SodaStream International's (SODA) CEO Daniel Birnbaum on Q4 2016 Results - Earnings Call Transcript

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SodaStream International Ltd. (SODA) Q4 2016 Earnings Conference Call February 15, 2017 8:30 AM ET

Executives

Brendon Frey - Managing Director

Daniel Birnbaum - CEO

Danny Erdreich - CFO

Doug Pritchard - President of North America

Henner Rinsche - President of Europe

Analysts

Jonathan Keypour - Deutsche Bank

Pablo Zuanic - Susquehanna International Group

Akshay Jagdale - Jefferies

Operator

Good day. My name is Ebony, and I will be your conference operator today. At this time, I would like to welcome everyone to the SodaStream International Fourth Quarter Fiscal 2016 Earnings Conference. Today's call is being recorded. [Operator Instructions] Thank you.

I would now like to turn the call over to Mr. Brendon Frey of ICR. Please go ahead.

Brendon Frey

Thank you, and welcome, everyone. Present on the call today are Daniel Birnbaum, CEO; Danny Erdreich, CFO; Henner Rinsche, President of Europe; and Doug Pritchard, President of North America. Following the prepared remarks, we will open the call up to questions.

Earlier this morning, we filed a 6-K, which includes the press release and financial tables along with the CFO commentary document and a supplemental slide presentation. I would like to remind everyone that certain statements will be made during today's conference call which are forward-looking within the meaning of the securities laws.

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

Changes in economics, business, competitive, technological, regulatory, 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. In addition, we will make reference to certain adjusted financial measures. The reconciliation of these adjusted measures to the most directly comparable IFRS measure can be found in the Company's fourth quarter earnings release, which is posted on the Company's Web site.

For more detailed information about these factors and other risks that may impact our business, please review the paragraph in this morning's press release that begins with the word, This Release Contains.

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

Daniel Birnbaum

Thank you, Brendon, and welcome to everyone on the call with us today. I’m very pleased with the sales and earnings momentum we built throughout 2016, which concluded with a strong fourth quarter.

Our recent performance highlights that the strategies we’ve implemented to build a global brand franchise and accelerate household penetration of our home carbonation system are working successfully.

At the same time, the consolidation of our manufacturing and logistics operations in our Lehavim facility, along with numerous expense optimization actions over the past 12 months have made us a much more efficient organization. Combined with our solid revenue growth, these actions allowed us to achieve record fourth quarter and full-year operating income and generate strong free cash flow.

Let me review some of the financial highlights from the fourth quarter. Revenue increased 17% to $132 million. Gross margins increased 440 basis points to 52.4% and operating expenses as a percentage of revenue decreased 440 basis points leading to a record high quarterly operating income of $18.8 million. EPS tripled to $0.71 and we generated approximately $12 million of free cash flow.

In terms of sales by product category, sparkling water maker unit sales increased 22% to 941,000, our highest quarterly figure in the last two years and gas refill unit sales grew 10% to $7.4 million. These results indicate that consumers are responding positively to our messaging around health and wellness, convenience, and the environment and are using SodaStream to produce and consume sparkling water in record numbers.

Finally, as we expected, flavor unit sales decreased year-over-year by 6% to $5.2 million in line with our strategy to promote the consumption of water. Similar to recent quarters, 87% of the 420 million liters of beverage produced by our system during the fourth quarter was non-flavored sparkling water.

Our full-year results also showed marked improvement across nearly every metric. In short, revenue increased 14% to $476 million, operating income increased 176% to an all-time record $54.5 million, and net income increased 106% to $44.5 million also an all-time record. This together with strict working capital and CapEx management, generated a strong free cash flow which resulted in $57 million in cash and short-term deposits with zero financial debt compared to a net debt position of $2 million at the end of 2015.

By product category for the full-year, sales of sparkling water maker units grew 22% to 2.9 million units, gas refill units increased 10% to a record 29.4 million, and flavor units declined 2% to 22 million. Our recent performance underscores the significant progress we've made executing the growth plan that we announced in late 2014.

As you recall, the plan centered on repositioning the SodaStream brand globally in order to capitalize on the tectonic shift in consumer preferences away from sugary and sweetened drinks, toward sparkling water. In line with this plan, we honed in on the key consumer benefit in each of our markets and made it central to an effective marketing message. With two years into the growth plan, which also included significantly enhancing our infrastructure and the initial results are very encouraging.

