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SodaStream International, Ltd. (NASDAQ:SODA)

Q3 2012 Earnings Call

November 7, 2012 8:30 a.m. ET

Executives

Yonah Lloyd - Executive Director, Corporate Development and Communication

Daniel Birnbaum - Chief Executive Officer

Daniel Erdreich - Chief Financial Officer

Gerard Meyer - President, SodaStream USA

Analysts

Joe Altobello - Oppenheimer

Jon Andersen - William Blair

Bill Schmitz - Deutsche Bank

Jim Chartier - Monness, Crespi and Hardt

John Faucher - JPMorgan

Greg McKinley - Dougherty & Company

Scott Van Winkle - Canaccord Genuity

Operator

Good morning. My name is Audra and I will be your conference operator today. At this time I’d like to welcome everyone to the SodaStream International Third Quarter 2012 Earnings Conference Call. Today’s call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Yonah Lloyd, Chief Corporate Development and Communications Officer. Please go ahead sir.

Yonah Lloyd

Thank you, Audra. 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 supplemental slide presentation featuring business highlights. These are also available at our IR website and on our new IR app for both iPhone and Android platforms.

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 these forward-looking statements, our actual results may differ materially from anything projected in these forward-looking statements. As such we can give no assurance as to their accuracy and we assume no obligation to update them. Results that we report today should not be considered as an indication 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 projections 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

Thanks, Yonah. Thank you for joining us, and for those of you on the East Coast we hope you and your families are recovering from last week’s storm.

We had a very strong third quarter with record revenues of $112 million, up 49% from a year ago, and record diluted earnings per share of $0.80 inclusive of a onetime tax credit of 67% versus the year ago period. This performance included record unit sales for both soda makers and consumables as well a strong growth in all of our four regions with revenue in Americas up 61%, Western Europe up 33%, CEMEA up 37%, and Asia Pacific up 145%.

These results highlight the globalization of our business and the increased activity among our growing user base. Within each of our regions, several countries delivered very strong results. In the Americas, U.S. sales grew 48% versus last year. During the third quarter we sold 301,000 soda makers representing a year-over-year increase of 21% and a sequential increase of 54%. This is a notable gain achieved despite minimal new door pipeline fill and only modest holiday orders compared to year ago Q3.

Last year we began shipping Bed Bath & Beyond and Macy’s holiday orders during Q3. This year those holiday orders began shipping only in October due to the timing of our new Source soda maker. Excluding this holiday pipeline timing shift, soda maker sales in the U.S. were up about 100% versus a year ago. Gas refills in the U.S. were up 82% year-over-year to 702,000. The net sequential growth excluding pipeline was approximately 20%. This included Wal-Mart roll out in Q2 and the gas exchange tests at Target and Kohl's in Q3. And also at the very end of Q3 we began rolling out 130 liter value-size gas cylinder at Staples. To date, we have achieved nearly 9000 gas exchange locations in the U.S., up from approximately 3000 a year ago.

Finally, U.S. flavor unit sales increased 114% to 2.1 million and were roughly 60% up sequentially excluding pipeline, primarily the Wal-Mart roll out in Q2. In addition to these sell-in results, sell-out at retail during the quarter was also strong. According to NPD data, sell-out for soda makers, flavors and gas refills were all up high triple digits. These are overstated because they are total sell-out figures rather than same-store sales, and as such this level of triple-digit growth reflects our significant door count increase captured in the NPD database.

However, reported NPD sell-outs per door across each of our product categories has significantly increased year-over-year indicating growing productivity per door in units and dollars. On a same-store sell-out basis, data provided to us directly by retailers shows steady growth year-over-year. We are very pleased with this, especially considering we more than doubled our U.S. store count to 14,000 during this period.

To date, our U.S. strategy has focused on growing our retail network. These last few years could be characterized as phase one of our long-term plan. We have heard the concerns about our ability to further growth in the absence of significant new retail expansion. With our recent rollout to Wal-Mart, some have even suggested that this is the beginning of the end for SodaStream in the U.S. However, we view this point in the brand’s evolution as the end of the beginning.

Our focus now shifts to leveraging the powerful network of retailers we have in place to further grow our installed user base and generate more usage. This will be accomplished through the continued introduction of innovative new products like the Source and SodaCaps, expanding strategic partnerships like Kraft and Breville, and enhanced marketing activities highlighted by the upcoming launch of our new global branding campaign.

