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Edited Transcript of SODA earnings conference call or presentation 2-Aug-17 12:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 Sodastream International Ltd Earnings Call

Ben Gurion Airport Aug 27, 2017 (Thomson StreetEvents) -- Edited Transcript of Sodastream International Ltd earnings conference call or presentation Wednesday, August 2, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brendon Frey

ICR, LLC - MD

* Daniel Birnbaum

SodaStream International Ltd. - CEO and Director

* Daniel Erdreich

SodaStream International Ltd. - CFO

* Doug Pritchard

SodaStream USA Inc. - Interim President for North America

* Henner Rinsche

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Conference Call Participants

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* Akshay S. Jagdale

Jefferies LLC, Research Division - Equity Analyst

* Jonathan Daniel Keypour

Deutsche Bank AG, Research Division - Research Associate

* Pablo Ernesto Zuanic

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Peter K. Grom

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good day. My name is Kayla, and I'll be your conference operator today. At this time, I'd like to welcome everyone to SodaStream International Second Quarter fiscal 2017 Earnings Call. Today's call is being recorded. (Operator Instructions). I would now like to turn the call over to Brendon Frey of ICR. Please go ahead.

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Brendon Frey, ICR, LLC - MD [2]

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Thank you, and welcome everyone. Present on the call today are Daniel Birnbaum, CEO; Danny Edrreich, CFO; Henner Rinsche, President of Europe; and Doug Pritchard, President of North America. Following the prepared remarks, we'll open the call up to questions. Earlier this morning, we filed a 6-K, which included a 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. For more detailed information about the risk factors that may impact our business, please review the paragraph in this morning's press release that begins with the words, "This release contains".

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

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Daniel Birnbaum, SodaStream International Ltd. - CEO and Director [3]

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Thank you, Brendon, and welcome to everyone on the call with us this morning. The strong momentum we experienced at the start of the year carried over into to the second quarter. Our work towards building a global sparkling water franchise by providing consumers a smarter, more convenient option for fulfilling their beverage needs continues to gain traction. Importantly, we are executing our growth objectives in a highly efficient manner that is fueling strong gains in profitability and increased free cash flow.

There are a number of highlights from our recent performance that underscore the success of our strategic and financial initiatives. Revenue increased 10%, driven by a 35% increase in sparkling water maker units to 859,000. At the same time, gas refill units grew 10% to an all-time record of 8.3 million. These results indicate 2 very important points about our business: One, we are increasing our global household penetration now at 11.6 million; and two, our existing as well as our new users are active. In Q2, our consumers prepared 460 million liters of carbonated beverage with our system, 88% of which was non-flavored sparkling water. In line with our strategy to position SodaStream as a sparkling water brand, flavor unit sales decreased 11% year-over-year to $5.3 million. With revenue growing 10% in the quarter, our performance below the revenue line was even stronger, highlighting the combined benefits of our advanced manufacturing capabilities and enhanced operating platform, which allowed us to significantly leverage our cost structure on higher production volumes. To illustrate, gross margins increased to 240 basis points to 53.1%. This improvement was achieved during a period when our results were negatively impacted by FX and product mix. We were able to more than offset these headwinds through greater efficiencies in our manufacturing process and leveraging our infrastructure for scale. We've also been able to raise machine margins through successful reengineering of our leading Sparkling Water Makers, and operating efficiencies that provided meaningful cost reductions. We were able to reduce the operating expenses as a percentage of revenue by 280 basis points, despite investing additional dollars in A&P this quarter versus a year-ago as we optimized and leveraged our selling expenses and G&A. As a result, operating income increased 84% to approximately $17 million and operating margin improved 520 basis points to 12.9%. EPS increased 74% to $0.64, and we generated free cash flow of approximately $11 million in the quarter. We ended the second quarter with approximately $109 million of cash and deposits and no financial debt. To help understand what's driving our recent results and shaping our outlook, I want to provide color on current trends in each region. Starting in Western Europe, second quarter revenue increased 10%. We continue to make good progress expanding our user base in markets we believe we are under-penetrated. Machine sales in Germany, Nordics and Benelux, all grew double-digits on a percentage basis, fueled by effective messaging, great PR and solid execution by our teams in Europe. At the same time, gas refill sales in many of these markets along with more highly-penetrated markets such as Switzerland and Austria, were up double digits.