Today, SodaStream is the number one sparkling water brand by volume with 27 million active users across 45 countries, consuming 1.6 billion liters of beverage annually. We just reported double-digit revenue growth and record operating and net income in 2016. The growth we're experiencing is broad-based with most of our markets posting solid year-over-year gains, including new and established markets.

In Western Europe, revenue growth accelerated in the fourth quarter increasing 18% year-over-year. The regions performance was once again led by Germany, which posted its 20th consecutive quarter of double-digit growth. This performance was driven by double-digit volume gains combined with price increases in all product lines.

For the year, sales in Germany were up nearly 30% as our simple and effective messaging around convenience, combined with great PR continues to resonate with a broader audience. This alongside excellent sales execution drove household penetration in Germany to over 6%, which doubled in just three years. But we’re only scratching the surface as more than 90% of households in the world's largest sparkling water markets are not yet active SodaStream users.

We're also experiencing success in several other European countries. Switzerland, one of our established markets had its best quarter and best year ever, driven by strong growth in machine sales. Austria also had its best year ever driven by a strong double-digit increase in gas sales. The Nordics has been a standout performer over the past 12 months as the new leadership team has done an exceptional job executing our growth plan.

The fourth quarter was highlighted by positive gains in all product category led by strong double-digit increases in machine sales. It's clear that repositioning the brand around convenience in the Nordics like we’ve successfully done in Germany through effective PR and digital marketing execution, is drawing new consumers into our system and sparkling momentum in this important market.

In France, sales were flat in the fourth quarter and up high single digits for the year. While there is still more work to do to reignite household penetration in France, the progress we've made with our distributor partner, repositioning the brand around sparkling water has set the business up for continued growth in 2017.

Moving to the Americas, fourth quarter revenue increased 20% led by solid performance in the U.S and exceptional growth in Canada. In the U.S., the momentum we experienced in sparkling water maker sales in Q3 continued during the fourth quarter with unit sales increasing 62% compared with Q4 2015.

The marketing programs we invested in during the quarter helped fuel demand for the Fizzi, our newly launched entry-level, high functionality machine and the Power, our automatic sparkling water maker. Equally important, gas refill sales continue to increase in the quarter turning 2016 into a growth year following the declines we experienced throughout 2015.

In Canada, our business remains on fire and continues to be our fastest-growing market globally. All of our product lines accelerated in the quarter with machine sales increasing by more than 50%, gas refills by more than 30%, and flavors by more than 20% in 2016. Importantly, these impressive results were achieved through higher productivity at existing doors and without the benefit of new distribution.

Now to Asia-Pacific, quarterly sales increased 9% driven by Japan were sparkling water makers and gas refills were up double digits. It was a very positive year for our business in Japan, but we’ve only begun to scratch the surface in terms of the potential in this important market. We will be stepping on the accelerator into '17 with additional marketing investments to further accelerate household penetration.

Meanwhile in Australia, sales were up mid single digits, led by sparkling water makers and gas refills. This market -- this marked the second consecutive quarter of positive growth following some softness earlier in the year when our efforts to reposition the brands around sparkling water were just getting underway.

Lastly CEMEA, sales were flat compared to year-ago, but Q4 is a small quarter for this region, so I think it's more important to look at our full-year performance in these countries to get a better picture of the momentum in the region. In 2016, sales to our Czech distributor grew by strong double digits led by sparkling water makers, and sales in Israel increased double digits, driven primarily by gas refills.

Speaking of Israel, as we’ve discussed in our previous call, developing a direct sales channel to the consumer is one of our priorities for 2017. We've chosen our Israeli home market as the pilot to test various programs, applications, and technologies to sell directly to the consumer.

These include a CRM retention management system, a proactive call center, a gas loyalty program where we sell packages of 12 gas refills, a home delivery gas exchange service where consumers can receive their refills within two hours and an IoT device, which is app connected and enables consumers to order gas refills at the touch of a button.

I’m glad to share that the initial results of these activities are already showing a significant increase in sales of machines and gas refills, and also help strengthen consumer retention. Today, 40% of the total machine and gas sales in Israel are made through our direct channel, and moving forward we will be expanding direct selling tools to additional markets around the world.

