular usage, stable increases. Do you see anything that you could share with us?

Daniel Birnbaum

We see the consumables as such an important indicator for stickiness and other then the gas refills which is very important indicator in the case of the U.S., we also closely monitor the syrup sales and the syrup sales quarter-after-quarter continue to demonstrate a very strong ratio to gas, it's 3:1, which is incredible. I mean if an American user is using four gas refills a year that means they are using 12 syrups a year and that compares to four syrups a year in Europe or in rest of world. So, that’s a very strong indication of stickiness and certainly when we have projects like we do with Kraft and Crystal Light and Country Time and Kool-Aid. And by the way the Kraft here is performing very, very well. And they have decided to expand the program to Kool-Aid. So, that’s only more tail-wind for higher stickiness and usage levels moving forward.

Mitch Pinheiro - Janney Capital Markets

Is there any unusually things to know regarding how shipments through the holiday will come, are we going to see very similar patterns to last year. Are you going to be shipping earlier so we might see an impact in Q3. Can you talk about that a little bit?

Daniel Erdreich

Well, we don’t give specific guidance on the quarter, but I can just tell you in general that this will depend on the timing of the expectations of our retailers and distributors to receive their holiday season product. Last year we saw some early request and there we might see the same going through this year.

Daniel Birnbaum

I’ll take this opportunity to elaborate a little bit on the dynamics of around inventory in our case it can be sales when you introduce a new line of product such as our new line of soda makers which is very different from everything else we have done until now. We have added another color or another model that was similar, but the source is receiving such strong reviews around the world including in the U.S. by media and also buyers that we have to closely manage the transition from an inventory standpoint and also our manufacturing capacity standpoint to make sure that we don’t have too many bumps ups or down when retailers might be facing out of one line and entering another. And that’s something we are cognizant of and we are managing and I’m saying this because we just need to be prepared that there could be a situation that across that fence between Q3 and Q4 for example, where we do think pipeline in one model and have not yet build the other or vice versa. We may have shift the new one and then we need to wean off the other. So, there is a little bit of that going on but we will obviously manage it as closely as we can and keep posted on those development.

Operator

And we will go next to Greg McKinley with Dougherty.

Greg McKinley - Dougherty

I wonder if you can just really quickly recap how is Source different than your existing soda makers.

Daniel Birnbaum

The Source is designed by Yves Béhar who is a tier 1 designer lives in San Francisco and he is credited with some fabulous designs that he has worked on in the past. But from a functional standpoint (inaudible), but its price point is lot more achievable. (Inaudible) $199 the Source is going to hit the shelves at $129 and there will be a model that’s a little bit more expensive at 149 and later on there is going to be a model at $99. So, it's achievable for the consumer and it has the (inaudible) which is very quick phase time device. It also has LED indicators that help the consumer know how much carbonation they are pumping into the bottle and it's very seamless and easy to use. So, that’s our functional standpoint, it's going to come with a new bottle starting late this year or early next year, which is a beautiful lifestyle carbonation bottle, also designed by Yves Béhar. But really beyond the functionality what’s distinctive about the Source is its visual appeal and its design. And that’s the reason we are getting reviews on it, it is an elegant [mono block] machine which has been compared to Apple in design land and we believe everyone is going to want to have one of those on their kitchen counter, obviously for us it's not good enough that it's going to be sitting on (inaudible).

Greg McKinley - Dougherty

And that’s manual operated versus automatic?

Daniel Birnbaum

Yes, it's manual but it's a lot quicker and when you combine it with the SodaCaps which we’re launch about a quarter later by the way. SodaCaps are in test market in Israel right now by the way. So they are available at retail.

Greg McKinley - Dougherty

So, those will be a Q4 launch the SodaCaps?

Daniel Birnbaum

SodaCaps will be a Q1 launch and Q4 will start seeding them and sampling them, but we won’t be selling materially in Q4. But from a user experience the combination of the Source and SodaCaps really cuts preparation time in half.

Greg McKinley - Dougherty

In terms of potentially cording of their branded partners, is that something that investors should be thinking as something we will see development time over the next 6 to 12 months or so. And then does SodaCaps play a role in that in terms of the brand owners perception that you have consistent flavor mix so that it taste the way the brand is intended to taste any thoughts around that?

