Executives
Yonah Lloyd - Chief Corporate Development and Communications Officer
Daniel Birnbaum - Chief Executive Officer
Danny Erdreich - Chief Financial Officer
Gerard Meyer - President, SodaStream USA
Analysts
Wendy Nicholson - Citigroup
John Andersen - William Blair
Bill Schmitz - Deutsche Bank
David Kaplan - Barclays
John Faucher - JPMorgan
Greg McKinley - Dougherty
Jim Chartier - Monness Crespi Hardt
Akshay Jagdale - KeyBanc
Molly Iarocci - Stifel Nicolaus
Mark [Siegel] - Cannacord
SodaStream (SODA) Q4 2013 Results Earnings Conference Call February 26, 2014 8:30 AM ET
Operator
Good morning everyone. At this time, I would like to welcome everyone to the SodaStream International fourth quarter and fiscal 2013 year-end earnings conference call. [Operator instructions.] I would now like to turn the call over to today’s host, Yonah Lloyd, chief corporate development and communications officer. Please go ahead sir.
Yonah Lloyd
Thank you, operator. Welcome, everyone. Today’s call will consist of prepared remarks from our CEO Daniel Birnbaum. We filed the 6-K this morning, which includes the press release and financial tables, along with the CFO commentary document and a supplemental slide presentation featuring business highlights. These are also available at our IR website and on our IR app for both iPhone and Android platforms.
Present as well are Danny Erdreich, our CFO; and Gerard Meyer, president and general manager of our U.S. subsidiary. Following Daniel’s remarks, we will open the call for questions.
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 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 assurance 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 non-GAAP financial measures, including adjusted net income. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company’s fourth quarter earnings release, which is posted on the company’s website.
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 words, “this release contains.”
And now it is my pleasure to the turn the call over to the chief executive officer, Daniel Birnbaum.
Daniel Birnbaum
Thank you for joining us this morning. As we announced in early January, the fourth quarter was much more challenging than we expected, particularly from a profitability standpoint. We entered the holiday season with a solid plan, including a balanced mix of promotional and marketing activity.
This plan included our first-ever Black Friday promotion, utilizing larger configuration soda maker packs, what we call megapacks, intended to kick of a strong holiday season and generate incremental growth. Unfortunately, the challenging retail environment during Black Friday and in the weeks immediately following Black Friday reduced expected replenishment orders and triggered retailer requests for additional promotional support.
We quickly changed our plans to avoid losing the important holiday window to increase household penetration. We immediately increased our promotional activity, doubled down on megapacks, and secured orders from low margin alternative channels. As a result, revenue ended only slightly below guidance, but gross margin was well off plan.
What I’d like to do on this call is walk through the specifics of the fourth quarter earnings shortfall and explain how we’re addressing these issues. Then I’ll give an overview of Q4 performance for each region before outlining our outlook for 2014, and I’ll discuss why we remain confident in our ability to continue to lead the home carbonation category and reshape the $260 billion worldwide carbonated beverage industry.
As you’ve seen from our press release this morning, fourth quarter gross margin was 42.4% versus our plan of approximately 53%. Let me bridge this 10.5-point shortfall. The biggest impact on fourth quarter gross margin was from lower sell-in prices on soda makers. On average, soda maker selling price was 10%, or $5, lower than our original plan. This accounted for nearly half of the gross margin miss, or approximately $8 million, and was driven by late Q4 discounting programs as well as additional megapacks beyond our plan.
Also contributing to the lower sell-in price were sales to channels that carried lower margins than our traditional brick and mortar retailers, such as TV shopping. For example, HSN featured SodaStream in December and sold 40,000 soda makers in only one day, which helped increase our U.S. installed base but at a significant margin sacrifice.
The second largest component of our gross margin shortfall came from higher product costs. This accounted for about 30%, or $6 million, of the miss. Higher product costs were partially a result of cost overruns from our new initial SodaCaps production, but the primary driver for higher product costs came from higher than expected reconfiguration of finished goods.
Reconfiguration was necessary for several reasons, including the conversion of starter kits to megapacks, the shift from brick and mortar to direct selling channels, and the redeployment from one country to another. Each such event requires the opening and rework of a finished good, a soda maker kit, which entails significant handling, materials, and transportation costs.
For example, the redeployment of a soda maker from the United States to Canada requires us to open each U.S. starter kit, replace the CO2 cylinder, the carbonating bottle, and even the flavor portion pack sampler, all to be compliant with Canadian regulations, and then put all that into a new box that includes the French language.
In December, we shifted outside of our original plan 20,000 soda makers from the U.S. to Canada, more than 100,000 soda makers from brick and mortar to TV shopping and ecommerce, and 450,000 starter kits to megapacks worldwide. In total, we reconfigured about 600,000, which is about 40% of our total soda makers sold during Q4, certainly an inefficiency that we are addressing.
Most of the remaining shortfall in gross margin, approximately $2 million, is attributable to product mix, as gas refills, our highest-margin product offering, was below forecast due to a combination of inventory reductions by our U.S. retailers as they sought to counteract the effects of their overall soft holiday season, as well as lower sales of spare carbonators, which were not featured together with starter kits as part of our holiday displays.
Changes in foreign currency exchange rates, primarily the Israeli shekel versus the U.S. dollar, also had a small impact on gross margin versus our guidance. As we always do, we based our quarterly forecast on an average exchange rate from the previous quarter. In Q4, we planned approximately 3.58 shekels to the dollar, which was the average from the third quarter. However, the shekel strengthened in the fourth quarter to an average of approximately 3.5.
