Fevertree's first half sales rose 14% to £160.9m. This reflects a strong recovery in activity by Fevertree's customers in the hospitality industry.
However, despite the higher sales, underlying cash profits (EBITDA) fell 25% to £22m, as margins fell from 20.6% to 13.6%. That reflects inflationary headwinds and continuing investment in the business for growth.
Full year guidance remains unchanged. Revenue is expected to be between £355m and £365m, and underlying cash profits of between £37.5m and £45m.
Fever-Tree intends to pay a 5.63p interim dividend
The shares rose 12.3% following the announcement.
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Our View
Profits are moving in the opposite direction to revenues, and high input and distribution costs are to blame. There's no sign of respite for the rest of the year, with the cost of glass being highlighted as being of particular concern to management. But the group's reliance on shipping, so that it can service its US customers, is an area that's been focused on, and we're a little disappointed by progress.
New bottling partnerships across the pond were expected to ramp up production in the first half, but labour shortages scuppered those plans. These issues, first flagged in the July 2022 trading update have persisted and until some clarity emerges, could cast a shadow over investor sentiment.
Not only did that mean US demand couldn't be fully met but shipping from the UK had to ramp up despite 50% higher freight costs. Longer term it's a good move, but benefits need to start making their way through and that's unlikely to happen until Fevertree's bottling partner on the East Coast of the United States increases the capacity available. Fevertree is heavily involved in helping to resolve this, and an action plan is in place, but ultimately delivery of this is not in management's control.
Fevertree's operating model has also come under pressure. 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 in inventory over the last couple of years to combat supply chain pressures has been a drain on cash and we saw an operating cash outflow in the first half of 2022.
Looking at the broader picture, there are some positives to consider.
The UK is back to modest growth, while new flavoured soda launches and 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 looks healthy in both Fevertree's core and growth markets. However, a prolonged period of economic weakness and an increasingly embattled consumer could put a stop to that.
Despite the recovery, explosive UK growth seems to be over - there's a limit to how much premium tonic you can sell and it looks like Fevertree is approaching it. In order to keep making progress international expansion is key, particularly in the US and Europe.
Overall, Fevertree has a strong brand and broader consumer trends are currently supportive. And the group's net cash position is a bonus. But in the short term, the group needs to get a tighter grip on costs so margins can start to move in the right direction again.
Despite the material downgrades to consensus earnings estimates by analysts in recent months, the stock still trades on a very high valuation. We struggle to get too excited at this level while margins and profits stall.
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.
Half year results ending 30 June 2022
Fevertree's UK (33% total revenue) home market saw sales growth of 6% to £53.5m. Sales to eating and entertainment venues were up by 73%, more than offsetting the 21% decrease in sales from retail channels. This reflected the lifting of lockdown restrictions. Fevertree is seeking to invigorate retail sales through new product launches.
Europe was the fastest growing region with revenues up 27% to £52.3m on a reported basis. The return of holidaymakers to southern Europe has helped sales to exceed pre-pandemic levels.
The US enjoyed 11% growth to £40.1m. This could have been stronger, with deliveries unable to keep pace with strong demand, reflecting labour shortages and challenges in Trans-Atlantic shipping. Fevertree is enjoying strong customer traction Stateside adding more than 1,000 new points of distribution in Marriott Hotels, along with new accounts at Disney and Hilton Luxury Hotels in the period.
Fevertree is working to overcome its US production issues, but the situation remains challenging. This is heightened by the poor availability of glass for its bottling operations, with the glass industry suffering from high gas prices and wider cost pressures.
Revenue from other territories was up by 7%.
Free cash flows went into the red to the tune of £5m, a swing of £7m. In total net cash was down to just under £100m, from £133m, in part reflecting the payment of a £50m special dividend.
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.
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