In summary, the fourth quarter represented a strong finish to a successful year for SodaStream on many levels. Strategically the global repositioning of the brand around sparkling water through effective guerrilla marketing and social media, such as our Shame and Glory video and the introduction of innovative new flavored water products as much more aligned with consumer trends and created a strong platform to support future growth.

Operationally, we significantly enhanced our infrastructure with the completion of world-class manufacturing and logistics facility in Southern Israel, that has greatly improved efficiency and reduced costs throughout our supply chain. And financially our unique business model allowed us to translate 14% revenue growth into 106% net income growth and generate $75 million in EBITDA and $57 million of free cash flow in 2016.

Looking ahead, we remain focused on executing our strategies aimed at increasing household penetration, improving retention, and driving higher profitability. We also have some exciting new products in the pipeline, both machines and water flavors, products which are designed to appeal to a broader audience and support both household penetration and consumer retention.

For 2017, we're currently forecasting revenue to grow high single digits compared with 2016 on a constant currency basis. On a reported basis, which takes into account the current strength of the U.S dollar versus the euro, revenue is expected to grow mid single digits with high single-digit growth in the first half of the year. On a reported basis, gross margin is expected to be approximately 52%, which includes about 150 basis points headwind from changes in FX.

Operating expenses as a percentage of revenue including A&P are projected to be consistent with 2016 levels. For the full-year, operating income is projected to increase approximately 30% on a constant currency basis and low teens on a reported basis based on current exchange rate [technical difficulty]. CapEx for 2017 is expected to be approximately $25 million, while D&A is expected to be approximately $20 million.

In closing, I’m very pleased with our many recent accomplishments. With that said, our sites are firmly on the future. The entire organization is energized and committed to capitalizing on the many opportunities that we believe exist for our business globally and consistently delivering profitable growth and greater shareholder value over the long-term.

Operator, we’re now ready to take questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will take our first question from Jonathan Keypour with Deutsche Bank. Please go ahead.

Jonathan Keypour

Hi, guys. Good afternoon.

Daniel Birnbaum

Good afternoon.

Danny Erdreich

Good morning, actually.

Jonathan Keypour

I have a couple questions actually. Well, good morning to me. Good afternoon to you guys. So basically compared to our model that beat you guys pull this quarter, which congratulations by the way, mostly came from Western Europe. I was just wondering did that -- was that an effective like the French problems you guys had in the prior quarter, or is it just like selling to make up for that?

Daniel Birnbaum

No, it was a strong -- it was broad-based, the strength of the fourth quarter. The Americas were up significant and Canada is our fastest-growing market, the U.S was quite profitable and grew nicely versus last year. And I think the key drivers for the exceptional performance in Q4 were a: very strong holiday sales that came in late in the game. They were not projected. We were just -- the brand is hot and the sellout was very good, and we had replenishment orders during the season, during December. And the second was the exceptional effectiveness of the A&P, specifically the Shame or Glory campaign, which was so effective that we were able to reduce our investments during the quarter and deliver higher profitability.

Jonathan Keypour

Okay. And then I also had a question about that $631 million reclassification of impairment to adjusted EBITDA that’s like a 6% boost over what it was before like what you guys had published last year. I was wondering exactly where that came from?

Daniel Birnbaum

I will ask Danny to speak to that.

Danny Erdreich

So, Jonathan, you were asking about last year expenses?

Jonathan Keypour

Well, there was an EBITDA, I saw an adjustment to the previously stated EBITDA number. We had like $10 million 509 and then there was $631,000 adjustment to it. I was just wondering like it says that it’s a reclassification of impairment, but I was wondering why that came through now?

Daniel Birnbaum

Well, this year's EBITDA number was just for this year. We only had -- if you look at the Q4 results, it was only in addition to the net income of D&A, and that's basically it. So nothing exceptional in this fourth quarter and last year during last year it was $10 million, there is $9.5 million you’re referring to. Last year it was related to restructuring costs. This was the cost, the one-time exceptional cost of transferring the activity from our former factory to the new factory in Lehavim, in the Southern part of Israel. This was a one-time exceptional item.

Jonathan Keypour

Okay. It is like a reclassified $631,000 charge to EBITDA from -- in 2015 that I just see now. It wasn’t there in the prior year release?