Lastly, we wrote off an additional $1 million of obsolete inventory during Q4. As these events began unfolding in early December, we immediately took actions to protect the bottom line by reducing all expenses including our A&P spend during the final three weeks of the quarter. We reduced A&P as a percent of revenue by 590 basis points to 16.8% compared with last year, which helped partially offset the gross margin decline.
To address our gross margin erosion, we started implementing an action plan to tackle both the price and cost sides of the issue. On price, we established higher-margin thresholds for promotional activity and will be supporting this with new systems such as centralized invoicing.
Moving forward, we’ll be much more selective on low-margin deals and restrict the use of megapacks in markets where they were not effective. On the cost side, we’re improving the flexibility of our supply chain to more efficiently react to changes in global demand without the cost of double handling and reconfiguration.
For example, we’re moving the final configuration and packaging stages to our regions. Today, we typically ship a fully packed starter kit directly out of our factories. In the future, we will be shipping the separate components in bulk, for final assembly in the market. This will reduce rework and allow for faster response to our customers, more in line with just in time sourcing.
At the same time, we are evaluating our emphasis on cost reduction opportunities across the organization, beyond the direct causes for the Q4 mix. We’re implementing SKU rationalization, design to cost initiatives, and a new global procurement department, as well as a West Coast filling station and distribution center for our Americas business, which will begin operating later this year and which will reduce transportation costs.
And of course, our new primary facility in Israel will go live in stages, beginning with the second quarter of this year. In fact, buildings are already up and lines are being installed right now. With these initiatives, we expect our gross margin to gradually be restored to our historic levels during the course of 2014.
Turning to fourth quarter revenue, overall we grew 26% with solid gains across all product categories. Soda maker units grew 39%, gas refills were up 25%, and flavors rose 32%. Each of our regions increased revenue double digits, led by Western Europe, which grew 38%, driven by strong growth in France, Italy, and Germany.
Americas fourth quarter revenue increased 16%, which was slightly below forecast. For the quarter, U.S. soda maker unit sales increased 21% to 679,000, gas refills rose 29% to 1.2 million, and flavors increased 54% to 4.3 million units.
It’s hard to pinpoint exactly why holiday sales results were lower than planned, but it’s clear that several elements came into play. Many of our queue retail partners reported challenging Q4 results, marked by weak store traffic and a shorter holiday season, so our performance appears to have been to some extent influenced by overall market conditions.
This softness was seen with our Black Friday sales and continued in the weeks immediately following. Not only did the Black Friday results fail to generate replenishment orders in December, but on December 10, we had an unforeseen cancellation of holiday display pallets destined for prominent locations in one of our top retailers.
Furthermore, in response to the lack of replenishment orders and the order cancellations, we quickly chased new customers and new channels, and at the same time, to protect profitability, we reduced our A&P by 10 points as a percentage of sales, from 34% to 24% of sales, which represented a $3.3 million reduction versus last year.
This impacted the number of in-store demos by 34%, 9,000 demos versus 13,500 last year, and lowered our advertising spend by 32%. So although we netted out with soda maker sales up 21%, slightly below our expectations, it was still a record soda maker quarter, and our consumables continue to grow at a robust clip, with gas up 29% and syrups up 54%, which speaks to the stickiness of our business model.
Asia Pacific had its strongest quarter of the year as revenue increased 28% to $15 million. The strong gain came primarily from Australia, which was offset by continued struggles in Japan. With sales to Japan well off plan throughout 2013, it became evident that the distributor was not executing its stated growth strategy and was in breach of its contract. Therefore, we made the decision to take over the distribution in Japan effective April 1.
As part of this takeover, we will acquire approximately $5 million of soda maker inventory that was purchased in 2013. However, we held back shipments of approximately $3.5 million in the first quarter, in anticipation of this transaction. We believe Japan represents a terrific opportunity for SodaStream, and we already have a strong leader in place to oversee this important market.
Lastly, CEMEA revenue increased 36% to $9 million, with Israel and Czech Republic responsible for the increase. Strong consumables demand drove the improvement in the Czech Republic. This is a good indicator that our user base remains active, despite a challenging economy, which has pressured sales of soda makers over the past year.
With all four regions delivering double-digit growth in Q4, we remain optimistic about the viability of the home carbonation category and our prospects to expand our global share of the $260 billion carbonated beverage market.
There are many reasons that support our positive outlook. First, our full year results indicate our strategies are gaining traction and reinforce proof of concept. We grew revenues 29% to a record $563 million, which included selling a record 4.4 million soda makers, an increase of 27% over 2012.
At the same time, consumables sales increased 25%, driven by 30% growth in gas refill units and a 22% gain in flavor units. Geographically, our business improved in all regions, led by the Americas, which was up 38% in 2013, with soda maker units up 37%, gas refills up 59%, and flavors up 49%.
Western Europe, our largest region, grew 31%, as both new markets like France and established markets like Germany enjoyed tremendous success, expanding their user base and increasing usage rates.
Including our two smaller regions, Asia Pacific and CEMEA, we have a broad international portfolio of markets that are embracing SodaStream and prove a great foundation for future growth. And even with this early success, we’ve just scratched the surface of our true potential.
Second, our innovation pipeline has never been stronger, with innovation coming in all areas of our business, aimed at enhancing the user experience through automation, dosing, and partnerships. In just the past few months, we announced flavor partnerships with Welch’s, Del Monte, Cooking Light, and Skinny Girl, with more brands coming soon.
And the beautiful KitchenAid soda maker, powered by SodaStream, is about to begin production, and will be featured at both the KitchenAid and SodaStream booths at the upcoming IHA show in Chicago.
Also to be featured at our booth is the Samsung sparkling refrigerator, which this week has gone into production for expanded sales with new models to be sold throughout Europe, Asia, and the Americas during 2014. So these partnerships, layered on top of our innovation pipeline, only reinforce SodaStream as the platform of choice for leading brands to participate in the burgeoning home soda category.
