Fevertree Drinks plc (FEVR) Ordinary 0.25p

Fevertree’s full-year underlying revenue grew to £364.4mn, up 6%, ignoring exchange rate impacts. This was helped by 24% growth in the US, which offset a small decline in UK sales. Market share grew across all key regions.

Underlying cash profits (EBITDA) fell 23% to £30.5mn. High exposure to elevated energy costs for glass bottling and inflated freight costs over the year squeezed profitability.

Free cash flow worsened from an inflow of £3.9mn to an outflow of £6.4mn. Net cash dropped 37% to £59.9mn at year-end.

The 2024 outlook has been reiterated, with group sales set to rise around 8%. Underlying cash profit margins are expected to rise from 8.4% to around 15%.

A final dividend of 10.90p per share has been announced. This takes the full-year total to 16.64p, up 2%.

The shares rose 1.2% following the announcement.

Our view

Fevertree served up a mixed set of full-year results. 2023 saw its revenue bubble 6% higher to £364.4mn as the group scored market share gains across all its major regions. But in line with January’s trading update, cash profits (EBITDA) came in at the bottom end of the group’s prior guidance range, which had already been lowered.

At the last count around 80% of Fevertree's sales were bottled in glass, meaning fluctuating energy prices were having a material impact on the group's costs. Coupled with higher shipping costs, profitability got squeezed.

That's why we're pleased to hear the group's finally got a handle on the situation. It's locked in prices on its energy and shipping contracts, meaning there should be no nasty surprises in the near term. The focus now shifts to ramping up production and improving efficiencies to help restore margins.

New flavoured soda launches, marketing tie-ups with spirit manufacturers, and the addition of new corporate customers are helping sales in the US and Europe to surpass pre-covid levels. US growth looks especially healthy, and despite becoming the group's largest region by sales, we think there's a lot further to go given the vast size of this market.

But there are some challenges to be wary of.

There was a small decline in UK sales. It turns out there is a cap on how much premium tonic you can sell, and it looks like Fevertree has reached it in its home market. Successful international expansion will be critical to continued growth, particularly in the US.

The economic backdrop is looking slightly brighter than it did a year ago. But consumers' budgets remain stretched, so any unexpected shocks could see consumers trade down to cheaper alternatives if future price hikes aren't managed delicately.

The balance sheet remains in good shape thanks to low levels of debt. And after a one-off inventory buyback in Australia, it looks like the worst of the operational challenges are now behind the group. But it needs to keep a tight grip on costs if it wants to nearly double its underlying cash margin by the end of 2024.

We're pleased to see some of the issues of recent years finally ironed out. Momentum has turned positive, but the mammoth valuation remains hard for us to stomach. We'd like to see more concrete signs that overseas expansion is boosting the bottom line before we get excited about this mixer maker.

Environmental, social and governance (ESG) risk

The food and beverage industry tends to be medium-risk in terms of ESG though some segments like agriculture, tobacco and spirits fall into the high-risk category. Product governance is a key risk industry-wide, especially in areas with strict quality and safety requirements. Labour relations and supply chain management are also industry-wide risks, with other issues varying by sub-sector.

According to Sustainalytics, Fevertree’s management of ESG risk is average. The group doesn’t use plastic bottles but instead uses glass or cans from a portion of recycled materials. As such, the group’s products are completely recyclable, however, they are energy-intensive to mould and make. Fevertree also claims its range of mixers sold in the UK are carbon neutral. However, no concrete scope emission reduction targets appear to be in place.

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