Yonah Lloyd

Absolutely, we see from the success of the relationship with Kraft that’s it's an excellent strategy to take going forward. It's a magnet at the stores because the consumers recognize the brand that brings them and hopefully that leave them to buying the machine and then continuing on with those syrups. So, we are in discussions with tier 1 brands across various categories in beverage land. And you should expect to hear more announcements on this in the future. As far as the consistency issue, sure certainly for [culminated] beverages that is an issue and we are certainly in discussions and working through it, but I can’t really comment more at this time.

Greg McKinley - Dougherty

And finally, talk little bit about some of the geographies that you have mentioned in the past, you talked about Brazil, I think you mentioned India, where we stand with those in terms of new distribution opportunities.

Daniel Birnbaum

We are constantly evaluating new geographies and the ones you have mentioned are very much on our map, we are looking at India, so stay tuned on that. Brazil has already launched almost two months ago now, or a month and a half or so ago and at retail they are doing very well received. And there is other markets, Latin America largely white space for us and the markets like Chile and Argentina, very good markets for us. The business in Mexico is an opportunity for us but at the end of the day while we realize there is opportunity to grow a new markets and penetrate the developing markets most of our opportunities is right here in the developed markets and we just have to execute and take some serious share away from the leading brands. The market is there.

Operator

And the last question today will come from (inaudible) Barclays.

Unidentified Analyst

The growth in the United States and emerging markets is relatively new growth and that’s great. I think what I’m curious about is in your older markets in Europe and perhaps in Israel where some customers may have stopped buying flavors as much as they did at the beginning. And now I think with the marketing that’s going on, are the new flavors that are coming out, are you seeing those customers come back and buying disposables at higher rate than they were. Are you seeing a regrowth in that market I guess is the question?

Daniel Birnbaum

Absolutely, we are but even before we started launching these new flavors and SodaCaps now, we are seeing solid growth in their more mature markets across the board on soda makers and on consumables. So, it's not so much that a markets that’s maturing is becoming a cash cap for the consumables. That’s in theory, but in practice we are growing we are selling a lot of soda makers in more developed markets like Germany and Australia and Israel and whatnot. But the new technologies, the new syrups, the SodaCaps, the Source soda maker is an opportunity for us to relaunch and reinvigorate the brand which in some markets could be stale but it's around or decades without too much marketing support and we are seeing fantastic response. In market like Israel we just penetrated a large chain of convenient stores for example. 170 stores with a new range of soda makers it's the (inaudible), and with the whole collection of 20 some syrups. So, that’s an example of the market that’s very mature so to speak and receptive of their new product and triggering growth in those markets. So, we are not looking at the mature markets as those that won’t provide growth they do provide growth and profitable growth.

Unidentified Analyst

Just a follow-up on that, I mean you mentioned (inaudible) but when you are seeing growth in those markets do have any data that’s tell you that those are new home or are they people who (inaudible) upgrading to new products?

Daniel Birnbaum

There is a combination of that, every time you saw soda maker we know that some of the soda makers will go to an existing users upgrading and some will go to new one, to us it's the same. We want to keep that user engaged and using and if takes a new soda maker to keep them using then that’s good. We often do exchange programs trade-in programs and we receive the old soda makers from consumers and sometimes you get soda makers that could be 15 years old. And that’s an indication of how long a consumer will use one of these devices. And then once a year we do market surveys, tracking studies in all our biggest markets and now we are up to about 20 markets where we are doing these tracking studies and we track. From year to year our household penetration levels or usage levels when they got the soda maker, where they got it, why they go it, and why they are using it. So, that’s something we are monitoring and Israel just launched about two months ago, so it's hard for me to comment specifically on whether these end of users, but I’m pretty confident that at least half of them are new and about half might be existing.

Daniel Erdreich

We are not giving specific markets numbers but since you are asking about the Israel and Germany I can tell you these are two markets that are 17 and 20 years old markets and they both posted double-digit growth this quarter.

Operator

That have been our last question, I’d like to turn the call back to our presenters for any additional or closing comments.

Daniel Birnbaum

Thank you, Matt. Thank you all for joining the call. And please note that we will exhibiting our new products at the annual ISA Conference in Berlin early next month. So, if any of you will be in the area we invite you to stop by the booth and say hello. Please contact Yonah for more details and we look forward to talking with you again in November.

Operator

This does conclude today’s call. Thank you for your participation, have a good day.

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