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SodaStream Misses Q3 Earnings, Cuts View; To Close Facility

Zacks Equity Research

Shares of SodaStream International Ltd. (SODA) declined 2.19% as it lowered its 2014 revenue and earnings forecast after reporting weaker-than-expected third quarter 2014 results.

SodaStream also announced a restructuring plan under which it would close its West Bank facility in Israel and relocate to a new location by mid-2015.

Earnings Discussion

The Israel-based manufacturer of household soda machines reported earnings of 45 cents per share, which missed the Zacks Consensus Estimate of 51 cents by 11.8% and declined around 41% year over year due to weak margins and the ongoing operating challenges in the U.S.

Revenues

Almost in-line with the preliminary numbers announced on Oct 7, the company reported total revenue of $125.9 million in the third quarter. Revenues declined 12.9% year over year and missed the Zacks Consensus Estimate of $141 million by 10.7%.

The weakness in earnings and sales can be attributed to low soda and flavor demand in the U.S., which partially offset the higher share of gas refills. SodaStream has been facing soft sales in the U.S. over the past few quarters. Also, efforts to reinvigorate sales have failed miserably. Even the launch of hotspots in about 1,500 Wal-Mart Stores Inc. (WMT) outlets during the second quarter 2014 did not have the desired effect on demand. Management claims that though the company has quite a number of loyal customers, it has failed to gain new customers for its home carbonation systems during the quarter.

The international sales performance was mixed in the third quarter with strength in company operated markets such as Germany, Australia, Canada and Switzerland being partially offset by declines in distributor markets, namely France and the Czech Republic.

Geographically, revenues decreased 20.3% in the Americas, 0.9% in Western Europe and 2.2% in Central and Eastern Europe, Middle East and Africa (:CEMEA). Only Asia/Pacific recorded growth of 4.7%.

Among the product categories, while soda maker sales declined around 21%, consumables (like gas refills and flavors) increased 2.1% and other product sales increased 0.2%.

Margins

Gross margin declined 290 basis points (bps) year over year to 51.2%. An unfavorable product mix due to increased share of lower margin soda makers and inventory write offs hurt gross margin.

The sales and marketing (S&M) expense ratio increased 20 basis points (bps) in the quarter to 33.1% due to higher selling expenses. Higher selling expenses were related to the recently acquired Japanese distribution channels.

General and administrative (G&A) expense ratio increased 230 bps in the quarter to 11.1% of revenues due to additional expenses related to the newly acquired Japanese distribution channel, as well as additional infrastructure expenses.

Adjusted operating margin declined 540 bps year over year to 7.1% due to weak gross margins and higher S&M and G&A expenses.

Restructuring Plan; Closure of the West Bank Facility

As the company is experiencing disappointing sales due to low soda and flavor demand in the U.S., management believes that it needs to make significant changes in growth strategies. Concurrent with the third quarter press release, the company announced a comprehensive growth plan which will target returning the company to profitable growth.

As part of the restructuring plan, the company said it would be shutting its Maaleh Adumim facility in the West Bank and relocating its operations to Lehavim, northern Israel by 2015. SodaStream’s decision to close its West Bank factory comes amid rising Internet campaigns to boycott SodaStream’s soda machines.

Reportedly, SodaStream’s West Bank factory was facing pressure from pro-Palestinian activists who had boycotted the company because of its location and urged consumers to dump its countertop machines and flavored syrups unless they pull out of the disputed territory. However, the company denied the fact and stated that the relocation move was purely due to commercial reasons.

The closure of this facility is expected to result in restructuring charges of about $20 million. The company expects to realize approximately 200 basis points of improvement in gross margin starting in 2016 from streamlining the manufacturing process.

2014 Outlook Lowered

Management reduced the previously provided outlook for revenues and earnings, following sluggish third quarter 2014 results and a rather pessimistic outlook for the upcoming quarter.

Full-year 2014 revenues are now expected to decline about 9% over 2013 revenues of $562.7 million, comparing unfavorably with the prior expectation of about 5% growth.

With respect to regional performance, the company now expects the Americas to decline in the low 30% range, Western Europe to grow in the low single digit range, Asia Pacific to be up in the mid 20% range and CEMEA to grow in mid-single digits.

Gross margin is still expected to be approximately 51%, flat with 2013 levels.

Owing to a decline in revenue projection, 2014 EBITDA is expected to decline approximately 26% year over year, against the prior expectation of an increase of approximately 5%.

Full-year 2014 net income is expected to decrease significantly by around 42% year over year, much worse than the prior guidance of about 5% decline.

Our Take

We note that the $200 billion carbonated soft drink (CSD) market is having a tough time in the U.S., where consumers are abandoning traditional soda for more natural, less caloric and water based beverages. With the changing trend and shift towards health and wellness products, leading soft drink companies like The Coca-Cola Company, Inc. (KO) and PepsiCo, Inc. (PEP) are experimenting with solutions to offset declining consumer demand for traditional CSDs.

SodaStream has already shifted toward health and wellness brands and is also making significant changes in growth strategies. However, it is to be seen if the company will be able to successfully return to profitability with these efforts.

SodaStream carries a Zacks Rank #5 (Strong Sell).

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