Third, we will be expanding into new geographies, including China, and increasing the availability of our consumables in existing markets, including the timely penetration into grocery and drug.
But most importantly, the consumer is telling us that she is seeking alternatives to traditional packaged soda for her family. Packaged soda as we know it must change, and is changing. I don’t know of anyone that would drink a cup of coffee with nine teaspoons of sugar, and yet incredibly 69% of soda consumed in the United States is regular soda, and contains about nine teaspoons of sugar in a 12-ounce can.
It’s no surprise that 70% of Americans are obese or overweight, according to the Centers for Disease Control. In addition to healthier solutions, the consumer is seeking ways to customize her life, from playlists, to apps, to footwear, and of course food and drink.
And finally, the consumer is increasingly federal up with having our planet littered with about 1 billion bottles and cans every single day and the fact that the increase in recycling rates is not keeping up with the proliferation of this trash.
SodaStream addresses all of these consumer megatrends, of health and wellness, empowerment, and the environment, which positions us well to win with the consumer. For all these reasons, we remain confident about the tremendous opportunity of home carbonation and our leadership position in this category.
Turning to our balance sheet, at year-end, our inventories were $140.7 million, an increase of 25% compared to $112.7 million at the end of 2012, and receivables increased 26.7% to $145.2 million from $114.7 million, both in line with revenue growth.
At December 31, 2013, we had cash and cash equivalents of $41 million and bank debt of $15 million, compared to cash and cash equivalents of $62 million and no bank debt a year ago. The change in our capitalization is due to the investments we made in 2013 towards the construction of our new factory, which remains on schedule and on budget.
Now to our guidance. Based on current visibility and conversations with major retail partners, we are currently forecasting 2014 revenue to increase approximately 15% over our 2013 revenue of $563 million. This outlook is based on a midteens growth rate for Western Europe, CEMEA, and the Americas, and a slightly higher growth rate for Asia Pacific, driven in part by our transition to a direct subsidiary in Japan.
For the full year, gross margin is projected to be approximately 50%, similar to 2013 levels. While the majority of our Q4 issues have been rectified, we face additional headwinds in 2014, namely unfavorable movements in foreign exchange rates and higher depreciation.
Our projected tax rate for this year is approximately 12%, up from 10% in 2013. For the full year, we expect EBITDA to increase approximately 11% over 2013 levels, and net income on an IFRS basis to increase approximately 3% over 2013 levels.
Excluding the impact from the changes in foreign exchange, including a stronger shekel versus the U.S. dollar, EBITDA would be projected to increase approximately 25%. Our guidance assumes a shekel-dollar exchange rate of 3.50, compared to an average 3.62 in 2013.
With respect to the first quarter, many retailers came out of 2013 with elevated inventory levels due to the challenging holiday season, and have reported continued struggles with consumer traffic thus far in the first quarter. Given the uncertainty particularly around the U.S. retail environment, we believe it’s prudent to take a cautious approach to sell-in in the near term, and this is contemplated in our guidance.
We expect the first quarter to be challenging from both a top and bottom line standpoint, due to the combination of soft sales, FX headwinds, and higher A&P expenses from the Super Bowl ad and Scarlett Johansson ambassadorship, as well as increased marketing investments in Europe. In terms of 2016 targets, at this stage, we’re focused on resuming profitable growth, and we will revisit our longer-term goals at a later date.
Clearly, it was a disappointing end to an otherwise great year. The fourth quarter was a bump in the road, but we are confident in our plans to return to profitable growth. 2013 was a year in which we made progress towards increasing category and brand awareness, growing global household penetration, and strengthening SodaStream as the category platform. At the same time, we forged partnerships with highly regarded regional and global brands that further support our foundation.
And speaking of well-known brands, our category just got more exciting, with the recent announcement of the joint venture between GMCR and Coca-Cola for the Keurig cold system. This recent news is further validation that leading companies recognize a clear opportunity to participate in and grow the disruptive new category of in-home carbonation.
There is a lot of runway ahead, and we’re in a great place to advance our leadership status as a result of our strong innovation agenda and the many compelling consumer benefits that we are uniquely positioned to deliver.
Operator, we’re now ready to take questions.
Question-and-Answer Session
Operator
[Operator instructions.] And we will take our first question from Wendy Nicholson with Citi Research.
Wendy Nicholson - Citigroup
My first question is with regard to the nature of your relationship with retail, and the fact that you capitulated and kind of gave into the requests for more promotional dollars. How do you go back and restore? I know you talked about putting pricing guardrails in or whatnot, but how do you restore a sense of order to that? And is there a risk maybe that we’ve just changed, in terms of your lifecycle, and now we’re getting to the point where the soda makers have to be sold at a much lower gross margin, given that you’ve given into this?
Daniel Birnbaum
I don’t think there’s anything other than a tactical event in Q4. And that’s something that suggests that we’re in a different phase of our lifecycle. We’re just at the beginning of our lifecycle, and we acted very quickly, during a window of opportunity, where we did not want to lose the household penetration opportunity in Q4. So decisions had to be made on the spur of the moment.
So it’s not that we caved into retail, it’s that household penetration for us is first and primary. And if we have to provide some kind of a promotional incentive, even if it’s at the encouragement of a retailer, we do so. In hindsight, we would have used different vehicles than some of the ones that we did choose.
For example, the megapack is a vehicle that did not prove to be effective for us, at least not in the United States. So next year, you probably won’t see many of those in the marketplace. IRC couponing, again, is not an ideal vehicle for us, as it panned out. In-store demos, on the other hand, is a vehicle that worked very well for us in previous years, and we spent less on in 2013.