These combined activities will serve to establish SodaStream as a mainstream alternative to traditional soda brands. Our plan is to share updated information about the size of our U.S. active user base and household penetration on an annual basis as we did on our year-end call in February. However we believe that by waiting until our Q1 call in may, we will be able to provide a more accurate assessment of our progress as the data from our tracking study will then incorporate feedback from consumers a few months after their holiday purchase.

Before moving on, other developments in the Americas included the acquisition of our Canadian distributor assets and the decision to establish a wholly-owned subsidiary in Mexico, which by the way is the highest per capita soda consumption market in the world. We are also excited about the potential in other Latin American markets which index strongly for soda, notably Brazil.

Now to Western Europe, where our strong sales momentum from the first half carried over into the third quarter with growth of 33% over last year. We continued to experience robust sell-in and sell-out in our largest markets led by France, followed by Germany and the Nordics. In France, our business was exceptionally strong with sales to your distributor up 86%. While at the same time their sell-out of soda makers, syrups and gas increased 58%, 85% and 78% respectively.

Also in Western Europe you may recall from our last call, we referenced our Italian distributor as facing financial issues due to the soft economy in that market. Our distributor continues to struggle with the economic slowdown but on a positive note, sell-out of gas in Italy was up double-digits in Q3. A good indication that our user base remains active in this market despite the challenging consumer environment. As we did last year with the Nordics, we are closely monitoring the situation in Italy and evaluating our options moving forward.

As we anticipated, sales to the Czech Republic rebounded in the third quarter driving a 37% increase in our CEMEA region. Following strong sell-out of soda makers and consumables in the first half of the year, our Czech distributor resumed a more normalized buying pattern. In addition to our improved results, distributor sell-out in the third quarter remained very healthy.

Asia Pacific revenue increased 145% to nearly $11 million. Japan has quickly become our largest market in the region underscoring the positive consumer reception SodaStream has continued to enjoy following our launch late last year. At the same time, Australia, a country where SodaStream has been for decades, exhibited strong double-digit growth. Australia is a great example of the growth opportunities we are creating within established markets through new product launches and more effective marketing programs.

Asia Pacific is an enormous region which includes China and India, the two most populous countries in the world, both of which we are targeting to enter at some point during 2013.

In summary, our global business was firing on all cylinders in the third quarter. And our ability to translate a 49% sales increase into a 60% operating profit gain clearly demonstrates the power of our business model.

Looking ahead, demand in the fourth quarter appears to be stronger than we expected. Combined with our record third quarter results, we are raising our full-year sales outlook and now expect 2012 revenue to increase approximately 46% over 2011 levels, up from our previous outlook of 40%. We are also raising our bottom line outlook for the year and now expect net income to increase 59% over 2011, up from our previous guidance of 55%. On an adjusted basis, net income is now projected to increase 50% compared to our previous projection of 47%.

Our update full-year net income outlook is based on our fourth quarter gross margin assumption of approximately 54%. The projected year-over-year decline is the result of some exceptional onetime expenses related to demand that exceeded our initial projections and the short delivery window ahead of the holiday season. In order to ensure on time deliveries, we were required to utilize more third party manufacturing than expected, as well as airfreight a portion of shipments. Compounding this temporary issue even further was the impact of Hurricane Sandy. Due to the storm, the port in New Jersey was closed during a critical holiday shipping window and therefore we needed to spend more on transportation.

The combination of these events will impact Q4 gross margin by approximately 200 basis points, which equates to approximately $0.11 in diluted EPS. However, for the full year gross margins are projected to be in line with our original guidance of approximately 54%. I realize there are a lot of moving parts to our revised net income outlook so I will quickly summarize.

One, we recorded a onetime tax benefit in the third quarter worth approximately $0.10 in EPS. Two, this is being more than offset by the $0.11 in temporary or onetime gross margin I pressure I just outlined. And three, better than expected revenue in Q3 and our increased revenue outlook for Q4 in total equates to approximately $17 million or $0.05 in EPS.

In closing, we are very pleased with the company's performance through the first nine months of the year. We have been able to post significant gains in revenue and profitability while at the same time making the strategic investments that are critical to our long-term success. We continue to invest in R&D, a competency we believe provides us with a strong competitive advantage. We are also on schedule with our capacity expansion plans which will improve our speed to market and overall efficiency. And we are very excited about our new TV campaign launching tomorrow, which will help drive brand awareness and category leadership.