In the Americas, revenue grew 8%. U.S. revenues were up 3% in the second quarter, led by 24% growth in Sparkling Water Maker units, in line with retailer sell-through. At the same time gas refill units sales were up 5% to $1.2 million, and flavors were down 4% to $1.1 million. Our research shows, a strong correlation between sparkling water usage and retention. Adding to our confidence that our brand repositioning in the U.S. is working. To build on our current momentum and gain further traction, we're expanding our retention efforts, led by our home delivery of gas.

As you'll recall, following the successful launch of this program in the New York area, we began rolling it out to other metro areas during Q2, such as Philadelphia, Baltimore, Florida and Los Angeles. We believe that our free home delivery of gas, coupled with our ability to communicate directly with our consumers through our CRM platform will support improved retention levels and enhance our brand franchise in the U.S.

Canada remains on fire, with strong double-digit revenue growth, which was achieved through higher productivity at existing doors without the benefit of new distribution. We continue to study our success in Canada as a possible blueprint for the United States.

Now to Asia-Pacific. Quarterly sales were flat with last year. The strong start to the year we experienced in Australia continued in the second quarter, as machine sales nearly doubled and gas refill units were up strong double-digit. This momentum in Australia was offset by a decline in South Korea, where we're up against an exceptional comparison due to the appointment of a new distributor who received his initial pipeline shipment in Q2, 2016.

Japan continues to be one of our exciting growth markets as we expand the distribution and marketing activities and are experiencing strong consumption patterns, albeit still on a small-scale.

Lastly, CEEMEA. Sales increased 37% compared to year ago led by strong sales of Sparkling Water Makers and gas refills to our Czech distributor. Meanwhile, in Israel, our ongoing efforts to develop an extremely user-friendly and profitable direct-to-consumer model through the testing of numerous programs are helping to strengthen consumer retention in our home market.

We're pleased with the top line trends we exhibited during the second quarter and first half of the year, and even more so with the significant increases in profitability we delivered during these periods. The fundamentals of our business are sound, and the strategies that we have in place to support both household penetration and retention have us well positioned to drive profitable growth over the long term. These strategies include: One, introducing new innovations that further enhance the consumer experience and elevate the multiple consumer benefits of our home carbonation system. For example, the Fizzi and soon-to-come the electric Fizzi, the mix machine and beer concentrate, both of which are in market test at this time. The development of our water flavored segments. We just began rolling out the Fruit Drops and plan to launch the infused line of fruits, flower and earth sachets. And SodaStream nature, which is an all-natural and rich-in-fruit concentrate as well as our new dishwasher-safe bottle, all rolling out starting Q4.

Second, capitalizing on our strong brand key to drive higher purchase intent. Thanks to great digital campaigns like Shame or Glory, and the more recent, homo schlepiens which launched last month, we have generated tremendous buzz and awareness from hundreds of millions of views and PR impressions. We're increasing our focus on investment on programs to convert these awareness-in-brand type these games into increased demand and purchases. This includes investments in more in-store demos, show-off presence in secondary displays, consumer promotions, infomercials, social media activations and opinion leaders referral programs. These allow us to transform our brand momentum into sales.

Three, strengthening our relationships with the key retailers where our consumers frequently shop, both online and brick-and-mortar and improving the scale and quality of our in-store execution. With the retail landscape continuing to undergo significant change as consumer buying behavior rapidly evolve, a priority for us is improving our online presence with e-retailers led by Amazon, which is becoming an increasingly important account for us in every market.