So I think coming out of Q4, there’s a great opportunity for us to embrace the learnings and just do better at moving forward. But this does not suggest any material change in the business dynamics.
Wendy Nicholson - Citigroup
And in terms of your relationship with retailers, I know you talked about the December 10 loss of a major display. Two months into the first quarter, have you seen the retailers come back and say, hey, we don’t need those heavy promos, it was only holiday related? Or are you feeling resistance, and is there a risk of incremental distribution losses?
Daniel Birnbaum
No, I think what we’re feeling in Q1 is two things: continued softness of our retail partners, where they’re telling us about reduced traffic and reduced sales in general, and we’re part of that. And the other is high levels of inventory following their Q4 programs. And that’s one of the reasons we expect a very soft Q1, specifically in the Americas, in our business. But there’s no pressure, and we will certainly not allow and encourage more promotional activity, certainly not price promotional activity, among our retailers, regardless of how large they are, in Q1 or moving forward. It’s not the way to build our business.
Wendy Nicholson - Citigroup
And my last question is just the timing of the Green Mountain/Coke relationship. I guess there’s one argument to be made that if you really are hopeful that you can boost household penetration, cut the price of soda makers in half, get as many out into consumers’ homes as possible, and then worry about all the repeat consumable purchases later. Is there any contemplation that in the next four quarters, before Green Mountain comes to market, that you want to hurry up and get more soda makers out to market, potentially at a loss?
Daniel Birnbaum
Absolutely not. Price cutting and accelerating household penetration at the expense of margin is not part of our plan. We’re doing other things, but not that.
Operator
And we will take our next question from John Andersen with William Blair.
John Andersen - William Blair
Bigger picture question with respect to Green Mountain and Coca-Cola. Green Mountain has used a razor blade model in the hot beverage area, where they sell machines kind of more at cost, I suppose, rather than earn a profit margin on them.
I don’t know if they’ll follow a similar approach in cold beverage, but I’m just wondering what you experienced in the fourth quarter, and as you think about the business over the next couple of years, in the context of additional competition, have you thought about maybe the need to move toward more of a sharper razor blade model where you reconsider the margins on the machine side in order to drive household penetration?
Daniel Birnbaum
No, I think that our model, by and large, is very sound. It’s proven and tested and it works very well. I think that the fact that GMCR and Coke are entering our category does not suggest that we have a fundamental flaw in our model. Indeed, they’re coming out with a different mousetrap. It’s early to determine the validity of it, pricing, functionality, efficiency, etc. We’ll see the product, and then we’ll be able to study and compare.
But we have a really robust razor and razor blade business model. We don’t have to sacrifice margins on the razors to generate more blades. In fact, we have data to suggest that if the price of the razor is at a premium, there will be higher loyalty and stickiness, higher usage rates among the user. So the model that GMCR are using on their coffee makers does not necessarily apply directly to our type of business.
John Andersen - William Blair
You didn’t comment at all this quarter on end demand, or point of sale trends. Are you able or willing to just comment on sell-through in the fourth quarter and maybe what you’ve seen so far quarter-to-date in the first quarter for machines and flavors?
Gerard Meyer
Sell-through in the fourth quarter in MPD was strong. We had 24% growth in soda makers versus a year ago, and consumables were up quite robustly as well. And that was across MPD, across pretty much all of our customer base, and customers that weren’t part of MPD.
If you look at Q1, we’re seeing some softness. If you look at the MPD data overall, you’re seeing some softness in the machine sales. But actually, if you take out those retailers that aren’t merchandising to the same level as a year ago and there’s one or two of those, and actually in the rest of the market, we’re up on a same-store sell out basis and sell through versus a year ago.
Yonah Lloyd
I would add to that that the consumables, the gas refills, are up significantly throughout Q1 to date. And that of course reflects on usage patterns.
John Andersen - William Blair
The guidance for ’14, the earnings per share guidance, you’ve kind of moved away from communicating adjusted and IFRS. And I think this year there was somewhere in the neighborhood of $11 million of stock comp expense. What’s the expectation on that line for ’14?
Danny Erdreich
It’s $9.5 million. It’s likely under. There is a $1.5 million gap, but there is some confusion on the way of measuring. We thought it was best to move to one direction, IFRS accounting based measurement. And we will provide the information about the stock comp expense in each quarter, so that you can do the calculation yourself.
Operator
And we will take our next question from Bill Schmitz with Deutsche Bank.
Bill Schmitz - Deutsche Bank
Can you just give us a little bit more granularity on the first quarter? Obviously there’s going to be some [unintelligible]. Sales low single digit? Anything that you can maybe give us some cover as we build the model.
Danny Erdreich
First of all, Daniel mentioned Japan. Since we held back shipments, it’s not going to have a material impact on the comparison. We do see some softness, as mentioned, in the U.S. market. So overall, we do not expect, in Q1, to see an increase in revenue compared to Q1 of last year.
We will see some headwind in terms of slightly lower gross margin, especially due to FX. We’ve had 64% last year. This year overall we guided approximately 50%. And expect Q1 not to be substantially away from this direction. We will have higher A&P expenses, higher advertising expenses, as Daniel mentioned, especially around the Super Bowl, around the cooperation with Scarlett Johansson, and around additional marketing activities in Western Europe. And again, these activities are really right now helping sell out in retail and preparing the ground for us for improvement in the quarters afterwards.
Bill Schmitz - Deutsche Bank
What’s the big gap between EBITDA growth and net income growth? Because I think you said EBITDA growth is 11%, but net income growth is only 3%.
Danny Erdreich
It’s a good point. We see a substantial increase in depreciation going into next year in light of all the investments we’ve made so far. This is the main reason for the gap. We also see an increase in tax rates going up from 10% to 12%, and we will also have some increase in finance expenses going into next year. So between all this, this is the reason for the gap.
