Fevertree Drinks PLC

Hello everyone, and welcome to the FeverTree Full Year 2023 Interim Results Conference Call. My name is Bruno, and I'll be your moderator for today. During the presentation, you can register to ask a question by pressing star followed by 1 on your telephone keypad. I will now hand over to your host, Tim Warlow. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us to hear about Fevertree's performance during the first half of 2023. My name is Tim Worrello, co-founder and CEO of Fevertree, and I'm joined on the call by Andy Branch for our CFO, Charles Gibb, our North American CEO, and Alan Hines, our Director of Investor Relations. So, over the page, slide two. This morning, I'd like to start by highlighting some of the key points that I hope you'll take away from the presentation before reminding you of the significant global opportunity for the brand and how we will take advantage of this in the most responsible way through our comprehensive ESG agenda. Following this, Andy will take you through the financial review before Charles and I present the regional strategic update. So, slide three. The group has delivered good revenue growth during the first half of the year, especially in the US, where the brand grew by 40% to become our number one revenue-generating region for the group. We've successfully driven share gains in each of our regions, and with it, further extended our premium mixer category leadership globally. In addition, our new products have contributed meaningfully to top-line growth as we expand our portfolio to a greater number of drinking occasions. We continue to experience macro cost headwinds, resulting in gross margin pressure on the business, and our team remains focused on mitigating these through a range of projects, covering glass supply, how we work with our bottling partners, as well as the implementation of new technology to optimize our global operations. Specifically relating to glass, we're now in the contracting phase for our UK-European glass tender process, which will give us better security supply, a more transparent approach to energy hedging, and crucially, better glass pricing. Our progress on glass alongside more advantageous transatlantic freight rates makes us very confident in delivering a meaningful improvement in gross margin next year. Slide four. Before we go into detail about how the group has performed over the first half of the year, I wanted to briefly remind you of the strategic blueprints we laid out in March. Our focus on innovation allows us to tap into ever more occasions, and with it the most popular drinking trends in each one of our markets, whether it's the growth of tequila in the US, the popularity of the split serve across Europe, or of course the gin and tonic around the world. Our unwavering pursuit of product quality and our significant first-mover advantage has enabled us to build an unrivaled reputation with the trading consumer. And our premium but accessible price point allows us to appeal to a broad customer base that also delivers superior margins for all our customers throughout the chain. Each of the elements on this slide have propelled us to become by far the largest premium mixer brand globally. and our continued investment in the brand is driving further share gains and underpins our confidence in the future opportunity. Moreover, as the only mixer brand, premium or mainstream, with a global footprint and single ownership, we have become the partner of choice for global spirit brands, giving us a further significant advantage against the competition. Over the page. And while we have made great progress so far, FeederTree still has a significant growth journey with an ever-lengthening runway ahead. Over and above our stronghold markets, such as the UK, where the brand has premiumized and significantly expanded the mix category to become the largest mixer brand by some margin, a substantial amount of our growth over the next few years will come from our next wave markets, such as the US and Australia. In these markets, we are investing behind the brand to increase trial, awareness, and distribution, as well as building relationships with customers across the on and off trade. And beyond this, we have a number of white space markets, particularly in Asia, where we're focused on ensuring we're working with the right partner for the right age and stage of development, such as our new partnership with Asahi in Japan. So not only does the volume growth opportunity look compelling, but Fevertree has a unique position at the center of a number of strong global trends, from the primalization of spirits and their growth ahead of wine and beer, to consumer preferences for quality ingredients and easy-to-make cocktails. This is why we also see opportunities across many of our markets beyond our core carbonated mixes, and will continue to develop products to cater to trending categories, such as cocktail mixes and sophisticated adult soft drinks. leveraging the power of the brand. Slide six. Before I hand over to Andy for the financial review, I'd like to update you on our progress under three of our five branches as part of our ESG agenda. Firstly, climate, where we continue to focus on our carbon footprint and strategies to promote emission reduction, including switching to renewable energy where it's feasible, ensuring that we're producing as close to our end markets as possible. Secondly, we have several ongoing programs in place to support our community, both close to home and where we source our ingredients. As part of this, we're proud to be in our 10th year of our partnership with Malaria No More, where we've raised money and supported projects that directly help the people impacted by the disease. And finally, we make sure we're supporting the most important part of our business, our people. Over the last year, we've made great progress on our diversity, equity and inclusion agenda, where our committee has been working on a broad range of initiatives to foster engagement, education, and training with a focus on collecting feedback and reflecting this in staff policies and ongoing event programs. I'll now hand over to Andy to take you through the financial review.