And four, strengthening our consumer connections. In addition to the broader rollout of an extremely user-friendly and profitable direct-to-consumer model, we are implementing a new cloud-based ERP system that will significantly enhance our CRM capabilities. We've had good success with numerous programs in Israel and are confident that similar applications can be used to drive higher demand and improve retention in other areas of the world.

Shifting to our outlook. Based on changes in FX combined with an improved outlook for our core business, we are raising our full year guidance. We now expect 217 (sic) [2017] revenue to grow approximately 10% to about $523 million compared to $476 million in 2016, up from our previous guidance of $510 million. This revenue guidance takes into account a reduction in second half revenue of approximately $3 million due to the sale of our professional business unit, which we executed in Q2. Third quarter revenue is expected to increase approximately 7% to about $133 million. This equates to roughly 48% of our projected second half revenue, which is consistent with historical patterns looking at the revenue split between Q3 and Q4. We are also raising our full year gross margin guidance by 100 basis points to approximately 53%, compared to 51.5% last year. A&P as a percentage of revenue is expected to grow roughly 100 basis points versus 2016, as we increase our ad spend to capitalize on strong momentum in certain markets. Based on our higher revenue outlook and operating efficiencies, we now expect the operating income to increase approximately 30% to about $70 million compared to $54.5 million in 2016. Our new guidance assumes a euro-dollar exchange rate of $1.15, compared to our previous assumption of $1.09. In addition to the significant impact of the euro on our business, it's equally important to know the impact of the Israeli shekel, as approximately 40% of our costs and operating expenses are Israeli shekel-based. With an 8% weakening of U.S. dollars against the Israeli shekel so far in 2017, the positive impact on operating income of the euro is more than fully offset by the negative impact of the Israeli shekel compared to 216 (sic) [2016], which is included in our guidance.

For the year, we expect net income to increase approximately 40%, and diluted earnings per share to be approximately $2.70, up 30% compared to $2.07 in 216 (sic) 2016 . CapEx for 217 (sic) 2017 is expected to be approximately $25 million, while D&A is expected to be approximately $20 million. 217 (sic) 2017 is progressing very well. We are generating great brands and sales momentum in the markets that we prioritized for growth. At the same time, we're transitioning our top line improvement into significant gains in profitability. This is allowing us to reinvest capital into programs aimed at increasing our global household penetration, while also further strengthening our balance sheet, both of which will help us return greater value to our shareholders over the long-term.

Operator, we're now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Peter Grom, JPMorgan.

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Peter K. Grom, JP Morgan Chase & Co, Research Division - Analyst [2]

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Two questions from me. With machine's unit sales up 35% in the quarter, and I appreciate the commentary on sell-in versus sell-through in the US. But some of the takeaway data would suggest that the takeaway -- the trend seems to be slowing, so any commentary on what you're seeing would be helpful. And second, can you provide an update on your door count in the U.S.? And how should we see that number evolving as we move to the balance of the year?

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Daniel Birnbaum, SodaStream International Ltd. - CEO and Director [3]

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Okay, very good. Thank you, Peter. I'll ask Danny to address the first question and Doug to address the second.

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Daniel Erdreich, SodaStream International Ltd. - CFO [4]

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Peter. Well, you asked about the improvement on machines in the second half. We see continued strong momentum on machines in the second half. Obviously, the growth rate would be lower because we're off a higher base, but overall, the momentum continues.

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Doug Pritchard, SodaStream USA Inc. - Interim President for North America [5]

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Peter, with regard to the U.S., let me talk about -- first about the sell-out. The sell-out continues to be very strong in the U.S. and in line with our sell-in. So we're seeing about 23% sell-out growth in the United States. So we feel very good about our continued growth and feel that we're continuing to accelerate as we get to the back half of the year.

