SodaStream Annual Report: Failure Finds Awards


SodaStream enters 2016 with two consecutive years of metric declines.

Bonus compensation is found in spite of failing to meet company objectives.

PepsiCo relationship lacking supportive marketing.

What is going to come of SodaStream (NASDAQ:SODA) this year? That's what the few investors still awaiting something of relevance to happen to the company are pondering I would propose. Beyond offering a delayed launch of the SodaStream Mix and 4th quarter launch of the SodaStream Spirit machines, there has been little to no news surrounding the company in 2016. After two consecutive years of sales and earnings decline, the company has found its state of business in a depressive state, with some investors still awaiting a return to growth along many metrics. More importantly, investors are looking for shares of SODA to break out above the $13-$17 range where the stock currently languishes.

The home carbonation category that SodaStream gave birth to and has spirited for decades, with resurgence from 2007-2013, has now failed to generate user growth, brand and category appeal amongst consumers. Most every region around the world for which SodaStream distributes home carbonation systems has witnessed sales declines and most every region around the world has exhibited distribution contractions for SodaStream products. These results have come at the expense of a 2014 Growth Plan that has greatly underperformed even the company's own expectations. And of course, this underperformance has also come at the expense of SODA's share price, which has fallen precipitously since late 2013.

I would be of the opinion that when a company exhibits two consecutive years of metric declines and fails to deliver on most every objective that would benefit shareholders, management would be called to the forefront of accountability. Instead, as it pertains to SodaStream executives, they have only benefited from mismanaging the company and failing to deliver returns on shareholder capital. The CEO of SodaStream has benefited the most with approved stock grants since 2012 and as recent as December 2015. The CEO has also been granted a bonus package contingent upon hitting certain operational objectives and milestones. But even in the absence of success, the CEO has been able to renegotiate his bonus package to the benefit of the CEO and most obviously to the detriment of shareholders who have received nothing from the company's failures. Take a gander at the most recent Annual Filing by SodaStream that outlines the CEO's bonus and now Deferred Conditional Bonus Amount:

In April 2016, Mr. Daniel Birnbaum unilaterally notified us that 50% of the 2015 annual bonus amount to which he is entitled under the terms of the annual cash bonus plan for our chief executive officer and 50% of the bonus amount to which he is entitled under the Four-Year LTIP (together, the " Deferred Conditional Bonus Amount") shall be deferred and only be payable if we achieve a performance condition that our operating income for the year ending December 31, 2016, as disclosed in our consolidated financial results for the year ending December 31, 2016 on Form 6-K, equals or exceeds the targeted amount set forth in our annual budget approved by our board of directors (excluding expenses resulting from exceptional non-recurring events), provided that, notwithstanding, the Deferred Conditional Bonus Amount shall become payable in the event that, prior to the release of our financial results as aforesaid, he no longer serves as our chief executive officer, he suffers a disability, his death or a change of control in the company.

On December 22, 2015, our shareholders approved a grant of options to purchase 600,000 of our ordinary shares to Mr. Birnbaum with an exercise price of $15.00 per share. 300,000 of the options vested as of the date of grant; 150,000 of the options vest on the first anniversary of the date of grant, provided, however, that such options shall only become exercisable if at any time following the first anniversary of the date of grant, the closing price of our ordinary shares for any five consecutive trading days exceeds $22.00; and 150,000 of the options vest on the second anniversary of the date of grant, provided, however, that such options shall only become exercisable if at any time following the second anniversary of the date of grant, the closing price of our ordinary shares for any five consecutive trading days exceeds $27.00. 190,000 of such options are in lieu of the options to purchase 55,000 of our ordinary shares approved by our shareholders in December 2011 and the options to purchase 135,000 of our ordinary shares approved by our shareholders in December 2012. The options to purchase 315,000 of our ordinary shares approved by our shareholders in December 2012 did not vest and lapsed.

