FQVTF - Fevertree: Energy Prices Continue Pressure On Margins In The Face Of Mixed Results

Summary

• Fevertree released its trading update today for the year ending December 2022.
• European energy prices continue to put pressure on margins.
• The saving grace is their strong performance in the USA and the Rest of the World.

Trading Update Results

The tonic and mixer producer released its trading update for the year ended December 2022 ahead of its Preliminary Results in March 2023 with mixed results.

United Kingdom

The standout figure is for the disappointing contraction in revenue from Fevertree Drinks' (FQVTF) (FQVTY) home market, the United Kingdom. This is the first decline we have seen in this market and below the company's previous guidance for this sector. Previously, Fevertree had been guiding for growth in the U.K. between 2% and 5%.

The company outlines two main factors for this decline, most notably seen in the off-trade market: strong comparable sales achieved during lockdown, and the train strike action throughout the U.K., particularly during the Christmas period.

Europe

Although the rest of Europe revenue segment did fall below previous projections for the company, the results showed signs of promise in the face of high energy prices in Europe caused by the war in Ukraine.

Fevertree has been highly susceptible to elevated energy prices due to the knock-on effect on glass prices. The higher glass prices for 2023 have inflated costs for the company by around £20m compared to that in Q1 2022. The company notes that approximately 80% of sales are in glass bottles, with the remaining sales from metal cans.

These increased prices have created immense downward pressure on the company's share price since the start of 2022.

Management outlines that energy costs will remain "material" throughout 2023, and although prices have dropped in recent months, the market remains volatile and at current levels is three times more costly than 2021 levels.

United States and the Rest of the World ((ROW))

The United States and the ROW remain to be the company's strongest growth areas with 23% and 18% growth respectively despite industry-wide port congestion and logistics disruption in the U.S. This was aided by favourable FX conditions.

At the current trajectory, the U.S. is on track to overtake the United Kingdom (the company's home market) with continued strong growth in sales and market share, particularly in the off-trade market.

These gains have been aided by the company deepening its relationships with major suppliers such as Walmart (WMT) and Target (TGT), along with hotel chains Marriott (MAR), Four Seasons and the Hyatt (H) in late 2022.

The company is managing to accelerate growth while pricing its drinks at a large premium to the competition.

Outlook

Management has noted that continued volatility remains throughout 2023 but sales will be driven by continued success in the United States along with a return to growth in the U.K.

Revenue is projected to elevate to a range of £390m to £405m ($483.15 to $501.73m) from £344.3m it reported in the year prior.

The company has lowered expectations for EBITDA from the £37.5-£45m ($46.47-$55.76m) range provided in the interim results in September to a range of £36m-£42m ($44.61-$52m) in 2023.

The EBITDA guidance is conditional upon energy prices remaining at current levels and has noted that " any further recalibration of energy pricing towards more normalised levels would allow for a significant margin improvement in 2024" .

Conclusion

Fevertree has provided mixed results in its trading update in the run up to its Preliminary Results due in March with the United Kingdom and Europe providing weaker results, mainly due to European energy prices caused by the war in Ukraine.

Comparatively, the United States and the ROW have shown strong gains in both sales and market share with the U.S. on track to become the company's largest market.

The company has provided cautious future guidance but notes that any drops in energy prices, and thus raw glass prices, would elevate margins significantly going forward.

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