We are confident that our global traction will serve as the launching pad to propel our business further ahead in 2013 and well beyond. Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will go first to Joe Altobello at Oppenheimer and Company.

Joe Altobello - Oppenheimer

First question, just wanted to get an update on how trends are going at Wal-Mart post the launch there. And maybe also how is the gas exchange trials are doing at Target and Kohl’s?

Daniel Birnbaum

We can't give specific retailer data, but I can tell you that broadly things are going very well at all American retailers, and that includes Wal-Mart. As far as the test, the gas exchange test, it’s a bit too soon to say. We will know during the next few weeks, probably by the end of the holiday and as always, we expect to roll out to the entire chains and that’s happened to each and every test we have had in the U.S. until today.

Joe Altobello - Oppenheimer

Okay. But in terms of Wal-Mart, have you guys expanded your product portfolio there? Your offerings there, I should say.

Daniel Birnbaum

No. We opened up there with a full portfolio. 30 syrup flavors including the Kraft range, 2 soda makers, gas exchange, spare gas, spare bottle. So they came out at the gate with the full gamut. And we didn’t expect to expand the product portfolio there and as in most cases with most retailers, we are looking for a strong holiday season and good feature and display activity across retailers. We have a locked up end cap in to next year at Wal-Mart which is very unusual. Normally you get those for a very short window, four-week windows. And we have maintained our end cap at wall Wal-Mart stores into next spring.

Joe Altobello - Oppenheimer

Okay. That’s helpful. And just secondly, one of your competitors announced that they have a relationship with Cuisinart. Just curios, your thoughts there? Maybe your opportunities for SodaStream to partner with other appliance manufacturers in the future? Thanks.

Daniel Birnbaum

Yeah. Well, success does attract competition and it’s no surprise that this happened and there will be more. But you should have no doubt that we are committed to continuing the leadership of the category and we look forward to this competition. We thrive on it. As far as cooperating with other brands, just like we have earlier announced with Breville there could be and there probably will be such co-operations. But we like to announce things when they are done, when they are complete.

But I would like to give you little bit of color about what happens when someone competes with SodaStream around the world. We had one example in the States that you all experienced. But I will give you some other examples. Two years ago the leading appliance brand in the Nordics, that’s OBH Nordica, launched a soda maker across Scandinavia. If you will, they are the Cuisinart of Scandinavia. They supported their launch with TV and secured immediate broad distribution. And today three years later, they struggle to maintain their 5% market share and their price went from €129 per soda maker to €99.

Here’s another example. Two year ago in Italy, [Indesit] that’s the third largest kitchen appliance brand in Italy, launched that same soda maker that OBH launched. And their TV advertising drove our sales, at the peak they reached 10% market share. And today most retailers are delisting their products because of poor sell-out and their market share is down to single-digit.

And I can go on and on, but there is one important example. AGA also in the Nordics, which is a subsidiary of one of the world’s largest gas companies, that’s Linde Gas, is a well known and trusted Nordic household name. And they launched a full carbonation system in 2009 that included soda makers, gas and syrup and they captured 10% market share on soda makers. But AGA’s entry dramatically grew the category. And since their launch in 2009, the category household penetration in Sweden grew from 10% to 30% today.

SodaStream holds more than 80% of that penetration, but it grew the category. So that’s what we expect will happen in the U.S. as well. A lot depends on the execution that Cuisinart will do. On how much they will dedicate to investing in there launch, the quality of their products. But we do expect to see the category grow. And this should do away with any of the skeptics out there that say that this is a fad or a passing theme. Here we go. We have some attractive good brands out there that also want to participate in this category. And we are well positioned to leverage the technology and the product line and the first mover advantage, and also our focus to in here because this is all we do. And we also know that our real competition lies in a red can of soda and nothing will distract us from that.

Operator

We will go next to Jon Andersen at William Blair.

Jon Andersen - William Blair

I wanted to ask just briefly about the gross margin impact in the fourth quarter. Daniel, you referred to that as kind of an exceptional impact. Should we consider that onetime in nature and something that you have the capacity etcetera to address as you move into 2013? Thanks.

Daniel Erdreich

Hi, Jon, it’s Danny. Yeah, it’s a onetime thing. Actually most of this 200 basis points are to do with just delivery, high transportation cost. We had to airfreight deliveries to the U.S. because of closed ports and really very short window to get there before Christmas. And to airfreight a container, just to give you a magnitude, it’s ten times more expensive than to send it by sea. So this was really an exceptional thing and this was actually -- airfreight was the main item there. We also had to airfreight, in some cases, raw material. So it was really an exceptional thing.