With regard to doors, we're seeing really -- we are making great progress on doors. I think as we had talked in our last quarter, we added about 1000 doors of gas with Walmart, which we're excited about. And we are, in the back half, going to be adding another 591 doors with machines, as an in-and-out, which in 2018 in the first half, will be then put in line. We also are working with a lot of other retailers and making good inroads of them as well, including Sam's Club. Best Buy is adding another 300 doors of machines. They added back 1000 gas earlier in the year, but we're adding another 300 doors from machines, which is exciting. And we have talks going on with of BCS, Office Depot. We're looking to expand at Ace, Meyer and we've implemented a business development group, which we're excited about, which is really expanding outer independence as well. So overall, we feel good about our door call. When we look at door count overall, we're up over -- about 1150 new doors versus where we were last year, in the United States.

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Daniel Birnbaum, SodaStream International Ltd. - CEO and Director [6]

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Peter, let me just add to that, that there is one door called Amazon and other e-tailers that are becoming more significant in our business and in some of our markets are even becoming the lead retailers for us. So we're getting those e-tailers a lot of attention as well.

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Operator [7]

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We'll go next to John Keypour with Deutsche Bank.

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Jonathan Daniel Keypour, Deutsche Bank AG, Research Division - Research Associate [8]

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Yes, I was just wondering, speaking of your online presence, I was wondering if you could break out total percentage of online sales as like -- as a contributor to your total sales. And also do you have a quantification of like how much Prime Day might have impacted sale?

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Daniel Birnbaum, SodaStream International Ltd. - CEO and Director [9]

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Well, I can just give you some anecdote because we don't report that specific metric. But online, in general, for us represents almost 10% of total global revenue. You know what, I won't even quote on that -- it's direct, because in some markets it's by phone and not only by internet. So direct sales are close to 10%. That includes Amazon e-tailers and our own direct business. What was your second question?

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Jonathan Daniel Keypour, Deutsche Bank AG, Research Division - Research Associate [10]

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If you had any color on Amazon Prime Day? And what that impact might have been in the quarter?

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Daniel Birnbaum, SodaStream International Ltd. - CEO and Director [11]

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Yes, we -- I can just give you the example of how we performed in Prime Day in Germany. You know what, I'm going to ask Henner, who's leading our European business to comment on Prime Day in Europe.

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Henner Rinsche, [12]

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Sure, John. So Amazon in Germany, they actually have just made a public announcement, where they told the world what were the best-selling products of all their suppliers across all product categories in Germany on their Prime Day on July 11. And the 2 best-selling products were a PlayStation subscription and a SodaStream machine that produces sparkling water in a beautiful and dishwasher compatible glass carafe. So of all product categories on Amazon, SodaStream has been the #1 or one of the two best-selling, and I think that's an interesting anecdote to just outline how much fun Amazon are having with the SodaStream, for example, in Germany.

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Jonathan Daniel Keypour, Deutsche Bank AG, Research Division - Research Associate [13]

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That's great. I have another question about U.S. gas program. I was just wondering if you guys have any metric you're willing to put out in terms of coverage, like a subscriber percentage over the geographies you've already deployed it in?

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Daniel Birnbaum, SodaStream International Ltd. - CEO and Director [14]

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Doug, can you comment to that?

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Doug Pritchard, SodaStream USA Inc. - Interim President for North America [15]

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Yes, I can. At this stage, we're not really releasing kind of any of the data, but we feel good about the program and where it is in its initial stages. And it's on the right track for everything we're looking at, and we're continuing to be excited about the program and roll it out nationally by the end of the year.

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Operator [16]

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We'll go next to Akshay Jagdale with Jefferies.

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Akshay S. Jagdale, Jefferies LLC, Research Division - Equity Analyst [17]

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Yes. I wanted to ask about the takeaway trends in the U.S., again, I think some of the machine data that's available publicly is -- it pointed to a pretty significant decline in June. I know you referenced the 20-something-percent takeaway. Can you get into that a little bit more detail here, because there is something data that's available to us, which obviously isn't complete because it maybe doesn't cover your -- some of your larger customers? But June is a pretty important month for machines, and it looked like June was down, right? And so can you give us a little bit more color on the takeaway trends in the U.S.?

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Daniel Birnbaum, SodaStream International Ltd. - CEO and Director [18]

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Sure, Akshay. I'll let Doug to speak to that.