Bill Schmitz - Deutsche Bank
Why do you think Coke chose Green Mountain instead of you guys? Surely you had conversations with them. If you kind of had to do the postscript on it, why did they pick Green Mountain instead of SodaStream?
Daniel Birnbaum
I can’t speak for Coke, but I can tell you who to ask.
Bill Schmitz - Deutsche Bank
[laughter] We don’t answer that question. It surprised me a little bit, because you’re sort of the viable company out there in the market that’s already selling products. So I’m just curious, do you think [unintelligible] why you think that was the case?
Daniel Birnbaum
You mean, why I think Coke chose Green Mountain?
Bill Schmitz - Deutsche Bank
Yeah, exactly.
Daniel Birnbaum
Well, you know, everyone has the right to make a mistake, and it’s really their decision. And we’re going to play it out.
Operator
And we will take our next question from David Kaplan with Barclays.
David Kaplan - Barclays
Can you guys talk a little bit about what the machine pipeline looks like? I know we’re expecting the [unintelligible] launch a little bit later in the first half of this year. And then are there any plans to optimize the product line, consolidate the number of machines? Because you guys tend to have a lot of SKUs on the shelf right now.
Daniel Birnbaum
There is an optimization project going on, which is part of the cost reduction effort that’s going on group wide, because we’ve been adding soda makers and not eliminating, which created more of a logistical challenge for us, and also prevented us from focusing on cost reduction or design to cost opportunities on a narrower range of products. And all that translated into higher costs on lower gross margin.
So yes, we are eliminating some SKUs. We’re doing that in a controlled fashion, with consumer input, based on where the user experience is best. That’s the primary driver of the SKU choice.
As far as the innovation pipeline, I’d encourage you to come to IHA. You’ll see some new stuff over there. I have to resist the opportunity and the temptation to tell more about what we have in the pipeline, particularly as we’re entering more of a competitive environment now. But you can rest assured that we have a robust innovation pipeline on all fronts of our products and delivery methods.
David Kaplan - Barclays
And another SKU question, but in a different part of the business, on the flavors and the flavor delivery systems. What’s the plan for SodaCaps? I think going back to the last conversation about Coke, yes or now, I think one of the underlying beliefs in the market is that the beverage companies want to make sure that there’s a measured and controllable delivery system. And SodaCaps seem to answer that.
So is that a direction where you see one day SodaCaps essentially being the only delivery system for SodaStream, or some form. That’s not quite single serve, because it’s a liter, but is that the direction where you see SodaStream heading towards in terms of delivery as opposed to the paid bottles?
Daniel Birnbaum
I think we’re going to net out with a blend, where SodaCaps is part of the mix of the delivery system at SodaStream, for those who seek convenience and consistency, perhaps for partners who are seeking consistency. But consumers who seek value and are more sensitive to the environmental benefit, they will probably choose to use a different delivery system, such as our bottles or others that we’re developing right now.
So I think from a modeling standpoint, you should assume that SodaCaps will have a greater part of the mix, but they will not become the only delivery system that we have in our system.
David Kaplan - Barclays
I guess this is more of a comment than a question, but you talked a lot about how when you saw that Black Friday was a little bit weaker than you guys expected and then the reorders didn’t come, and then you had the cancellation, and you kind of ran around chasing promotions to continue to drive machines into the market.
I guess the question is, for a company of SodaStream’s size, with the market share that SodaStream has as the leader in the market, I guess I was a little bit taken aback by the fact that SodaStream would react so quickly that way, almost knee-jerk reactions, and out of plan.
And while you talk about how you’re going to put checks into place to make sure those things happen in the future, I kind of then look at that versus the guidance that you guys gave and said that a lot of these headwinds continued to last into the first quarter, and I understand in the macro side to this, with the retailers having, in the Northeast particularly, with retailers and the weather impacting store traffic.
But it seems like the things that you saw went wrong, you should be able to fix them, and it shouldn’t take that long to see margins return. So can you talk a little bit about what you’re planning in terms of those changes, specifically, and why you see the impact lasting as long as the guidance seems to imply that they are?
Daniel Birnbaum
If we had grown the top line of about 4.5% like one of our comps, then our profitability would have been outstanding and the Street would have been delighted with the profitability line. And the situation that occurred in Q4 was where we had to make a choice, and we had to make it under the gun, where we focus on. Top line or bottom line?
And it’s a strategic choice that we made, to focus on household penetration and increase our user base, our installed base. And you know, Christmas only happens once a year. So if you miss that window, they you’ve kind of got to wait until the next round, certainly for North America, where the holiday is so important. And we made the choices we made.
In some cases, we would do things slightly differently on the tactics, but on the strategy of focusing on household penetration, we would do nothing different. As far as correcting the gross margin, we put a lot of the corrective action in place and it will be a gradual but not a slow return to the historical levels of the gross margin.
Unfortunately, for the first quarter we had the headwinds of the foreign exchange rate, which are negatively impacting us for Q1. But the business is very much on track to the historical levels.
Operator
And we will take our next question from John Faucher with JPMorgan.
John Faucher - JPMorgan
It seems as though we’ve seen a bit of an acceleration in you guys bringing in your distributors over the past year and a half or so, probably going back to the [Sweden] acquisition. Can you talk maybe a little bit about where your differences and expectations for growth have varied versus what’s going on at the distributor level? And where do you think you stand now in terms of committing capital to bring that in? Obviously those tended to be sort of earnings accretive from that standpoint. And is this something that we’re going to continue to see over the next couple of years?