And if we have to look at what our gross margin would have been excluding this, we would have been looking at something like 56% gross margin in the fourth quarter.

Daniel Birnbaum

Let me add to that Jon. You know every quarter we are asked, are we capable of servicing the growth. And until now I have always said, yes, definitely. We are investing in capacity and inventory to be able to do that. And today for the first time, I got to say that our growth exceeded our expectations. We did not expect to grow 50% in Q1, 49% in Q2, and 49% in Q3, otherwise we would have guided closer to that. But we guided 28% coming into the year. Something is going on. Consumer demand is very high. Retailers are embracing this. And because our demand is exceeding our expectation, we had to scramble a little bit. Okay.

Now we are going to recover from this obviously and we are not losing a lot of sales, but we are talking about a lot of transportation that we could have avoided because we have multiple sites. We are talking about [co-packers]. Danny mentioned airfreight. Raw materials that have to be ordered in an expedite form which, there is always a penalty on that etcetera, etcetera. So we are going to obviously stabilize as we growth the capacity. I would say this is a temporary situation but its rich man’s problems.

Jon Andersen - William Blair

Absolutely. I was wondering if you could talk a little bit about the new brand awareness program. How it maybe differs from what you have done in the past in terms of the reach that you are looking for, the overall kind of level of investment and the impact there.

Daniel Birnbaum

Yeah. Well, it’s not only in the reach, it’s a completely new approach. A bold one, a confident one, towards the consumer with what we are doing. And the heart of the program is a new TV campaign that we are launching in the U.S. tomorrow by the way. And this TV campaign openly confronts the big soda brands and it aims to take market share from those companies. The campaign is starting in the U.S., it’s going to roll out to other markets after that. And it’s designed to coincide with the launch of Source, which is the hero of the campaign. So that’s the product you are seeing there.

We are estimating a rate card value of about $18 million in media behind this campaign for the initial 12 weeks, globally. That’s rate card, okay. Usually when you buy media it’s below rate card. But it’s a significant commitment. And I will explain a little bit about the campaign because it’s not just another campaign, it’s a very unique one.

The campaign has been developed by an agency called COMMON. They are headed by Alex Bogusky. And Alex, by the way, won Creative Director of the Decade by Ad Age and is considered one of the greatest creative mind in the adverting world. The production of the campaign was directed by Daniel Benmayor, who also directed Converse, PlayStation, Mini, Fanta and Schweppes campaign. The campaign is named, the SodaStream effect, and it’s aimed at establishing a strong brand image and a distinct lifestyle positioning. And it makes a strong statement about empowering consumers to make the world a better place by eliminating bottles and cans. We make the point that consumers can enjoy the bubbles without the bottles and the tagline of the spot is, if you love the bubbles set them free.

The copy will show different vignettes of soda bottles disappearing or dissolving as people use the SodaStream soda maker. It’s a very powerful campaign. We are very excited about it and I am sure that it will deliver the results we expect.

Jon Andersen - William Blair

Yeah, I look forward to seeing it. You had a lot of feature and display activity around the holidays last year. I remember the, what was that, the inside tri-fold with the Macy’s cover, or the Macy’s book. I think a cover of Bed, Bath. How do you feel at this point in time, you know entering that same period with your ability to comp that display activity?

Daniel Birnbaum

We feel good. We have programs locked and loaded across all retailers and it includes features, the circulars, it includes web, displays. Just today I saw an email from Target where we are featured in their -- homepage of their kitchen department. So very strong support from the retailers. At the same time we are also investing in store. We are continuing to doing a lot of in-store demonstrations. The TV monitor program continues and expands, so we have basically a 24-hour demonstration going on with the monitor without have a human being at the shelf. And we have the PR program that continues. It includes the radio endorsements, the radio DJs program that we had.

At the same time we wanted to leave enough money for the TV campaign. So we had to kind of design the mix appropriately. While last year the TV element was pretty small during the holiday season, this time our TV investment will be significantly larger.

Jon Andersen - William Blair

One quick one. I know you are not prepared or able at this point to kind of address 2013, but I know in the past you have talked about a longer-term growth algorithm that calls for 20% top line growth, 25% bottom line growth. Can you comment on that? Is that still intact as we look to ’13 and beyond?

