Fevertree Drinks PLC (FV8.SG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Fever-Tree Year-End Trading Update Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. And right now I would now like to hand the conference over to your first speaker today, Mr. Tim Warrillow. Please go ahead, sir.

Well, good morning, everyone. Thank you for joining Andy, Oli and I on the call this morning. We wanted to provide a brief update on recent trading, discuss our outlook for 2020 before opening up for a few questions. So group revenue is expected to be GBP 260.5 million, which is representing growth of circa 10%, which reflects the significant progress made during 2019 across many of our regions. However, this performance is below the Board's expectations, primarily reflecting subdued Christmas trading in the U.K. Our key growth markets delivered a strong performance with sales accelerating in the second half in the U.S. and Europe as well as a notable end of the year in Australia and Canada. And as we enter 2020, the group is seeing this good momentum continue across multiple regions. While the U.K. has performed below expectations, it has been a year where we have lapped exceptional comparators. And despite that, we have retained our clear category leadership position and are well placed to return to growth as we proceed through 2020. We are aware that this is the pre-close trading update and look forward to going into more detail at our full results in March. However, I'll talk in a bit more detail on each region before handing over to Andy to go through some of the financials. So starting with the U.K. As reported, the wider retail environment in the U.K. experienced a challenging Christmas with the mixer category not immune from the weak consumer confidence and corresponding slowdown in spending. The expected improvement in trading during this important period unfortunately did not materialize with the macroeconomic uncertainty leading to subdued end to the year across both the On- and Off-Trade. However, the U.K.'s performance over 2019 must be put into context. The category lapped some exceptional comparators from 2018, fueled by some heat waves, football world cups and royal weddings, on top of which we faced unseasonably poor weather over the summer months, which was followed then by unexpectedly weak consumer confidence in the latter part of the year, all of which impacted the volume of mixer consumed over the year. And furthermore, we saw a step change in competitor activity with premium competition given shelf space and Schweppes promoting more deeply, more widely and more aggressively than ever. But despite this, the Fever-Tree brand remained very strong. And we retain clear category leadership position and none of the myriads of premium competitors have had discernable impact despite the shelf space that they were given. In fact, as they lapped their distribution gains from late 2018, many are now in decline, a clear sign they're not having a meaningful impact on the category. And furthermore, in the On-Trade, we still delivered 5% growth for the full year and continue to see good demand from key national On-Trade accounts and opportunities with our broader range of mixers. But given the current level of consumer confidence, we expect conditions for the category to remain challenging in the first half of 2020. However, our brand strength, the operational improvement, distribution opportunities and our innovation pipeline, alongside softer comparison in the second half, provides us with confidence in returning to growth during the year. So moving to the U.S. Our U.S. business performed very strongly in 2019 with sales accelerating in the second half. As we have mentioned previously, we believe there's a huge opportunity ahead for Fever-Tree in the U.S. When we took over the running of the operations in June 2018, we made it clear that our priorities were: building the right team; ensuring we secured the ideal route to market; develop the relationships with key On- and Off-Trade partners; and widen and deepen our distribution footprint; and then drive sales and awareness. I've been delighted with how the U.S. team has delivered to this strategy thus far. The work undertaken during the last 18 months and especially in the second half of 2019 means we are now ideally positioned to increase our operational investments. And what do we mean by that? Prior to taking control of the business in the U.S., our price point has drifted up to the super premium price position. And whilst we are comfortable with that when seeding the brand and establishing its credentials, this by its nature creates a barrier for wider adoption. Having conducted very detailed quantitative analysis and run a number of successful trials in conjunction with our key customers in recent months, we firmly believe it is the right time to reposition our price from super premium to premium, which in turn means it's not just suitable for special occasions but everyday drinking occasions and which, in time, we believe, would open up the brand to a wider audience, more occasions and further distribution opportunities. This is exactly the price position that we hold in the U.K. and other category-leading markets around Europe. And we have just started to implement these initiatives, and we look forward to discussing this in far more detail at our full year results in March. Turning to Europe. While the end of the year was slightly behind expectations, sales in Europe accelerated in the second half with a good performance across our key territories. The premiumization trend is gaining momentum in many countries across the region and Fever-Tree is outperforming its premium competitors and driving the growth of the category. Looking ahead to 2020, we're confident to continue to drive growth in what is our second-largest market. There remain clear opportunities to increase distribution through current customers as well as gaining new accounts in both the On- and Off-Trade across this region. Turning to our final region, the Rest of the World. We finished the year very strongly in both of our key markets in the region. In Australia, the brand is gaining real momentum and have made significant distribution gains in the latter stage of the year. And these performed very strongly over the Christmas period. In Canada, the premium mixer category is also growing very strongly with Fever-Tree growing significantly ahead of that. Within tonic water, the Fever-Tree is outselling both Schweppes and Canada Dry on a sales per store basis within certain key retailers, again with significant runway ahead. So both of these markets have the potential to be significant in the short to medium term. But beyond that, there are a number of longer-term opportunities, particularly across Asia, where we're continuing to successfully seed the brand. So I'll now hand over to Andy, who will take you through some of the financials.