Daniel Birnbaum

Yes.

Jonathan Keypour

Okay. So that’s what it's from, it's from …

Daniel Birnbaum

Okay. You’re relating to the impairment of other intangible assets this item.

Jonathan Keypour

Yes.

Daniel Birnbaum

Yes, it's something to do with goodwill related to an investment we made in our Italian company, it was presented in last year in other section, but it's really not a big item.

Jonathan Keypour

Okay.

Daniel Birnbaum

And again it’s a one-time item.

Jonathan Keypour

Okay. And then I had a couple more, if that’s okay. I was just wondering how exactly where the gross margin growth is coming from, considering you guys are growing soda makers at such a rapid pace compared to the higher-margin refillables. So you’re getting like 4.4% of growth in margin expansion. And I was just wondering it seems like there should be margin dilution considering the soda maker growth compared to consumable growth that you guys are still printing huge numbers, I was just wondering where that comes from?

Daniel Birnbaum

Yes, that’s right. Danny, you address that please.

Danny Erdreich

Yes. Well, first of all, our actual real margin growth in constant currency basis is really higher. We’ve had about 0.5% headwind from -- resulting from currencies into quarter. Basically this is the result of just lower cost of production. It came from various directions. One, of course is the new factory that is very efficient, even better than our expectations in this result. Second, the mix of products. We introduced more profitable machines. For example, the Fizzi or the Spirit, new machine is much more profitable and its -- we sold about hundred thousand machines of Fizzi in the fourth quarter with higher profits. The increased profitability on our machines is the main driver for the higher margins.

Daniel Birnbaum

And to add to that we also took some price increases in some select markets around the world.

Jonathan Keypour

Great. That makes a lot of sense. Thank you. If I -- can I have a couple of more though, okay?

Daniel Birnbaum

Sure.

Jonathan Keypour

Okay. I was just wondering how the Fizz Concierge rollout is going. if you can give like enrollment numbers or any numbers to the effect of how that’s playing out? And then also you guys had mentioned Whole Foods test in the East Coast. I was wondering if you had like maybe doors or sales or anything like that, you could give about Whole Foods?

Daniel Birnbaum

Well, I will as Doug Pritchard to address both of those items.

Doug Pritchard

Okay. Thanks a lot. I can start with the Fizz Concierge program. As you know making gas refills convenient as possible is essential for us and for our consumers. Just yesterday actually we’re excited to announce that we’ve actually converted the Fizz Concierge into a new program called SodaStream Direct, which again just launched. The service allows our consumers in all five boroughs of New York City to receive actually free home delivery of gas refills. We want to make some big changes to the program, so make it actually more convenient to more cost-effective for the consumer. So we’re excited about the program and the new initiative and based on our success in New York over the next year our goal is to rollout the new service into major metropolitan areas across all of the United States and expand it to include actually our full product line as well. To transfer over to Whole Foods, we continue to work with Whole Foods in our initial test market in New England. We’ve had some great success there and we continue to work with them to expand our distribution to the other regions of the country. So when we get that distribution, we will announce it probably later in this year.

Operator

And caller does that answer your question? And with no response, we will move next to Pablo Zuanic with SIG. Please go ahead.

Pablo Zuanic

Yes, Hello everyone. Just a couple of questions. Just the first one, in terms of the U.S business, what I see when I go to say, my understanding is there are not many new doors, right and its more about just managing better what you really have. So if I go to [indiscernible] I see on the shelf is the same space. It is better organized. It looks cleaner and you have a lot of these new models that you’ve talked about, and you said those models were about 62% in the quarter. What I’m trying to get an understanding is what’s really happen in terms of takeaways? What’s it [indiscernible] you have shipped a lot into the stores and U.S essential takeaways and you’ve improvised a certain percentage for which [indiscernible] grew. I think you grew at 9% globally, but what was your growth in the U.S? Then obviously there seems to be a turnaround in the U.S., so I’m just trying to understanding so far where just the shipping level in terms of replenishing and reordering the shelves and how much are we getting really in terms of takeaways? I have a few follow-ups, but you can answer that first please.

Daniel Birnbaum

Okay. Pablo, thanks for the question. Sell out in the U.S is all positive, except for the flavors, which is kind of deliberate consistent with our strategy to focus on water, but I’m going to ask Doug to speak specifically about the sell out in the states.

