Sodastream Q1 Conference Call Summary

Sodastream International SODA on Wednesday reported its first quarter earnings.

Shares of the company are down 1.22 percent or $0.50 per share to $40.62.

Below are some key takeaways from its conference call:

Daniel Birnbaum, CEO:

• Our first quarter performance was generally in line with our expectations as strong growth in three of our four regions was offset by challenges in the Americas, particularly soda makers sell-in following softer than expected sell-out during the holiday season.

• Overall, global revenue was on plan while gross margin and earnings were slightly ahead as gas refills were a bigger percentage of our product mix. For the quarter, gas refill units increased 22% to a record 5.8 million and flavor units were up 9% to 8.4 million, while soda maker units declined 22% to 604,000. In the U.S., soda maker units decreased 69% to 80,000, and flavor units declined 20% to 2.7 million, while gas refill units increased 27% to a record 1.4 million.

• Unlike gas, which is usage-driven and not a holiday gift item, sell-in numbers for both soda makers and flavors were particularly affected by weak holiday sell-out and the resulting excess inventory that carried over into Q1.

• Also, our Q1 comparison in the U.S. suffers from an extremely strong Q1 in the prior year, in which we saw unit gains of 78% for soda makers and over 100% for flavors and the gas refills. Notably, last year in Q1, we were still on an end cap as part of our launch program at Walmart, a program which ended in May 2013.

• Sell-out is a better indication of consumer demand and was more encouraging during the quarter. According to NPD, soda maker sell-out was down 19%, and flavor sell-out was down 6%, while gas refills increased 47%. As with sell-in, these sell-out figures also suffer in comparison to a strong Q1 prior year due to the Walmart end cap program.

• Our business outside of the U.S., which represented 70% of first quarter revenue, continues to perform well, as evidenced by the 19% growth in Q1.

Scott Guthrie, General Manager-Americas Region:

• Now to guidance, based on our first quarter results and current visibility, we are reiterating our outlook for 2014. As a reminder, we expect full year revenue to increase approximately 15% over our 2013 revenue of $563 million.

• With respect to regional performance, we now expect Western Europe to grow slightly faster than we originally expected and the Americas slightly slower. For the full year, gross margins is still projected to be similar to 2013 levels of approximately 51%. Our projected tax rate for this year is approximately 12% up from 10% in 2013.

• For the full year, EBITDA is expected to increase approximately 11% over 2013 levels and net income to increase approximately 3% over 2013 levels. Excluding the impact from the changes in FX, including a stronger shekel versus the U.S. dollar, and weaker currencies versus the U.S. dollar, such as the Australian and Canadian dollar, EBITDA is still projected to increase approximately 25%.

• With respect to the second quarter, we are expecting our top-line to grow mid-single digit as soda makers sell-in will remain under pressure, although not to the degree we experienced in Q1.

• While 2014 is off to the start we expected, we are clearly not satisfied. We are taking our recent performance as an opportunity to learn from our early experiences to address elements of our go-to-market strategies that need refining, particularly in the U.S.

• On the positive side, we are encouraged with our strong double-digit growth in all three regions outside the Americas and the fact that the first quarter represented an all-time record quarter for gas refills, both globally and in the U.S., which are up 22% and 27%, respectively.

Four Key Areas

• Birnbaum: Let me take a moment to address four key areas of the business. First, core consumers remain very active and passionate about our brand, because we deliver multiple consumer benefits that are in line with some of today's most relevant mega trends. Our recent survey from January 2014 tells us that 77% of consumers who use SodaStream are using it at least three to four times per week, with 55% of those using it at least once per day, and 70% are using our flavors.

• Birnbaum: At the same time, unaided brand awareness grew at a double-digit pace year-over-year to 40%, with aided awareness very high at 84%. That said, I believe there is tremendous opportunity to sharpen our positioning in consumer messaging to convert that high awareness into purchases, which will ensure our continued leadership of the burgeoning home carbonation category.

• Birnbaum: Second, the brand has built the strong presence in over 17,000 retail doors in the U.S. that spans high-end specialty to mass market. This is an incredibly strong foundation for a brand that just launched at retail only five years ago, and something we can better leverage going forward.

• Birnbaum: Retailers remain excited about the new incremental revenue and profit opportunities that SodaStream is creating in home carbonation and continue to embrace the attractiveness of our razor/razorblade business model.
• That said, I see significant opportunity to expand our presence across new channels and doors, including grocery and drug, but more immediately, we need to better optimize our current distribution. To this point, I'm very pleased to announce that starting this coming Saturday, we are kicking off a 20-foot shelf-set in 1,600 Walmart stores.

• Birnbaum: Third, our product line-up is incredibly strong with a variety of soda makers at different price points. Our recent national roll-out of SodaCaps and a range of over 100 flavors, including iconic partnership brands such as Ocean Spray, Crystal Light, Kool-Aid, and V8 Splash.

• Birnbaum: And fourth and finally, gas refills are the life blood of the SodaStream system and continue to grow. Our exchange program is a well oiled reverse logistics system that drives valuable consumer traffic to our retail partners and represents a very strong barrier to entry to our competitors.

• Birnbaum: In summary, in addition to strengthening our infrastructure, we are very focused on: one, improving our marketing effectiveness by sharpening our position in consumer messaging; two, optimizing our current retail estate in addition to growing new doors; three, driving product innovation and SKU rationalization; and finally, four, continuing to expand and leverage our gas exchange accessibility.