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Doug Pritchard, SodaStream USA Inc. - Interim President for North America [19]

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Sure. We don't typically release the data on a monthly basis, but like as I said, in Q2, we saw really, really good growth of a 23%, which was consistent with our 24% sell-in. So we feel good about that, and as we start looking at our preliminary data in July, we're seeing that even accelerating well beyond the 23%. So I'm not quite sure the data you're looking at, so I wouldn't say there is any concerns. As we look at the data overall, we think our business continues to be healthy. And as we look at the back half of the year, we anticipate we'll be continuing to accelerate.

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Akshay S. Jagdale, Jefferies LLC, Research Division - Equity Analyst [20]

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And just similarly, can you provide some color on Europe? Give us information or some color on the takeaway trends there too in Western Europe and a couple of your larger countries? That would be great.

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Daniel Birnbaum, SodaStream International Ltd. - CEO and Director [21]

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Okay, Henner will take that.

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Henner Rinsche, [22]

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Akshay, sure. So in 2017, year-to-date sell-out in Europe grows double-digit year-on-year. So our 2017 value sales to consumers are up year-on-year in 8 out of the 12 countries that we buy information, that we buy sell-out data. As an example, value sales to consumers in the measured food and drug retail channel in Germany are up 20% year-on-year in the first half of 2017. And including the non-measured channels, online, electronics retailer, the total sell-out growth year-on-year would even exceed 20% by far. So basically, Europe is absolutely on fire. And just as another point in case, if you look at Germany for example, our biggest market worldwide, 2017 quarter 2 was the 22nd consecutive quarter of double-digit year-on-year revenue growth in Germany. So Europe is doing really, really well in terms of consumer demand.

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Akshay S. Jagdale, Jefferies LLC, Research Division - Equity Analyst [23]

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Okay. And then, just on the guidance, you mentioned the decline in the back half. Can you talk to that? I haven't been able to go through all the numbers yet, but your guidance seems to imply continued growth in the back half. I think, you were -- maybe you were just talking specifically about the impact of the business you sold. So can you just condense that down a little bit for us in terms of your guidance? You've increased your revenue guidance -- revenue growth guidance and it continues to imply -- looks like pretty robust growth in the back half. So can you just clarify what you said in the opening remarks?

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Daniel Birnbaum, SodaStream International Ltd. - CEO and Director [24]

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Yes. Just -- I'll let Danny speak to that, but in the prepared remarks, I did mention that we spun-off a nonstrategic business unit that was generating in H2, $3 million. So we're going to be lacking that, so we're up against a high base, and nevertheless, we raised guidance for the back half. So not a decline but an increase. So I'll let Danny give some color on that.

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Daniel Erdreich, SodaStream International Ltd. - CFO [25]

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Yes. Let me find you a breakdown of the numbers. We provided a guidance number for the year of $523 million. If you'll break it out to first half and second half, you'll see that the number for the second half is approximately $277 million. And this excludes about $3 million of the business -- of the professional business that we won't have. If you add that, the increase is about 9%. So it's, I guess, higher than our previous expectation of 7% for the year.

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Akshay S. Jagdale, Jefferies LLC, Research Division - Equity Analyst [26]

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Okay, great. And just your gross margin guidance, obviously you took that up. Can you give us a sense of your expectation on the back half, because the mix this quarter obviously with the machine sales being higher, which is a good problem to have I guess, mix was negative. Are you assuming a similar trend in the back half?

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Daniel Birnbaum, SodaStream International Ltd. - CEO and Director [27]

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We're assuming similar trend as we think so far, with strong machine sales, and the breakdown between consumables and machine would stay more or less the same. We guided for 53% gross margin, and this is simply a reflection of higher profit that we're making mainly on our machines.

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Operator [28]

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(Operator Instructions) We'll go next to Pablo Zuanic with SIG.