Daniel Erdreich

Well, Jon, it’s still too early to say, to give the 2013 guidance. It’s even direction, we are closing or budgets and our numbers for 2013. We feel very positive about 2013. It’s going to be another growth year but it’s still too early to speak about the numbers.

Operator

We will move next to Bill Schmitz at Deutsche Bank.

Bill Schmitz - Deutsche Bank

Can you tell us, I think there were 5000 new doors added, if you kind of just like read the bottom of the press release it was 55,000 last quarter and 60,000 this quarter. Where were those doors predominantly?

Daniel Birnbaum

You are talking about U.S. doors?

Bill Schmitz - Deutsche Bank

No, no. I think in the bottom of your press release you say, like you are in 60,000 stores globally now and it was 55,000 last quarter. So I am just trying to bridge the gap. We have a model that kind of looks at all the store growth and I am trying to figure where they came from?

Daniel Birnbaum

Globally, rest of world, we have new retail in UK and in Japan, some in France. All over the place. It’s not one particular market that had explosive door growth. And in the U.S. it was about an incremental 1000.

Daniel Erdreich

We are focusing on the U.S., Bill, but you remember we opened Brazil, for example. And then Japan is a new country. So it’s, as Daniel said, all over the place.

Bill Schmitz - Deutsche Bank

Okay. Got you. Are these big stores, little stores, I mean how should we think about the stores you added?

Daniel Birnbaum

It’s a mix. In Japan it’s mostly department stores. Those are big stores. They are actually performing very well relative to department stores anywhere else in the world. We had a record sales day in Japan. We sold more soda makers in one day than we did anywhere in the world, which was 300 in one store. And then the smaller stores, there is independent stores, the specialists, there is all kinds. It’s a mix.

Bill Schmitz - Deutsche Bank

Got you.

Daniel Birnbaum

In the U.S. -- you want to talk about this...?

Gerard Meyer

Hey, Bill, this is Gerard. And in the U.S. we added some doors. We added another 400 Staples doors. So we are now chain-wide in all 1500 doors there. We went into Costco now, back in to Costco and in all of their doors now. So that’s more doors as well. And then we went into Buy Mart and a few others.

Bill Schmitz - Deutsche Bank

Okay.

Gerard Meyer

About a 1000 doors.

Bill Schmitz - Deutsche Bank

That’s really helpful, thank you. And then can you just tell us what the advertising and promotion component of that general and administrative cost is? Usually you break that out for us.

Daniel Erdreich

Yeah, Bill, it’s actually -- you see it written in the CFO commentary. But the number is, a little over 14% of revenue was in advertising and promotion. This is above the rate of last year which was a little over 11%. And as for the other selling expenses, the rate of business is going down to something like a little under 18%. It’s going down from 19%, a little over 19% last year.

Bill Schmitz - Deutsche Bank

Got you.

Daniel Birnbaum

Just to help you plan, model the rest of the year. For Q4, we expect the A&P to be slightly below last year’s level of 25%. And for the year we are still on track to be slightly above the 16%. So it will be slightly above 2011.

Bill Schmitz - Deutsche Bank

And then just on the CO2 refills. They came in quite a bit below our model. Was there an anomaly in the quarter? You know maybe we just model it too aggressively?

Daniel Erdreich

No. It’s actually -- if you go back to our indication you see that this is really working just at the same structure. First of all we have to take out the U.S. refills. In U.S. we had a little over 700,000 refills. And these were refills actually almost with no pipeline this quarter. And you should add to this the refill that came from the Wal-Mart launch in Q2 this year, that only started serving consumers in Q3. So the U.S. is on track and we are seeing a very substantial growth. Even above the 80%-81% that’s been reported, taking into account the Wal-Mart pipeline.

Now if we go into the rest of the world, we do see an increase that indicates that we added something like 0.5 million active users since Q3 of last year. Remember that our model is assuming three gas refills a year and attrition rates of approximately 20% per active user in Europe. If you do the math and take the gas refills of the Q3 last year and do the same math and calculation, you will see that eventually the attrition rate actually was lower. It was closer to 17% during the last four quarters and this is a proof that our numbers in our plan are correct.

Bill Schmitz - Deutsche Bank

Got you. And then just lastly on Europe and some of the distributors you have there. How would you characterize the inventory now? Is it pretty clean? I know we had the Czech things and that’s kind of resolved itself, but is there anybody out there right now that might have either too much or two littlie inventory?