Doug Pritchard

Right. Actually we had a phenomenal sell out in Q4. Our U.S machines were up 46% and sell out and consistent with our sell in. So, very, very strong. When you looked at our sell out on gas refills, it was actually very strong in Q4, plus 7%, and that was a huge turnaround from minus 7% in Q1. So, we’ve seen significant turnaround in our gas business and are very pleased with the growth we’re seeing at plus 7%. As Daniel talked about globally, flavors in terms of sell out we're down 12%, which is consistent with the-- across the globe.

Pablo Zuanic

Okay. How [multiple speakers]. Go on, sorry.

Doug Pritchard

When we talk about new doors, our total focus in Q4 was to make sure that we had strong same-store sales growth within our existing stores. So you can see with a plus 46%, we had some very strong growth there. So as we look at 2017, expanding distribution and opening new doors, it will be one of our important strategies. Based on the success in Q4, we are going to be looking at -- again expanding on that success. To support that new door expansion, we’ve actually created a new business development team, whose entire focus will be on expanding selective distribution consistent with our health and wellness positioning. And as we open those new doors, we will start communicating those to the financial community.

Pablo Zuanic

Right. It's very helpful. And then just a follow-up, so I think in terms of guidance, you’ve talked about SG&A to sales being flat in 2017 versus '16. As you’re trying to get all these new customers and trying to bring back awareness, I guess, [indiscernible] U.S., I would have thought you needed to ramp up marketing as a percent of sales in 2017, but that’s not the case. Can you just expand on that, why that’s all necessary and why -- what is that you’re doing different, I guess, that’s more effective now than [indiscernible]? Thanks.

Daniel Birnbaum

Well, it's really -- it's not so much about the amount we invest in marketing, but really the quality of what we execute in marketing and case in point is Shame or Glory campaign, which we've launched globally to speak to the environmental benefit of using SodaStream were one bottle can replace tens and tens of thousands of plastic bottles that are -- that’s hazard to the environment. That campaign garnered billions of impressions worldwide at a very, very small expense. And then it was enhanced only because companies like Nestlé and the bottled water industry are challenging us on our messaging basically elevating our case to the global -- high-level of the global media attention and dialogue. So Shame and Glory has been viewed as a video by more than 60 million people right now. We were just challenged in a court, in Belgium, about our messaging there, which will give us another wave of visibility and debate around the validity of the SodaStream environmental benefit. So you don't have to go and invest millions in a Super Bowl ad when you can just tell a simple and true story and let consumers turn into a viral message. And that's the way we do marketing. Its proving to work for us time after time after time. We had three such campaigns during 2016 and we intend to continue that type of activity viral, social, authentic, ethical messaging that's what SodaStream is about.

Pablo Zuanic

Right. And one last one, when I talk to investors about your Company and particularly to investors that are new to the name, that are doing homework on the name, one push back that I get is that they say at the end of day, the business model now that you’re moving away from flavors and mostly sparkling water, that the business model at the end of the day is just a few to refills. Its selling, that the air, if you want. Then to the profit margin, so obviously on the canisters and not so much on the units. So, first of all, is that a fair characterization? But more important than that, how proprietary are this here to refills? And particularly based on your experience in Europe can people go and refill their canisters somewhere else, I don’t know if they involve shop or some petrol station or some other stores, because that’s where you’re making your money and then there is this perception that is not so proprietary, then you’re not run the risk in the area. If you can just explain on that and that’s it. Thank you.

Daniel Birnbaum

I don’t know any business, it’s a 100% proprietary, but we have a tremendous barrier to entry in our business, because of the first mover advantage, the installed base of retailers, which are approaching 80,000 now globally, possibly the largest distribution globally of any kitchen appliance. The fact that we’re installed in about 11 million homes around the world and used by more than 25 million people. And retailers are not looking for additional brands of gas to deal with, because it's complicated for them. Its considered hazardous material and its reverse logistics, which is complicated. So, yes, we do have competitors who try to cherry pick on the gas where indeed a lot of our profitability is coming from. But these cherry pickers have never been able to threaten the strength of our position in this category. We have competition in Germany. Many, many hundreds of companies or shops really its bicycle or scuba diving shops, mechanic shops, who can fill a CO2 canister. If I were a consumer, I would not choose to do that, because this thing is high-pressure, it’s a food item. I don’t know what kind of chemicals I’m going to get in there if I go to some mechanic shop so -- and retailers certainly will not go in and fill with pirate fillers who cannot assure safety food and other safety here. So, yes, there is a potential for competition, but we hold such a strong position that is a barrier to entry and I’ve not yet spoken about the unique technology that we’ve which in one case during the fourth quarter has enabled us to shut down a competitor in Germany who came in with a machine that carbonates in glass bottles and doing so completely ignored our patents in that field and a court was able to rule them shut down. So, yes I think this is a pretty strong business for future growth and we're not that susceptible to competition.