On December 22, 2015, our shareholders also approved, in the event of a "strategic investment" (as defined below), a one-time grant of options to Mr. Birnbaum to purchase 100,000 of our ordinary shares, provided that Mr. Birnbaum is serving as our chief executive officer at the time of the closing of the strategic investment. Such options, if granted, will vest over three years as follows: 33,333 options will vest on the first year anniversary of the closing of the strategic investment and the remainder will vest at the end of each three-month period over the second and third year following the closing of the strategic investment. The exercise price of such options will equal the price paid by the investor at the closing of the strategic investment for one of our shares. A "strategic investment" means an investment in shares of the Company by a third party who is not a director or officer of the Company or an affiliate of any of the foregoing, in a transaction or a series of related transactions, in the aggregate amount of not less than $25.0 million and regarding which, in the reasonable judgment of our board of directors, the identity of such investor or such investor would make a contribution to the prospects of the Company beyond the actual sum for the purchase of the shares of the Company.

As an investor in SODA, if you don't see the actions taken by the Board of Directors as a "kick in the teeth"…well then you are likely more resound to accepting share price depreciation than many.

In late 2015 as noted in a December 2015 SEC Filing, Daniel Birnbaum was to receive a grant of options should the company achieve a strategic investment. To date no such investment has been garnered by the CEO or the company. Despite all efforts and all current relationships, SodaStream has not yet been able to accomplish the goals set that would enable the CEO to achieve said option grants. Instead, now the CEO has seemingly renegotiated at least a portion of that "bonus package". Nothing like moving the goal posts and in the face of continual failures.

Sadly, as a company with foreign issuer status, shareholders have little if any recourse concerning how SodaStream conducts its business and its fiduciary duties. SodaStream's failures will not be met with any impact from shareholder sentiment regarding said failures due to their foreign status. This point of fact is also articulated in the company's annual filing each and every year.

Over the past 2-3 year period and as demand for SodaStream products has declined, the company embarked and now completed the construction of its $120mm manufacturing and production facility. This $120mm facility was partially paid for by Israeli Government grants, but resulted in extreme capital expenditures over the last two years in the amount over roughly $120mm. All of this while revenues declined from over $500mm in 2013 to just over $400mm in 2015. When embarking on greater manufacturing capabilities, SodaStream failed to understand their Total Addressable Market (TAM). The company and its management believed demand would continue to grow and as such believed manufacturing need to expand with demand. This misunderstanding by management has also left the company with nearly $34mm in debt, no free cash flow to date and limited abilities to advertise, market and promote its products and brand around the globe. But the cash drain of yesterday is hoped to change in 2016 and for the foreseeable future.

SodaStream has offered that CAPEX will fall mightily from recent years, leading to better free cash flow that will help to pay down current debt while aiding in the support of marketing. Hopefully, this will lead to demand creation and a return to growth. I would propose that even if this takes place, growth would not exceed a few percentage points and not generate strong share price appreciation. I suggest this because shares are trading at the lowest volumes ever, indicating "nobody cares about SODA" anymore. Many investors have simply moved on to "greener" pastures as they say. For a stock that used to average greater than 700,000 shares trade daily, it currently struggles to trade 200,000 shares daily. So with any realization of returning to growth in metric performance, this may not benefit newer shareholders all that much over the long haul. This is what happens to a stock once trust is breached and why proof of a turnaround takes longer to show in a stock's performance.

Some of the hope for SodaStream since 2014 has been the hope of a large strategic partner. When PepsiCo (NYSE:PEP) finally partnered with the company it was seen as a big deal. But the limited partnership failed to generate any meaningful results for either company. The co-branded products didn't resonate with consumers and neither company marketed the products well. That situation still persists for the co-brand Pepsi Homemade products. This partnership remains limited, with negative sentiment pervading the products from consumers as displayed on promotional sponsored ads on Facebook (NASDAQ:FB).