Thanks, Tim. So I'll walk through the regions and margins. I'm going to focus on our 2019 outturn and competitive expectations and comment on some changes to our half year guidance. Now on one hand, it's been a challenging year for us in our home market, the U.K., which coming into 2019 represented 57% of group revenue. And whilst we remain the clear category leader, our revenue declined by 1% this year. However, set against this, we've had a strong performance across our other markets, which grew by a blended 24% with acceleration seen in many of these. These 2 combined to a full year group revenue of GBP 260.5 million, which represents growth of 9.7%. So taking firstly the U.K. In the Off-Trade, as we headed into the key Christmas trading period, we forecasted a return to modest growth across our retailers through November and December to end the year with full year till sales growth of 0.5%. This did not ultimately materialize. We saw softer trading in both November and December than expected as we lapped extremely tough comparators from Christmas 2018 against a continued backdrop of deflated consumer sentiment, which clearly impacted the tendency to trade up to premium at Christmas. As a result of this, and as we would expect to see reflected in the Nielsen data published later this week, we ended the year minus 3% through the tills at retail. On top of this, as expected, we saw a destock from our retailers, which further reduced our sell-in to them. Thus, Fever-Tree's reported full year Off-Trade revenue declined by 7% in 2019. In the On-Trade, we also suffered from a softer Christmas trading period than expected, particularly with respect to our sales into wholesalers over the crucial late November, early December period. However, we still ended the year up 5% at U.K. On-Trade, which was behind expectations, represents a very strong performance across a challenging year. Looking forward, following the more subdued end to the year than expected, we're revising our guidance for U.K. growth as we expect conditions to remain challenging in the near term. However, as Tim described, we're confident in the strength of our brand and our plans for 2020. And as such, we believe we'll defend our market leadership position, retain share and see a return to growth as we progress further through 2020 and begin to lap the comparators from the second half of 2019. However, across the year as a whole, we expect revenue to remain broadly in line with 2019. Thereafter, we believe we have the opportunity to grow at low single-digit levels. Moving on to the U.S., where we performed strongly, accelerating in the second half, finishing at plus 33%, which is plus 28% on a constant currency basis. We're very pleased with the way we're progressing in the U.S. and delivering against our strategy. As Tim described, we're confident it is now the right time to invest further in the market with the repossession of our pricing architecture. The execution of this change, however, remains at an early stage with conversations and negotiations ongoing. We're mindful that we need to allow for time for implementation and also for a lag between our investment and the return we expect to see. Subsequently, we believe it prudent to revise our U.S. net revenue growth to circa 10% for 2020 as these changes are implemented with an acceleration to 30% growth in the outer years. In Europe, trading in the final period of the year was slightly behind expectations. However, we ended with sales growth of 16%, which was 17% on a constant currency basis, again representing an acceleration in the second half of the year. In terms of guidance, nothing underlying changes in our view of the European opportunity. And our guidance for 2020 remains unchanged at 15% growth. And finally, in the Rest of the World region, we saw a strong in-market performance in the latter stages of the year, most notably in Australia and Canada, ending with growth of 32% across the region. And as for Europe, our guidance for 2020 remains unchanged with 25% growth expected for the region. Moving on to margins. We expect the 2019 gross margin of circa 50.5%, which while strong is behind the current expectation of 51.2%. This shortfall was the result of a combination of factors, including FX headwinds, a high level of promotional expense than expected and a post year-end revaluation, which impacted our product cost. Going forward, in light of the investment we're making in the U.S., we are reducing our gross margin guidance to circa 49% over the coming 3-year period. Moving down to EBITDA. In 2019, we saw the opposite gearing effect to that benefited from in recent years, where our full year EBITDA margin has typically been flattered by the effects of strong Christmas trading in the U.K. This year, due to lower revenue than forecast, our OpEx increases as a percentage of revenue from the forecast level of 20% up to 21%. And subsequently, we expect the full year EBITDA margin of 29.5%. This then drops down the P&L and results in a 5% earnings retraction year-on-year compared with 2018. Despite the reduction in U.K. revenue this year, we haven't adjusted our levels of investment in our key growth regions, where we remain committed to investing ahead of the opportunity. Going forward, we intend to keep investing in these growth regions and maintain OpEx at 21% of revenue. As such, alongside the 49% gross margin we're now expecting, this will recalibrate our EBITDA margin to circa 28% over the next 3-year period. Finally, our balance sheet remains strong with working capital improvements resulting in improved cash conversion and expected year-end cash of circa GBP 128 million. With that, I'll hand back to Tim.