Pablo Zuanic

And just one last one.

Operator

Caller you there?

Pablo Zuanic

You have great momentum right now, but when we just think of [indiscernible] coming from Europe what are the markets, or perhaps kitchen counters are not as big, people already have a sale machine or something else and now we have SodaStream, I know you’re simply are being facing the question [indiscernible] faced for sometimes, nothing new, but when you think of this industry five years out, in terms of your model, the sparkling water model, is that an issue or what’s next, when I put it on the fridge or that’s not really something to worry about too much. [indiscernible] space where people go on buy the machine and put it somewhere in the house and how the sparkling works. Thanks.

Daniel Birnbaum

There are so many ways for us to access the consumer and make the idea of home carbonation easier, whether it's in the refrigerator and we do have a long-standing partnership with Samsung or whether it's in a different home appliance, countertop device which we -- by the way we do have in our portfolio and in our pipeline and we’ve chosen not yet to launch it. Its [indiscernible] would have been successful we would have launched our much, much better much more modern product, but there was no urgency to do so and there's so much low hanging fruit in what we're doing today. We choose not to lose focus. We can, for example, launch other product, other flavors. We can launch beer tomorrow, our test is going great, but we’re choosing deliberately to stay focused on what we do, because the growth ahead is so tremendous. And the largest market Germany case in point, we’re only at 6% household penetration and yet 80% of Germans drink primarily sparkling water. So we’re staying focused for now, but down the road we can expect very exciting growth opportunities.

Pablo Zuanic

Great. Thank you. Congratulations.

Daniel Birnbaum

Thanks, Pablo.

Operator

[Operator Instructions] And we will take our next question from Akshay Jagdale with Jefferies. Please go ahead.

Akshay Jagdale

Thank you. Congrats on the solid quarter. I wanted to ask about the installed base. Can you give us the latest guesstimate on global and U.S installed base, please?

Daniel Birnbaum

Yes, globally we're estimating our installed base at a 11.1 million households, active households. And I will let Doug speak to the U.S installed base.

Doug Pritchard

Sure. So the installed base in the U.S is around 1.5% household penetration. So somewhere around 1.6, 1.7 million machines.

Akshay Jagdale

Okay. That's helpful. Thank you. And so how should we thinking about that math between soda makers sold and the installed base going forward? Obviously, with the reset in your strategy, there's been a lot of noise there. So basically what I'm looking for is when you look at a long-term soda model for every hundred machines that you sell, new machines that you sell, what's the best way to think about how many should get added to the active installed base, given your new strategy?

Daniel Birnbaum

Well, when we sell a machine sometimes it goes to someone who is already a user base. And that depends on the penetration level within a given market, so the higher penetration, the higher cannibalization. And sometimes it goes to a new household and at the same time we have attrition. So my rough guesstimate is that about 40% of the machines we sell contribute within a year to the increase of the household penetration. That’s my guesstimate. But again, it's not -- we don’t have strong enough data for me to be able to find that one [indiscernible].

Akshay Jagdale

That’s super helpful. And related to that -- can you help us understand how you sort of quantifiably think about your return on advertising spend, I mean, certainly the results have been good recently, but I mean what -- you know your customer acquisition costs seem to be relatively high based on when you compare to some other systems. So one could argue that you could maybe reduce A&P spending even more and get even more effective. So can you help us understand how you guys think about customer acquisition costs and how that plays into your A&P spending effectiveness comment?

