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Fevertree - inflation adds pressure to profits

Fevertree's full-year revenues grew 11% to £344.3m.

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Fevertree's full-year revenues grew 11% to £344.3m. Double-digit growth in the US, Europe and the Rest of World more than offset a 2% decline in the group's core UK market, which still accounts for around a third of total revenues.

Underlying cash profits (EBITDA) fell 37% to £39.7m, as margins fell from 20.2% to 11.6%. This reflects inflationary headwinds, especially the impact of higher energy costs and continued investment in the business for growth.

Free cash flow fell from £43.2m to £3.9m, mainly due to the lower cash profits this year and an increase in US inventory levels to ensure the group can meet growing demand in this market. Net cash also fell from £166.2m to £95.3m.

The group "remain confident of delivering strong growth" this year and have reiterated full-year revenue guidance of £390-405m, which represents 13-18% expected growth. Full-year EBITDA is expected to be in the range of £36-£42m.

A final dividend of 10.68p per share has been announced, an increase of 2%.

The shares rose 7.8% following the announcement.

View the latest Fevertree share price and how to deal

Our view

Following Fevertree's detailed trading statement back in January, there were no real surprises in full-year results. The group measured double-digit revenue growth in all regions except the UK last year.

Unfortunately, Fevertree was unable to convert these bumper revenues into higher profits. The cost of glass has continued to be a significant concern. Energy prices are a big input cost in making glass bottles, and when 80% of your sales are bottled in glass, any fluctuation in energy prices is bound to have a material impact on costs. And so, high energy costs are eating into profitability, and this problem is expected to persist throughout 2023.

Last year, delays in ramping up production at its US East Coast bottling plant meant the group relied on shipping to serve its US customers. This left Fevertree at the mercy of port congestion and heavily inflated shipping costs throughout the year. These production problems look to have been ironed out, so we should see some benefits as US bottling production ramps up.

Outsourcing most of its operations (think bottlers and distributors) is a benefit in normal times and a large portion of profits drop straight through to operating cash flow. However, a significant increase inventory to combat supply chain pressures, particularly in the US, has been a drain on cash and we saw group cash levels take a big hit as a result.

Explosive UK growth seems to be over too. It turns out there's a limit to how much premium tonic you can sell, and it looks like Fevertree is approaching it. Successful international expansion will be critical to continue growing, particularly in the US and Europe.

Looking at the broader picture, there are some positives to consider.

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 surpass pre-covid levels. Underlying growth outside of the UK looks healthy. However, a prolonged period of economic weakness and an increasingly embattled consumer could put a stop to that.

Despite the increased inventory spend, the balance sheet is still in good shape thanks to low levels of debt. But the group needs to get a tighter grip on costs so margins can start to move in the right direction again. Currently, the mammoth valuation is hard for us to stomach. We'd like concrete signs that overseas expansion is boosting the bottom line before we get excited about this mixer maker.

Fevertree key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 22nd March 2023