Thanks, Andy. Well, look, in summary, despite the subdued end to the year in the U.K., we have delivered a strong performance across many of our regions in 2019 and begin 2020 with real momentum in a number of key growth markets. Whilst the U.K. mixer category has clearly not been immune from the consumer belt-tightening seen in recent months, we remain the clear category leader and have a strong platform to return to growth during 2020 and beyond. But let's not forget, this is a global opportunity, which remains in its relative infancy in many markets. Fever-Tree is the #1 premium mixer globally, and our performance in 2019 across U.S., Europe and as far afield as Australia and Canada highlights the fast-growing international strength of the business. Furthermore, the trend towards premium spirits and premium long mixed drinks continues to gather momentum around the world, which only goes to underpin the significant opportunity that lies ahead for the group. As Andrew just outlined, we remain absolutely committed to investing behind the longer-term opportunity. And whilst this will create some short-term margin compression, it is the right thing to do for the business and reflects our belief and excitement in the long-term potential. So thank you very much for listening, and we're here to field some of your questions.

[Operator Instructions] Okay. Our first question comes from the line of Edward Mundy.

A couple from me. The first is for Andy. There's been a bit of a margin contraction during 2019 down from quite high levels to more normalized levels. You're guiding for 28% margin in 2020. Could you talk through sort of your confidence that 28% is the right level, there's some further downside risk to that is the first question. Second, possibly for Tim. Clearly, you're recalibrating your pricing architecture within the U.S. I was hoping you might be able to talk a little bit more about that in terms of numbers, where are retail shelf prices today? Where do you think they will go? And as a follow-on to that, why is it a good idea to be cutting prices when you're trying to grow super premium mix of brand is the second question. And then the third one, possibly for Andy again. Obviously, you're implying that the -- your shipments are worse than your depletions in 2019. I see you've had a bit of an inventory cleanup. Can you confirm that that inventory cleanup has been completed within the U.K.? And to what extent there are any other sort of potential inventory cleanups, such as the U.S., that you need to get through for 2020?

Yes, good. Yes, thanks, Ed. Well, look, I'll take the first one and over to Tim, then I'll take final one as well. Look, our margins in terms of the 28% guidance for next year really is a function of 2 components. Firstly, on gross margin, we ended the year, this year, at 50.5%. The move to 49% is a reflection of the investments we're making in the U.S. and the impact that will have on gross margin. So obviously, there's going to be an impact on net revenue growth in 2020 in the U.S. and that investment also drops through to a lower gross margin. And then OpEx, we're committed to retaining it at 21% of revenue. And that spend continues to be kind of focused on our growth regions, particularly the U.S. but also Europe and some of those Rest of the World markets we cited, Australia and Canada. So that's the kind of shape of the P&L for 2020. A 49% gross margin dictates that 28% EBITDA margin at 28% with the OpEx level at 21%.

Ed, I mean in short answer to your question, I'm afraid in terms of the detail of it, that's not something that we're in a position to discuss now. You'll understand that this is commercially quite sensitive. These conversations are going on in the market as we speak. But the broad point is the fact that this business was never intended to be a super premium price point. Our success has been where the premium position allows it to be adopted by a broad customer base. And this is what we've seen here in the U.K. and as I mentioned, in our key European markets where we've got category leadership position. And so this is just a readjustment. This pricing, as I mentioned, really was allowed to drift. And that was one of the intentions of us getting our hands around this business. And so we're excited about it because we're seeing this business already grow at this price point and position at 33% last year. So if we can get it, which we will be able to now we're in control and managing this business, to exactly the right price point, working with our customers out there, we think this only goes to strengthen the medium- and long-term opportunity for this brand.