Daniel Birnbaum
The distributors represent about 20% of our business today. So it’s slightly different from where we started three years ago, when it was almost 50-50. And we don’t have a strategy of acquiring distributors. We’ll acquire them opportunistically, when it doesn’t work out. And that’s been the case so far.
And indeed, Japan is an example. Actually, it’s a pretty absolute example of a distributor that was not able to produce in the areas of brand building, household penetration, marketing, trade execution, all of those things that are so fundamental to building the new category and the new brand. And that’s why we’re taking over the business.
I don’t have a horizon of additional takeovers like that. There’s nothing in the works right now, and I hope we don’t have to do it, because we have enough opportunity to focus on our wholly owned subsidiaries and strengthen our position in them. That’s where we want to dedicate our time and our resources. And speaking of resources, I’ll ask Danny to speak to the capital requirements of the new subsidiary in Japan and elsewhere.
Danny Erdreich
Let me just maybe add something to that. We have had some great distributors in other markets, and they’re doing just fine. And they’re just the opposite of what we’ve seen in the markets we acquired. As for the capital requirements for this transaction, it’s going to be an approximately $7 million deal, and the majority of it is going to be purchasing of inventory.
John Faucher - JPMorgan
And then I guess as we look at this, you guys are talking about sort of pulling back on some of the promotional expense. Is this just simply just figuring out what’s worked and what hasn’t worked, and changing tactics? How do you continue to get the penetration higher, particularly in the face of the competitive launch that’s been mentioned? How are you going to get the penetration higher at a faster rate, given the pullback in some of the promotional spending?
Daniel Birnbaum
Well, we’re not planning to pull back A&P spending during 2014. We did that in Q4 of 2013, which could have a slightly negative impact into Q1 and possibly Q2, although it’s very difficult to measure the direct impact of that. But we are planning to invest in A&P, and yes, we will put the money where we know the return on investment is highest. Allow me not to get into the exact details of the executions, but I think you know by now where we believe our impact is strongest, and where we build awareness and purchase intent, and then conversions to actual purchase.
And that focus not only of programs but also of money into the markets where we have the highest potential such as the United States and streamlining the spending into those markets that are growth markets and particularly if there’s a competitive scenario, we would put more resources there. So we are accelerating the household penetration to the best of our ability.
And then on top of that, if you layer the product innovation and partnerships that are in the pipeline, I’m confident that we will continue to build our household penetration, both in the U.S. and elsewhere. We’re staying the course that we’ve been on all these years.
Operator
And we will take our next question from Greg McKinley with Dougherty.
Greg McKinley - Dougherty
I just want to revisit gross margins again for a moment. As we think about how the year unfolds, I didn’t quite catch what Danny’s comment was regarding Q1 on his gross margin view, do we expect that to approximate the fiscal year view at 50%? Or does that start lower? And then where are the immediate pickups in margin? Is it simply the fact that we’re not going to be incurring these reconfiguration costs that cost a lot in Q4, that’s already addressed, and then the ASP sell-in gets ratably addressed as the year progresses? How should we think of that?
Danny Erdreich
We indicated gross margins for the year at approximately 50%, and we said that Q1, on an approximated basis, is around this level. This will be a fix that is related to improvement in costs. For example, the issue of bundles and megapacks and discounts that we plan on reducing and eliminating. And we really have, in Q1, one impact, on substantial impact, compared to Q1 of last year, and this is the exchange rate. This is the impact of exchange rates, and it’s still pushing gross margins down below the levels we’ve seen in Q1 last year.
Greg McKinley - Dougherty
And then regarding Japan distribution, with the $7 million total investment, and remind us, you said there was a $3 million deferral of product shipment? I just want to make sure I understood that as to how it relates to what you think about Asia Pacific sell-in in the beginning of the year, as you work down inventories.
Danny Erdreich
The number is $3.5 million deferral of [unintelligible], of orders we have on hand, and we defer them to post the acquisition. Japan in Q1 is not going to be of a material impact on the results.
Greg McKinley - Dougherty
And then finally, post-acquisition, how should we think about your distributor versus directly sold mix? Is it a quarter of your sales? Where is it tracking?
Danny Erdreich
It’s still too early to say how exactly the breakdown between self-distribution and distributors will develop through the years. We have growth in plant and distributor markets as well as our self markets. But at this point in time, it’s too early to provide the exact breakdown.
Greg McKinley - Dougherty
And then capex for the year, what will that be, and how much of that will be invested for your production campus?
Danny Erdreich
For next year the investment plan is approximately $70 million of capex and investments. The majority of it will go to the new plant. Right now the estimation, for this year, is between $50 million to $60 million in investments related to the new factory.
Operator
And we will take our next question from Jim Chartier with Monness Crespi Hardt.
Jim Chartier - Monness Crespi Hardt
How do you guys think about U.S. machine sales in 2014? Do you think you can grow unit sales on machines this year? And if so, what are the key strategies to do it? Is it better shelf space at retail, or is it better marketing?
Gerard Meyer
Yes, we do think we can grow or continue to grow our machine sales in 2014, absolutely. We grew them pretty strongly in 2013, and growth will continue in 2014. And it’s really going to be a combination of a variety of factors. It’s going to be a combination of the fact that, as Daniel mentioned, all the trends with regard to the consumer are sort of in our favor and we are embodying all those trends, and we continue to see that continuing.
We’re continuing to do product innovation in terms of the machines themselves, and you’ll see more of that in the marketplace in 2014. We’re continuing to introduce new partnership flavors and those attract new consumers to our franchise. And we’re also continuing to improve the access and availability of our consumables, which makes it easier for a consumer to be in our system and enjoy our system. And we’re also certainly not seeing a decline, and in fact we’re going to see a continuation if not an increase of merchandising for our products, as the year goes through.