Thank you, Tim, and good morning, everyone. So we set out here the key financial metrics for the first half of 2023. I will talk to the detail in the following slides, and I'll also set out why we expect this to be the turning point Profitability going forwards with upside in gross margin and overhead phasing to drive an improved EBITDA margin in the second half of the year Before we expect a significant improvement in gross margin next year due to a combination of softening inflationary headwinds and the benefit of the proactive steps We're taking setting up the group for strong profitable growth going forward So turning the page Talking to the main moving parts of the H1 gross margin, we drove 190 basis points of margin improvement through pricing. We expect further upside in the second half as we enjoy a full six months with the increases in place. This was supplemented by a further 150 basis points of improvement from increased US bottling, with recalibrating transatlantic freight rates to provide a further benefit in the second half of this year. But as we explained at the start of the year, we are facing significant inflationary pressures across categories, with glass, as expected, driving 600 basis points of margin dilution alone. And so despite the mitigating actions we've taken, as a result of these extraordinary cost headwinds, gross margin reduced to 30.7% in the first half. This was in line with our expectations, and with tailwinds from pricing and transatlantic freight to come in the second half, we remain comfortable with a guidance range of 31% to 33% gross margin for the full year. So we move on to slide 10. We're confident of driving gross margin improvement in 2024 with three key levers. Firstly, driving improvement in glass pricing. We've seen a relative stabilisation in energy costs following the volatility and extraordinary increases we saw in 2022. UK gas forwards for 2024 currently sit at circa 130 pence per tonne, which is significantly below our glass suppliers hedge levels for this year. although not back to the historic 50 pence per therm levels. We're at the contracting phase of our tender process, which is initially focused on UK and Europe, and we are confident that this will underpin greater security of supply, a partnership approach, and full transparency with regards to energy hedging. As part of the tender process, we've agreed hedged energy levels with our primary supplier for 2024. Meanwhile, in the US, glass will be fully locally supplied going forward. removing the freight costs of previously imported glass bottles into the U.S. And so following the impact this year of extraordinary levels of glass cost inflation, we're confident of driving a significant year-on-year reduction in glass cost in 2024. Secondly, driving improvement in U.S. costs. We flagged in the R&S this morning an issue impacting certain U.S. production batches towards the end of the first half. Drinks PLC This issue, whilst extremely frustrating, did not affect customer relationships or our ability to continue to fulfil US demand. We've identified the root cause, remedial action has been taken, and we're now restarting production, with contingencies in place if required. It's important to state that we remain committed to building our local US production footprint, whilst the recalibration of transatlantic freight rates also allows us to supplement US production with UK production and still drive margin improvement in 2024. Finally, we're making good progress on a wide range of efficiency and profit enhancement projects across our global operations. Discussions have well progressed with the local Australian bottler. We are working with our anchor bottler here in the UK to improve manufacturing efficiency and are delivering a program of cost reduction and technical optimizations across our raw materials and packaging. The rollout of our technology program is also progressing well. which will drive further improvements across forecasting and production scheduling and will allow for more efficient procurement and optimized inventory levels. Subsequently, while the first half of 2023 represented the peak impact of the inflationary and operational challenges we have faced in recent years, the multiple proactive steps we've taken alongside a softening of inflationary impacts means we are confident we are entering a period from 2024 in which will drive strong growth and profitability. as we realise the benefit of these improvements going forward. Moving on, it's a reflection of our confidence in these gross margin improvements going forward that we continue to invest behind the opportunity. The phasing of overheads, which are typically more evenly spread between H1 and H2 compared to revenue, resulted in operating expenses increasing to 24.9% of revenue in the first half. This percentage will reduce as this phasing unwinds, which will allow for EBITDA margin improvement in the second half. Turning the page, working capital has been driven by increased inventory levels, largely in the US, where we're holding sufficient product to service the strong demand in that region. Increased working capital alongside the reduction in EBITDA margin has meant that operating cash flow conversion was negative in the first half. Despite this, cash remains strong at 76 million and we expect a return to positive cash flow conversion in the second half as both margins and working capital improve. And as a reflection of the confidence we have in the business and its prospects for continued cash generation, our interim dividend is increasing by 2% year-on-year. And finally, as flagged in this morning's R&S, we're reducing our full-year revenue guidance range to £380 million to £390 million for 2023. In the UK, we've seen more subdued trading than expected over summer, where poor weather impacted across the categories and so we're bringing full-year UK revenue guidance down, reflecting that impact and recognising that the continued soft economic backdrop will make it challenging to offset this in the remainder of the year. In the rest of the world region, we're working through a distributor transition and the establishment of our own subsidiary operation in Australia. Whilst these steps set us up for strong revenue growth in 2024, we are reducing our 2023 revenue guidance to reflect the one-off impact of this transition and associated inventory buyback. Below revenue, as I set out earlier, we are reiterating our gross margin guidance range of 31 to 33%, and we expect operating expenses in the range of 88 million to 92 million. And so the decrease in revenue guidance drops through to an EBITDA guidance range of 30 to 36 million. Looking forward to 2024, we're comfortable with consensus revenue growth of 10%, We expect the UK to return to growth, aided by our cocktail mixer and adult soft innovation. We expect momentum to continue in the US and Europe and that this will be accompanied by a return to good growth in the rest of the world region as we realise the benefit of running our own operation in Australia whilst lapping the effects of the transition this year. I've explained why we have confidence in driving gross margin improvement in 2024 and would expect a circa 600 basis point improvement in gross margin. driven by improved glass and freight pricing. Alongside an intention to continue investing behind the opportunity, this would result in an EBITDA margin of circa 15% for 2024, which is ahead of current market expectations. And so whilst it is disappointing to revise our 2023 guidance this morning, we are confident that we are turning the corner on the impact of the unprecedented challenges in operating environment we've faced over recent years. And we look forward to a period of strong, sustainable, profitable growth in 2024 and beyond. With that, I'll pass back to Tim.