Daniel Erdreich

You know as the company grows and we gain experience, we do learn also how to deal with our distributors. And we have a very tight control over what they are doing over there. We actually in many cases note and tell them you have too much inventory or too little inventory and there we recommend that either increase or reduce orders. So there is very good control from our side on this and right now based on what we know, they don’t hold too much inventory.

Bill Schmitz - Deutsche Bank

Got you. And there were no anomalies in the quarter with either like too much shipments and not enough shipments?

Daniel Erdreich

Well, one thing that Daniel noted is that we did struggle to deliver products to our customers at the back end of Q3. And we did have to move some of them, some small portion even to a later stage. And we when we got to this stage there was the Hurricane Sandy that gave us another headache. But overall, nothing other than that.

Bill Schmitz - Deutsche Bank

Okay. I mean the reason I ask, and I promise will stop, is it looks like the inventory days crept up again. I know there was the Canadian distribution acquisition that impacted a little bit but you would think that if you didn’t have enough product to go, that the inventory days would have crept down as they kind of slipped into the next quarter.

Daniel Erdreich

Well, it’s not really the case. First of all, you saw an inventory increase of approximately $17 million. Out of this the Canadian acquisition, the main asset that we bought in Canada was inventory, and this together with a very big inventory of Source machines. And we didn’t ship, by the way, a single Source machine during Q3. They are all going in Q4. So this, the Canadian inventory together will all those Source machines ready for delivery, actually explains the majority of the increase.

Operator

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

Jim Chartier - Monness, Crespi and Hardt

In the past you have broken the A&P spend for the U.S. versus the rest of the world. Do you mind doing that again for us?

Daniel Erdreich

Well, the U.S. spent was -- this quarter approximately half of the overall spend. We did indicate in Q4 of last year that the vast majority of the A&P will go the U.S. Last year it was approximately in Q4, 70%. This would be ballpark of what we expect to see going into Q4.

Jim Chartier - Monness, Crespi and Hardt

Thanks. And then can update us on where you are with the new manufacturing facility that you are building. How that’s going to roll out in phases and what the gross margin opportunity is from that?

Daniel Birnbaum

Yeah. It’s moving ahead well. Actually I passed by the site yesterday and was very happy to see a bunch of bulldozers there. So it’s in progress. Our plan is to start with a depot actually, more of a logistics center where we will do consolidation of our products from various facilities. Right now we manufacture in as many as five facilities in Israel alone. And that’s in addition to the other facilities all over the world. So we are going to start with the consolidation type of facility and we expect that to happen during the latter half of Q3 2013. And that’s the kickoff.

And then after that we will start rolling out facilities according to areas, departments. One will be a plastics injection facility. The other will be a metals facility, and an assembly facility. And finally the syrups facility. And it will take about a year and a half to complete that second stage of putting all the other facilities on the ground on site. The margin impact will be tremendous. The management impact will be tremendous because you can imagine how difficult it is to mobilize among all these facilities. I can tell you that every day, today every day we are shipping between 30 and 40 double trailers inside of Israel to move product from facility to facility. I am talking about work in progress product.

So a plastic injected component will go to a plastic painting facility. It will then go to an assembly facility. So that’s a tremendous headache to manage and luckily we have skilled management who can do that. But it’s also very costly, and that’s where we are getting some of that negative impact on the efficiency on the gross margin. So we look forward to this facility and if we can beat the timeline then we would be the happiest.

Daniel Erdreich

Just to add on, a little bit on the numbers, we did indicate in the past that we expect to have something like a four to five years ROI return on the investment in the factory. Which is very quick return on this level of investment. We said in the past that it will be something like a $40 million direct investment in this factory. So you can do the math.

Jim Chartier - Monness, Crespi and Hardt

Great. And then Mexico, do you have a distributor down there today? How much business are they doing (inaudible)?

Daniel Birnbaum

Well, we put the distributor on notice. The launch there has not been effective. It was mostly test mode with a few retailers. We decided that Mexico was a strategic account, a strategic market, we want to control and invest in that market directly. And for that reason right now we are establishing our own office there and recruiting a country manager. And it will take probably a few months until that is ready to go and during the 2013 we should see sales, direct sales in Mexico.

Another reason Mexico is an important market for us to manage directly is the pricing structure within that country. There is just not enough space for another hand. So we have to sell directly. And I will just give you the data point, one liter of cola, ready to drink cola in Mexico, costs about 60 cents and that compares to about 85 cents in the U.S. So we have to sell directly to be able to invest and be successful in that market. And we will.