Daniel Birnbaum
Just to be clear, on managing expectations, don’t expect to see that type of growth in Q1.
Jim Chartier - Monness Crespi Hardt
And then did you say when you expect to go into the grocery or drug channel? Is that a 2014 event?
Daniel Birnbaum
We are constantly evaluating that. It’s too soon to announce anything, but it’s something that we’re analyzing and evaluating when the right time is to do that, and I think you can expect that in the course of 2014 you will see the beginning of some of that, yes.
Jim Chartier - Monness Crespi Hardt
And the CO2 sales in the U.S. looked a little light. Why would retailers reduce inventory on something that doesn’t have a shelf life, and the exchange just doesn’t take up any shelf space for them?
Gerard Meyer
It relates to their open to buy in general. When retailers are struggling with their sales in general, then they put a cap on their open to buy in anything in the store. So it doesn’t matter whether it takes room on the shelf, it takes room in terms of their working capital.
Daniel Birnbaum
The other dynamic on that is that our spare cylinder sales, which are part of the gas sales, sell mostly when the consumer buys a starter kit. And during the holiday season, our displays in the key accounts did not feature these spare cylinders next to the starter kits, these megapacks. And certainly when someone buys a soda maker as a gift, they’re not going to go ahead and buy a spare cylinder. So we believe that the holiday was impacted negatively on spare sales, which didn’t support the gas number, which was a little bit light relative to Q3, but was up significantly versus Q4 of last year, which is 124% [NPD] sellout data.
Jim Chartier - Monness Crespi Hardt
And then can you talk about the profitability of the Americas versus the rest of the world?
Danny Erdreich
Over the year, all our regions were profitable, including the Americas. We will provide the exact breakdown of profit and profitability per region in a few weeks in our annual report. But all of them were profitable. Another comment on that, Western Europe is our most profitable region.
Jim Chartier - Monness Crespi Hardt
And then finally, can you just talk about the margin opportunities, what benefits you expect to get from the new manufacturing facility in 2014, and then how much cost reduction do you see from rationalizing the SKU count and other initiatives?
Danny Erdreich
Right now, the new factory will not be contributing to a large extent to our profitability in 2014. We will still be relying to a very high degree on subcontractors. So we will actually expect to see this only in the year after. And as for all the other components that are impacting gross margin, the mix of all this is within our estimation, going to 50% gross margin throughout next year.
Daniel Birnbaum
The combination of the lower price soda makers and the incremental cost of repacking and logistics of these megapacks and other reconfigurations account for about 80% of the gross margin miss. And those are things that we have already corrected. And that’s where the impact on gross margin will play out moving into 2014.
Operator
And we will take our next question from Akshay Jagdale with KeyBanc.
Akshay Jagdale - KeyBanc
I just wanted to ask about Green Mountain’s partnership with Coke. Obviously you put out a press release that talked about what it means for the category, but what does it specifically, in your opinion, say about your innovation pipeline? In my opinion, it somewhat validates Green Mountain’s innovation pipeline. But can you just talk to that a little bit? It seems like with your machines right now the ability to exact [bill] some carbonation and syrups is somewhat not where it needs to be for some of those larger brands. But I’m just curious to know what your thoughts are.
Daniel Birnbaum
I think that Coca-Cola could have just as easily partnered with SodaStream to deliver an outstanding homemade version of Coca-Cola. I don’t think there’s anything, as far as I know, in their machine - we’re looking forward to seeing it and how it operates and what features and benefits it gives to the consumer, but I do not know of any particular benefit that it can deliver to the consumer over and above what the consumer can get from the SodaStream product, which has been around for decades, and it’s a proven business model.
So I can’t comment further to the specific attributes of the GMCR innovation. I can assure you that we have a pipeline of innovation that will continue to surprise the consumer and deliver a better and better user experience, easier, quicker, healthier, more environmentally friendly, taste great and be refreshing, and all of that at a great value that will not cause the consumer to spend more money on the soda that they are currently getting from the store.
That is our model, and we will stay the course and just improve it, stage by stage. And again, we look forward to seeing what we’re up against when it finally launches.
Akshay Jagdale - KeyBanc
In terms of your consumer research, what do the consumers, current SodaStream users, and perhaps even ones that you’ve surveyed that don’t use SodaStream, say about the CO2 canister? Is it something that’s considered somewhat inconvenient? Curious to know what you have found out from your surveys on that.
Daniel Birnbaum
The fact is that we’re doing 21 million exchanges a year in 45 countries. I think that speaks pretty loudly to the fact that the consumer is happy with our solution. Of course, as we make it more and more available, it will be easier and easier to exchange. And there are other things we can do to our business and our product to make that whole system friendly to the consumer.
And then there’s another component, another player here, and that’s the customer. And our retail customer is asking us to increase the visitation frequency of consumers to the retail store, because they tremendously enjoy the traffic that we’re generating with that CO2 canister that takes up no shelf space at retail. So our model is well embraced by both retailers and consumers, and it provides a fantastic value and a great environmental solution at a very high level of carbonation. So there’s nothing to apologize about in our business model, which is doing very, very well.
Gerard Meyer
By the way, in 2013, we grew our CO2 doors by 47%, so where a year ago about 50% of our doors carried our CO2 canisters, in 2013 over 80% of our doors carried the CO2 canisters. So they’re becoming more and more convenient.
And in terms of our model for that, Americans and Europeans are very familiar with the whole propane exchange system, and it’s a behavior that they already do. So we’re actually not asking them to do any kind of a new behavior that they haven’t already done before.
Akshay Jagdale - KeyBanc
And can you just update us on, if you have this available, what are the brand awareness numbers, particularly maybe in the U.S., but if you have it globally that would be great. And then maybe what’s the purchase intent? I don’t know if you’ve shared your latest installed base number, but that would be useful to have.