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Pablo Ernesto Zuanic, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [29]

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Look at just -- with the non-U. S. businesses being more than 80% of earnings, I have promised myself not to ask questions about the U.S., but I want to break my rule and I will ask. So Doug, 3 questions regarding the U.S. business;. Number one, you mentioned in the call that there are a lot of good lessons to take from Canada, which you ran for the U.S. business. Expand on that briefly. Number two, just give us more color in terms of how you're creating awareness for the product because obviously, I wondered about digital TV. A lot of people still haven't even heard of the product, but this is more about displays. Just explain push versus pull, how are you creating more awareness of the product, given that, in theory, there's still such a large opportunity from household penetration. And the third one, last regarding the U.S., just remind us about that rollout at Walmart of these below $50 units. How is that going? And could that have a -- could that dilute the image of the brand to some extent? Selling a $100 plus units at based price and beyond and then $40 units at Walmart. I have a follow-up, but if you can touch on the U.S. first.

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Daniel Birnbaum, SodaStream International Ltd. - CEO and Director [30]

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Go up ahead, Doug.

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Doug Pritchard, SodaStream USA Inc. - Interim President for North America [31]

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Okay, sure. Not a problem. So we've obviously had a terrific success in Canada. I think we are up to about 3.5% household penetration. So we're excited about the business. I think some of the learnings we can take is, we've actually been able to get some great communication, #1 to the consumers. And really been able to leverage good continuity in our communication. But really augmenting that, as Daniel had said earlier, with a great thought leadership, great sampling, and great PR, whether that's through the global program, such as homo schlepiens or the Paris Hilton thing in April. But in addition to, we were getting our machines in front of a lot of daytime shows and new shows, where people are seeing it as a great gifting opportunity, number one.

Number two, I think we're -- because of the success in the business and as we start to get momentum, as we really looked at the business over the last certainly 18 months, the amount of customer support has been also phenomenal, the amount of display support we're getting, the amount of ad support we're getting. So the one thing we do have in Canada is, with the great pull that we're from the consumers, we are actually getting terrific push from our customers as well, as they are super excited on the business. And the one thing, let's say, all of our major retailers are really and truly understand in Canada is really the power of the gas business to continue to drive in-store traffic for them. And as a result, we're just seeing better and better displays, and we're seeing the business continue to accelerate. So as we continue to get good consumer support in the U.S., which is I think your second question, we'll be able to really kind of generate that support from our customers in the U.S.

And over the last year, I would say, as we looked at our customers and how they're looking at the business, the amount of excitement we're getting from our customers -- I just spent the last week visiting almost every one of them, and we're getting continued excitement from them. And they're really, really seeing how the business is turning around for them and how this can be a key growth driver for them. Not only on their online business but really on their bricks-and-mortar, as in the U.S., especially as Amazon is getting stronger, that they can continue to drive in-store traffic with our gas with their retail.

So I'd say, it's a combination of what we're doing kind of from good consumer communication and also outstanding execution at shelf and with our customers.

The second question is just creating awareness. We continue to spend a lot of time digitally and socially in the first part of the year, where we don't sell as many machines, but awareness continues to build, and we're excited about that. We continue to use thought leadership and a lot of events and sampling to making sure the consumers kind of understand our product and how it works.

As we look at into the critical Q4 time period, we're looking at potentially adding then television and looking at infomercial as well to ensure that consumer can truly understand the benefits of the product and the Sparkling Water positioning. So obviously, a key plank of our growth drivers moving forward.

Your last question on Walmart. The Walmart front is off to a terrific start. It's now over half of their business, and they are growing faster than the rest of our customers. They have been growing at about 50% on machines over the last 6, 7 weeks, as it's been implemented. And we see this as being a core growth driver from the Walmart channel. Do we see it affecting our business no -- overall? No, it won't have that huge of an impact. It's not like these fountains are going to be 30% to 40% of our business long-term. It's a niche that we need to be into. There is a growth opportunity there with those consumers. And we think it's going to be in the 5% to 10% range of our business over the long haul. And it hasn't having any impact on our ability to position the premium Sparkling Water positioning, because we do have it under a sub-brand as well. At the top-end, we're super excited with Aqua Fizz going into the Williams-Sonoma's in the high-end retailers, and they're super excited about that as we head into Q4. So overall, we think it's the right strategy for Walmart, and we think that it's not going to have an overall impact on our ability to grow at the higher revenue levels with the rest of our customers.