Operator

We will take our next question from John Faucher at JPMorgan.

John Faucher - JPMorgan

I was just wondering, as you look at the increase in the advertising, I just want to get an idea in terms of what you are thinking about the profitability of the U.S. business sort of on a standalone basis for 2012 and then looking forward. Do you see the advertising as something that sort of takes it to negative from a profitability standpoint or do you think you are growing fast enough that you can generate some operating profit growth?

Daniel Erdreich

Hi, John, it’s Danny. It will depend on the quarter. In a quarter like Q3 even though they had, you can calculate the number, it’s half of the 14% allocated to revenue going into A&P, this market was already profitable. In a quarter like Q4, obviously when they will have much higher A&P spend, they won't be. But overall, during 2012 the U.S. is expected to be profitable and this doesn’t -- it’s not in the numbers that we expect from this market. This market could be much much more profitable but it will be moving into the black.

John Faucher - JPMorgan

Okay. Thank you. And one other question which is, you guys obviously from a capital structure standpoint, could have more debt. Any thoughts on changes going forward in the capital structure or cash to shareholders or anything like that?

Daniel Erdreich

Well, actually we do have right now no debt and more than $50 million in cash. So you are right. We are looking at next year with the need to finance the vast majority of the cash investment in the new factory. And with this in mind we have available credit lines to finance this. We are not thinking about cash distribution going into next year but right now we are in a good shape in terms and financing. And we will have to move on with and see how we are dealing with it.

Daniel Birnbaum

On the other hand of that we are constantly evaluating the possibility of a share buyback depending on the share price performance. And that’s something we might decide to do.

Operator

We will go next to Greg McKinley at Dougherty & Company.

Greg McKinley - Dougherty & Company

I wonder if we could talk just a little bit, you have mentioned a number of new international markets you are interested in pursuing. Can you just give us an overall recap for the markets you expect to launch into, call it late ’12 early ’13, and what the timing of those launches might be?

Daniel Birnbaum

Yeah, sure. First of all we just recently announced Chile, Singapore and Russia. Russia is not a new market but we weren’t doing much over there. And again it’s a strategic market but we did decide to enter Russia with a partner because that’s the only way believe we can succeed that is [foreign] to us and a structured market like Russia.

Chile is a great opportunity for us. They drink a ton of sparkling beverage, and it’s a no brainer. And Singapore is probably going to be a smaller market but a very strategic one, the gateway to Asia. And speaking of Asia, the two big markets that we are starting to study there right now are China and India. We will probably start in India where there is a very strong culture of sparkling beverages. It came from the British mandate days. And they just love drinking sparkling water and sparkling beverages. In fact some of the big brands in the world have recognized that and made both China and India high priorities. In fact, India, I believe is the big market where PepsiCo is leading over Coca Cola because they are just making such a concentrated effort right over there.

So we are going to go there. And for both of those markets our plans is to go with a wholly-owned subsidiary for similar reasons as I outlined regarding Mexico. Pricing has to be competitive. And also these are strategic markets that we want to be able to invest in for the long run and control. So again we expect some news on that during 2013. First India and then China.

Greg McKinley - Dougherty & Company

You have a number of new soda maker products coming to market here shortly. Dan, you mentioned the Source. Just maybe give us a quick recap on the new models coming to market and should we expect to see any discontinuation of models that they might be replacing.

Daniel Birnbaum

Well, recently we launched the Revolution which is our firs automatic soda maker, and in the States for examples it’s sold at Williams-Sonoma. And in the world it’s sold at other premium upscale retail. It’s sold at $199 in the States. And now we are rolling out the Source. But the Source is expected to really be a step change in our product. It has technology in it that makes the carbonation easier to do. It’s the snap-and-lock bottle mechanism. No more screwing a bottle into soda maker, that belongs to last decade. And it also has LED indicators that indicate to the user how much carbonation they are putting into the device. And beyond all that, it’s designed just beautifully by Yves Béhar and I think it’s a type of product that anyone is going to want on their kitchen counter and also use.

So we are very excited about the source. We are planning to expand its price points from entry all the way to luxury. Right now it’s kind of in the middle there at $129 price point. But eventually we will take features out, we will put features in and we will be able to cover the entire range and that will basically be our significant soda maker. In time, as with any evolution of a product line, we will discontinue selectively models that perform less well. Right now there are no specific plans to do that. I am sure it’s going to happen during the course of 2013 as we optimize our product range and really chose the winners and let go of the laggers.