And in that context, in your opinion, how do you narrow the gap between installed base or purchase intent and actually your brand awareness? Is it, in your opinion, in the next decade, from your side going to come from innovation, better marketing? What’s going to drive that gap to shrink? And can you just comment broadly, give us more details, on what we might see from you guys from an innovation perspective over the next 12 to 24 months?
Gerard Meyer
The awareness, we track this on a regular basis. And I believe in May, as we do annually, we’ll talk more about it, but our aided awareness is in the range of 70%. It is quite strong. And our purchase intent is obviously lower than that, but growing. There’s clearly a gap, and that gap is understandable. It’s a new category.
So people start to become familiar with the category, become aware of the category, before they start purchasing. And that’s going to come from a variety of factors. It’s going to come from accessibility of our product, it’s going to come from better marketing, it’s going to come with partnerships that people are familiar with that help normalize the category. So all of those things will help drive the gap between purchase intent and awareness.
Daniel Birnbaum
One more thing. We also have an interesting gap between current household penetration and the top two boxes of intent to purchase. Because the intent to purchase is in the mid-teens, but household penetration is still somewhere from 1% and 2%. And that’s a great gap to have, because we know that there’s a desire by the consumer to want to get the SodaStream. And so that’s like the low-hanging fruit. So we’re talking about mid-teens of Americans as a percentage of households saying, “I’d love to have a SodaStream.” That’s who we are targeting now, and hope to close that gap in the years to come.
The second half of the question, on innovation, we’ve referenced what we plan to do, but we’re not going to go into more detail at this time.
Operator
And we will take our next question from Molly Iarocci with Stifel Nicolaus.
Molly Iarocci - Stifel Nicolaus
Just wondered if you could talk a little bit about what you’re seeing in Western Europe. Were fourth quarter results below expectations, in line with expectations? And then what are you expecting looking at the first half of the year versus your midteens guide for the full year in the region?
Danny Erdreich
On the Western Europe, we actually see very good development, very good results. We see increase in two medium markets, Germany and France, and double-digit growth, in all [unintelligible] of the business, in soda makers, in consumables. So this region is doing very well.
We didn’t provide the exact breakdown per quarter going into next year per region, but as already indicated, and as implied from what we said so far, if the breakdown of activity, of revenue, in 2013 was approximately 45% in the first half and 55% in the second half, we will see slightly lower activity in the first half of 2014 and a slightly higher portion going into the second half.
Molly Iarocci - Stifel Nicolaus
And then finally, you had discussed some A&P numbers in the Americas region earlier in the call. I just want to clarify them. If you can disclose the numbers for me, what was the A&P spend as a percentage of sales in the U.S. for the fourth quarter versus last year? And then can you give us an idea of what you’re expecting in total A&P spend for fiscal ’14?
Gerard Meyer
In the fourth quarter, U.S. A&P as a percentage of revenue was 24%, and that was down from 34% the prior year.
Danny Erdreich
And as for fiscal 2014, right now in the plan we have higher A&P versus revenue than we had in 2013. In 2013, we had approximately 15.4% of A&P revenue across the group, and we expect 2014 for this to be slightly higher.
Molly Iarocci - Stifel Nicolaus
And with the G&A line, are you expecting some deleverage there? Or are there expenses that you’re able to hold and maybe [unintelligible] some leverage?
Danny Erdreich
No, we expect to see more or less the same rate of G&A to revenue as we have done in 2013. We are leveraging some of our fixed cost base, but on the other side, we’re adding this year the full year’s activity of Italy and Japan and these two are adding, just filling up the gap that we just saved on being more efficient.
Operator
And we will take our final question from Mark [Siegel] with Cannacord.
Mark [Siegel] - Cannacord
Can you give us the volume growth rates in the U.S. by product category, like you have in the past?
Danny Erdreich
In Q4, volume growth in the U.S., soda makers 21%, flavors close to 54% and close to 30% on gas refills.
Mark [Siegel] - Cannacord
And then understanding the commentary of continued softness in the consumer appears to be carrying over into Q1 and some higher inventory levels. Can you talk to us a bit about your conversations with customers in the U.S., perhaps in the last couple of weeks, and their responsiveness to being more accepting of a more normalized pricing scheme? Just wondering how that dynamic is playing out.
Gerard Meyer
I think when you talk about the pricing, we are talking about the holiday period, where again retailers, everyone obviously wants to seize on that opportunity to not miss out on Christmas, which comes out once a year. So we’re not really in that same period anymore. So that’s not really an issue.
In terms of our conversations with our customers, certainly they believe in the category and they continue to believe in it, but there’s no question that Q1 will be a struggle because of their struggle with softness and because of what you referenced before, some of the inventory levels that they went into in the year.
Operator
And that concludes today’s question and answer session. At this time, I would like to turn the conference back over to our presenters for additional or closing remarks.
Daniel Birnbaum
Thank you. You know, we had four or five questions relating to the Green Mountain and Coca-Cola entry into our category, and I’m reminded of a page right out of the history of none other than Green Mountain, where back in 2005, the then tiny Keurig brand was fending off a competitive entry from Tassimo, which was a joint venture between not one and not two, but three giants.
It was Kraft, Bosch, and Starbucks, and then came more waves of competition from Phillips, with Senseo, and Mars, with Flavia, and Dolce Gusto. Who was that, Nestle? Well, we all know how that worked out. And my personal belief is that when disrupting a category, with a revolutionary approach, I’d rather be David than Goliath.
That said, I’d like to invite anyone who’s able to come and see our innovation and our brand in action at the IHA conference in Chicago, between March 15 and March 18, to please stop by our booth.
Thank you all for participating, and have a great day.
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