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Pablo Ernesto Zuanic, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [32]

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That was so useful. So Daniel, just maybe a bigger picture question, but -- now regarding the flavor strategy. So first, the idea was to have soda-like flavors, colas and others, and then that was reversed and we went into sparkling water, and now new are going into infused flavors. So if you can explain that, because when I look at the experience of La Croix, which is amazing, right? You have this growth of the company north of 50%. They manage to have like 15 SKUs the last time I counted at a supermarket, in terms of all these various flavors of sparkling water. So it sounds like, and I don't know if the U.S. is indicative of other markets, but the sparkling water opportunity, it's one, but then the flavor opportunity within sparkling water, if well managed, is quite significant. How do you think about that as it relates to your business?

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Daniel Birnbaum, SodaStream International Ltd. - CEO and Director [33]

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I agree. I think you just rolled out our strategy. We made a transition from CSDs to sparkling water in the end of 2014. That transition is taking effect and is proving to be successful on a global scale. And now what we're doing is, we're looking at the flavored sparkling water category as a big opportunity and launching product that will deliver that. So if you look at our website for example, you'll see in the United States and also in some of the other countries already, that we just launched a new range of flavored water, which delivers similar product to La Croix, but without the packaging. So all-natural zero-calorie, fruit-flavored fruit-essenced, and they come in 8 flavors. It's a wonderful range that we call Fruit Drops. You'll see more of those with the infused and later on the natural fruit line called Nature. So that's what we're developing right now. And at the same time, we're continuing to focus on sparkling water, plain sparkling water, which is 88% of our sales -- what consumers are using for SodaStream. So that's the strategy. Consumer momentum is with us, because consumers now, globally and especially in the United States and in Europe, are transitioning away from the sweet beverages to water. We are part of that transition. So that momentum, that mega-trend is supporting our strategy to continue to develop water, flavored water and regular water, and that's going to be the future of SodaStream for the next few years.

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Pablo Ernesto Zuanic, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [34]

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So useful. Daniel, financial question. Just, I appreciate all the color and guidance you've given for the year, but just how should we think about A&P over time? Is it at the proper levels as a percentage of sales or as you try to ramp-up household penetration, should we assume that, that will increase over time? Just any color you can give in terms of whether gross margins, EBIT margins, A&P more on a medium-term basis.

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Daniel Erdreich, SodaStream International Ltd. - CFO [35]

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Pablo, we guided for A&P to increase 100 basis points for this year. This means that it will be around 14.6% of sales. In 2013, it was 17% of sales, so obviously we are reducing the number. And in the future, the long-term, we're still able to reduce this number further. I would aim for 12% and then, even lower than that. We introduced a measurement called customer acquisition cost in which we're measuring the effectiveness of each dollar we spend on marketing, and that's the A&P divided by the number of machines we sell. Our threshold is $25 A&P per machine, and right now we're able to keep a level of around $20 per machine. So as you see, we have pretty good handle on this, and we will be able to reduce this number further in the longer-term.

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Pablo Ernesto Zuanic, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [36]

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One last one for Henner. Henner, you have -- 2 questions. One, you were seeing this experience in the U.S. and Canada, it seems to be quite successful. Any lessons from what's happening here for Europe? Maybe it doesn't apply at all. I mean, Europe has been the one leading but -- in terms of performance in the past, but just if you can comment on that.

And then number two, looking about the 10% year-to-date growth in Western Europe. In absolute terms, is it fair to say that most of that is coming from Germany? Just give us a color in terms of the dollar absolute change? What's key market that's driving that and what's happening in that market that's generating that growth?