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Unfortunately, most of these Pepsi Homemade sponsored ads find negative comments about the product from the consumers perpetually. What is even more unfortunate is that neither PepsiCo nor SodaStream have ever addressed the commentary or offered an education about the products to the benefit of the consumer. The two companies literally distributed the products, set up minimal promotional activity and left the products to do as they have done. In speaking with PepsiCo's Melissa Feldman this year, I've come to the conclusion that the partnership has been proven meaningless and the executives have not a single accountable metric aimed at this product line's performance.

Given the failures of the Keurig Kold system that generated great investment on behalf of Keurig Green Mountain and Coca-Cola (NYSE:KO), there doesn't seem to be an incentive for PepsiCo or any major partner to push forward into the home carbonation category. Prior to Keurig Kold failing to generate consumer demand, PepsiCo was incentivized to at least test the home carbonation category, which they have done. But now with Keurig Kold seemingly dead on arrival, PepsiCo can do as they please and diversify their existing product lines to the benefit of wholly owned profitability as opposed to shared profitability with the likes of SodaStream. Additionally, it should be recognized that never in its history has PepsiCo acquired a hardware company, which is essentially what SodaStream is, a hardware manufacturer. In short, where there was once reason to believe in a PepsiCo-SodaStream tie-up, there are significantly fewer reasons to believe today.

For all the aforementioned reasons that include funding executive compensation, bonuses and promotional activity, SodaStream has acquired additional credit. The new credit lines add up to roughly $50 million. The company has already drawn on this increased credit facility to the tune of $2.8 million in short-term debt. Hopefully some of this short-term debt will be utilized to better grow the Americas business segment. In the past, the Americas business segment constituted greater than 35% of total net revenues. Presently, the Americas constitute less than 25% of the total net revenues for SodaStream. The company has witnessed significant demand erosion over the last two-year period in the Americas with revenues falling mightily and distribution curtailed. Additionally, SodaStream has cycled through 3 different regional mangers for the region and has instituted a new General Manager after the most recent General Manager resigned after only 3 months with SodaStream. Maybe the former General Manager found the CEO's compensation grossly disproportionate to the his own and with little dedicated support for producing better results in the Americas. But that is pure speculation. What I find disturbing about the Board's actions is that they actually allowed for the CEO to renegotiate his bonus package given the poor results, complete failure to achieve corporate objectives and finding a new SodaStream USA General Manager leaving the company after only three short months. Who is electing these Board members? Well, whom do you think?

I often receive communication from former SodaStream executives and managers. One recent communication discussed the gross negligence found in the operations of SodaStream USA post the departure of Gerard Meyer. Mr. Meyer was the original General Manager of SodaStream USA, growing the business segment from $200k to roughly $200mm from 2003-2014. Upon Mr. Meyer's departure in early 2014 and once Scott Guthrie was positioned as the Americas President, revenues for SodaStream Americas and SodaStream USA plunged. It is a shame that the CEO of SodaStream positioned a supervisor, with no experience in home carbonation, to oversee Mr. Meyer and seemingly impugn his decade long success for SodaStream. Obviously that relationship did not last long once instituted by SodaStream's CEO, but I can't help but to wonder what would have been if the CEO better entrusted Gerard Meyer to run the Americas instead of bringing someone on board with absolutely no experience in the category. Seemingly though, for every single misstep taken by SodaStream's CEO, he is personally rewarded by the Board of Directors…or at least offered the opportunity to achieve an award.

In short, I don't foresee great advancement for the SodaStream business in 2016. While the company may be able to find a return to growth and from severely depressed levels, this may be met with an impaired share price valuation given the lack of trust for the company and its management team. SodaStream needs to find itself better capable of driving demand for its products beyond distribution gains in regions outside of the Americas. Partnerships have proven themselves to have little to no benefit for SodaStream and its shareholders in the past. It might be optimal for investors and readers to consider allocating capital elsewhere. The following articles identify what I have found to be an exceptional investment vehicle and with consideration of every investment vehicle available to investors and traders to date. As such, they are titled Greatest Trade of the Decade Part 1 and Part 2.

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

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

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