Greg McKinley - Dougherty & Company

Given your capacity investments, just remind us please what you are thinking of CapEx for this year, and I know you are not guiding next year but you have obviously made investment decisions. Can you give us some thoughts around what we should expect for investment?

Daniel Erdreich

Well, for this year 2012 we are on track to make the $30 million that we guided as the investment plan. Year-to-date until the end of Q3 we made approximately $22 million out of it and we are on track to make this acquisition -- sorry, to make this investment. This is excluding acquisitions of course of assets that we purchase from other parties. As for 2013, we don’t have yet the exact number to give you but the main item during the year will be the accelerated investment in the new factory.

Operator

And next we will move to Scott Van Winkle at Canaccord Genuity.

Scott Van Winkle - Canaccord Genuity

Following up that last question about the Source. With the Source in there, what does the price range look like, let's exclude the $199 product but kind of mainline price points. Is it $80 to $130 that we are looking at for this holiday?

Daniel Birnbaum

No, for this holiday the price is $129 for what we call the plastic model, and $149 for the middle model.

Scott Van Winkle - Canaccord Genuity

Yeah. I am sorry, I meant the entire range of soda makers you will have in retail doors?

Daniel Birnbaum

Okay, I am sorry. Yes, it’s $79 at the mass channel and $149 for the Source Metal and then up to $199 for the premium models which are the Revolution and the Penguin glass soda maker.

Scott Van Winkle - Canaccord Genuity

And how does that compare for the U.S.? How does that compare to the experience you have in more mature markets in the U.S. as far as kind of the breadth of the price and product range?

Daniel Erdreich

This price range is holding on for many years in many markets that we are operating in.

Scott Van Winkle - Canaccord Genuity

Okay. And then on the consumables side, specifically the third party relationships with Kraft, how significant -- you talked earlier about validation of competition coming in at the market in U.S., how significant is that relationship either in growing the category or share flavors?

Daniel Birnbaum

It’s been significant. It’s about 25% of our syrup sales right now in the U.S. And that’s before we promoted it, advertised it really. So it’s just consumers walking by and picking it up. And it’s exceeding our expectation, I believe it’s exceeding our partners expectation. And I think the direction of partnering with brands out there is a very good direction, very appropriate for SodaStream. And there is a lot of interest out there in the market by the way and stay tuned for some news down the road.

Scott Van Winkle - Canaccord Genuity

And then if I look at, I believe I have the numbers right, you said if you exclude last year’s Q3 price line fill of soda makers for the holidays in the U.S. you are up about double year-over-year. Did I catch that right?

Daniel Erdreich

Yeah. That’s exactly.

Scott Van Winkle - Canaccord Genuity

So, I mean that’s a big number. I mean last year there were roughly 100,000 soda maker kits sold in as holiday pipeline in Q3, do I have that number right?

Daniel Erdreich

Yeah, you have it right.

Daniel Birnbaum

It was a little more than that.

Scott Van Winkle - Canaccord Genuity

A little more than that?

Daniel Erdreich

Yeah.

Operator

And we will take a follow-up from Joe Altobello at Oppenheimer and Company.

Joe Altobello - Oppenheimer

Just a quick modeling question for Danny. I think in the last question you mentioned that you are expecting an 8% tax rate for the full year, obviously you got a benefit here in the third quarter and year-to-date your effective tax rate is under 2%. What's your EPS guidance for this based on in terms of the tax rate?

Daniel Erdreich

I would take the 8% and apply it also for the rest for the year.

Joe Altobello - Oppenheimer

Okay. So fourth quarter 8%, so year-to-date you are looking at something probably around 3%,4%?

Daniel Erdreich

Yeah, but you do have the exceptional impact that Daniel mentioned.

Operator

And we will take a follow up from Bill Schmitz at Deutsche Bank.

Bill Schmitz - Deutsche Bank

Joe just asked my question, thanks guys.

Operator

And that does conclude today's question-and-answer session. At this time I will turn the conference back over to management for any closing remarks.

Daniel Birnbaum

Thank very very much. I would like to thank everyone for your participation in today's call and have a great holiday season and I look forward to speaking with you again on our Q4 call in February. Thanks a lot.

Operator

And that does conclude today’s conference. Thank you for your participation.

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