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Henner Rinsche, [37]

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Sure, Pablo. So first of all, what lessons can Europe learn from the United States? I guess fundamentally, there's a major difference in that, historically, in the United States, the main nonalcoholic beverage category has always been sweet carbonated soft drinks. The U.S. are the homeland of Coke and Pepsi. Whereas Europe has always been much more about water. In some countries, more sparkling water, in others, more still water, but Europe has been a lot higher in per-capita consumption of water So for that reason, Europe has really identified their own strategy, which is in -- not all, but in most European countries, to tell people that with the SodaStream machine, you don't have to carry, you don't have to lug or schlep the heavy water bottles anymore, because you have your fresh tap water available at home, and with a SodaStream machine, push of a button you transform it into delicious sparkling water. So the consumer and market fundamentals are quite different between the U.S. and Europe. In my opinion, the common denominator between the U.S. and Europe is that our key mission is to educate consumers on the benefit of a SodaStream machine. So how does SodaStream machine improve the life of a consumer? Initially, people don't know that, so it's our job through marketing, communication, public relations, info demonstrations and so on to tell people that having a SodaStream machine and using it will improve their life considerably.

Second question, what role does Germany play within Europe? As I said before, in terms of...

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Pablo Ernesto Zuanic, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [38]

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Not necessarily Germany, but I'm just saying, when I'm looking at the absolute delta in terms of dollars sales growth that see in Europe, if you can mention the 1 or 2 countries that are driving the bulk of that amount, and if it's Germany, of course, comment on that.

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Henner Rinsche, [39]

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Sure. Sure. So, obviously, Germany is the highest-revenue country of SodaStream in the world, so even more so in Europe. And so, obviously the lion's share of growth in Europe comes from Germany, but obviously, most European countries are growing. As I said before, we buy sell-out data in 12 European countries and 8 of them are growing year-on-year. In fact, are growing double-digit year-on-year. So it's pretty broad-based growth that we have in most European countries. Germany being the biggest and also the most consistent. Obviously, Germany is the main driver of growth in Europe. Why is that so? Because basically, the approach to talk about the no lugging, the no schlepping of bottles originated in Germany almost 6 years ago, 22 quarters ago, and since those 22 quarters, revenue in Germany has been growing double-digit. So that's basically the story of Europe.

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Pablo Ernesto Zuanic, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [40]

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Remind us -- I think you've mentioned this in past calls, but remind us of the household penetration in Germany compared to your highest penetration in Europe? Your highest (inaudible) penetration?

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Henner Rinsche, [41]

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Sure. So there's different ways, obviously, to measure household penetration. We've got the most precise data in Germany, because in Germany, we buy GfK household panel data, where we know that more than 5% of households in Germany in 2016 have bought our gas refills. So they are basically repeat users. So in addition to this, I think, 5.3% of households that have bought our gas refills, there's obviously many, many households who came on board additionally in the second half of 2016 by buying their first SodaStream machine with an additional cylinder. But just the gas refills is a 5.3% household penetration in Germany. And then in terms of the highest number in Europe, now here we -- in other European countries, we don't have such precise household penetration data. But we definitely are in double-digit household penetration in countries like -- in different Scandinavian countries, and also in Switzerland. So in terms of household penetration, Sweden and Switzerland are probably our best in Europe.

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Daniel Birnbaum, SodaStream International Ltd. - CEO and Director [42]

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Pablo, thank you. Thanks for asking questions also about Europe, and I also -- I'll make the point that our 2 fastest-growing markets in the world are Australia and Canada right now. And up and coming in that category are also Japan. So we should keep a close eye on those as well. But thank you, Pablo.

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Operator [43]

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At this time, I'd like to turn it back to our speakers for closing remarks.

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Daniel Birnbaum, SodaStream International Ltd. - CEO and Director [44]

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Thank you very much. So thank you, everyone, for participating in the call today, and we look forward to speaking with you on our third quarter call in early November. Have a great day.

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Operator [45]

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That concludes today's conference. We thank you for your participation. You may now disconnect.