Daniel Birnbaum

Yes, we measure the effectiveness of our advertising and customer acquisition costs, CAC and our CAC in Q4 was one of the lowest -- maybe the lowest we’ve ever had with the exception of the hiatus period as we were turning around -- as we were executing the growth plan in 2015. But our CAC in Q4 of 2016 was $19. Our average CAC is around $23, so that’s kind of where we’re tracking. So effective this is improving. And I'll remind you that when you compare SodaStream to other systems, other systems namely Keurig were selling their machines at cost. That’s different with SodaStream. We do not believe in selling machines at cost. We believe we should be making money on every single item we sell. And we also believe and we’ve learned this through our experimentation that the higher the cost, the higher the price to the consumer, the higher the retention of that consumer. So we're not looking to reduce dramatically the price to the consumer and therefore we’re able to garner profit from the machine itself. So although the CAC might be $19, the net [ph] might be positive.

Akshay Jagdale

Okay. And then just specific to the U.S., can you talk a little bit about Costco and as you know been some noise there I guess at least the way I look at it. You are in the market, I think you enter those -- a good chunk of those stores in November and I think at least in some stores now -- either the product is not available or is sort of being sent back to the manufacturer, if I understand the labeling correctly. Can you just give us an update there on Costco and just let me know if I’m misunderstanding what’s going on.

Daniel Birnbaum

Yes, I will ask Doug to speak to Costco, but …

Akshay Jagdale

Sure.

Daniel Birnbaum

… Costco was designed as an in and out program and was very successful in holiday, but Doug you can go ahead, give some details on that.

Doug Pritchard

Absolutely. We had an incredibly successful period with Costco actually through Q4. And we’re very, very pleased with results. In fact, they’ve been so pleased that we’re working with them on programs and expanding -- more than doubling the number of doors at Costco in the front half of this year and certainly for [indiscernible] as well. So, again, we had a incredibly successful season with them and we’re very, very, pleased with the results.

Akshay Jagdale

Okay. And related to the U.S., what's your store account now in terms of cumulative doors in the U.S?

Doug Pritchard

Again, we’re in around 10,000 doors and that’s been very consistent over the last year or two.

Akshay Jagdale

And do you expect that to be similar in '17?

Doug Pritchard

No, as I mentioned earlier, expanding distribution and opening new doors is an incredibly important strategy for 2017. Again, our focus in 2016 was to increase the -- drive higher productivity within our existing retailers and doors. And based on the very strong results we had in Q4, we’re going to expand our door distribution in 2017. In fact, we’ve created a business development team whose entire focus will be on expanding selective distribution across the United States consistent with our health and wellness positioning.

Akshay Jagdale

Okay. And just one last one for me. In terms of the gas refills, the defensibility etcetera, obviously you made some really good points. What about disposable units? Obviously, one of the barriers, if I may, for customer acquisition or customers adopting the system is the exchange program, the availability of it and the ease of it, right. So all as equal, it’s a lot easier for the customer to just not have to exchange and I think there is options that you can avail yourself too, I guess potentially where you can have a disposable sized CO2 cartridge. So I know you had started to offer those, but can you just remind us where you are in that sort of strategy and what you think of that broadly?

Daniel Birnbaum

We never force the consumer to return their carbonator, they can just use gas by buying carbonators, we can them spares. In the States, they’re selling for $30 and in Europe it's about €25 and they can just buy a spare and use it and then set it aside and recycle it as they would or return it to the store eventually. So there is no handicap in doing so. We are testing, selling spares at a lower-cost, so the consumers can do that even more economically, but we don’t believe in it. We think that the right thing to do for the environment is to return and refill. We -- when we get an empty carbonator, we test it, we clean it, and refill it and I think that’s a much more sustainable and futuristic business model and using stuff and throwing it out belongs to the past, and we belong to the future.

Akshay Jagdale

Perfect. Thanks a lot. I will pass it on.

Daniel Birnbaum

Thanks, Akshay.

Operator

And we have no further telephone questions at this time. I’d like to turn the conference back over to Daniel, for any additional or closing remarks.

Daniel Birnbaum

Thank you very much. I’d like to thank you all for joining us today, and we look forward to seeing any of you who are able to come to the IHA Show, in Chicago, that’s on March 18 to 21st where we will be revealing some exciting new products and I hope we can see some of you there, otherwise we will speak with you all next time that we report our earnings in May. Have a great day.

Operator

And this concludes today’s call. Thank you for your participation. You may now disconnect.

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