And then back to your final question, Ed. Yes, look, for the U.K., we believe that absolutely is the case. We saw the retailers. I suppose to the extent which they bought in ahead of our depletion date at Christmas, our depletion sales at Christmas was much lower than the prior year. And that's why we saw that destock effect. So that should mean we begin the year with a -- in a relatively good position from that perspective in the U.K. Some of the softness in our Europe number was also a reflection of the fact that some of our December orders got reduced. So again, that puts us in good position from an inventory perspective in Europe. And on the U.S. as well, we don't see any of those issues. And certainly, there wasn't any sell-in ahead of depletions in order to hit our year-end numbers. So I think we're in a good, clean position as we move into 2020 from that perspective.

Great. And Tim, just to follow up my second question on the price reset. I appreciate it's still commercially sensitive and you can't go into the detail. But the relative price point of Fever-Tree in the U.K. and Europe relative to the U.S., are you able to comment on the relative affordability of Fever-Tree in the U.S. relative to the other markets?

Look, Ed, I mean we will set this out in real detail in March, I think, is really the best way of addressing that.

Okay. Our next question comes from the line of Jemima Benstead.

A couple for me. Firstly, just following on from Ed's question there. Could you comment if you're happy with your price position in the rest of your markets as well? And the second one for me is can you give us some more confidence in your expectation of a return to growth in the U.K.? And then -- and finally, can you give us a bit more detail on your market share trends there in the U.K.?

So look, in answer to your first question, yes, in our key markets, we are happy with the price position. The U.S. is clearly a key market going forward. And so that's why we've been concentrating a lot of time and attention into this. And so that's why we think it's now exactly the right time to make this move and adjustment. Your second question would reference to the U.K.?

Confidence in the U.K., yes, which, look, I think as Tim set out earlier, I think we've got to look at the fact that we've got market leadership position, we've got a strong brand, we've got distribution opportunities, particularly in the On-Trade. We have an innovation pipeline. And standing back, we've got to put into perspective the fact that in 2019, we were lapping exceptional comparators in 2018, whether it's the run of events we saw, it's the extraordinary summer weather we saw compared to poor summer weather in 2019. So we believe, particularly as we proceed through the year, we're going to be lapping softer comparators. And that should put us in a better position as we proceed through the year to return to growth in the latter stages. But that's why our guidance for the year as a whole is to remain flat and in line with 2019 revenue.

And I think it's worth adding that our position, our premium position only strengthens versus the competition, all who have performed, relatively speaking, poorly over this last year. And so we think we're in an even better position to start gaining some of their shelf space as the year develops.

And in terms of share, I mean the timing of this call means we don't have the full market data yet for December. So we will talk in more detail about that in March. But look, we've retained across base On- and Off-Trade category leadership position. Our softer Christmas trading may have meant we've lost some of our value share when we look at our 13-week rolling at the end of December. But we still expect to be #1.

Okay. Our next question comes from the line of Ned Hammond.

I was just wondering if you could provide a little bit more detail around the softness in Europe at the end of the year. I think you mentioned something around the destocking. But were there any countries in particular that were a bit softer than expected? And I don't know whether this is potentially a different way of asking the question that might again not be possible. But are you able to provide what your expectations for volume growth in the U.S. are this year? And then last question is on Rest of the World, again talking a lot about a lot of really good things that are happening there. But again, it was slightly below expectations. So was there anything there that wasn't going quite to plan towards the end of the year?

Yes, sure. Ned, so in Europe, there were a couple of different factors, which meant our full year revenue outcomes are slightly softer than expected. Look, out of 20-odd countries, 2 of them, we saw a reduction in our December orders, which was really just a reflection of sell-in to importers compared to their underlying sell-out. And on top of that, we faced some FX headwinds, which we weren't expecting when we updated the market in November. And finally, post year-end, we've done a full review of our European marketing spend under IFRS 16, if any elements of that spend that needs to be reclassified against revenue instead of as an overhead has to go up against net revenue. And we had a slightly higher level of that reclassification than we're expecting. So those 3 factors combined to impact the net revenue growth we're reporting. But underlying and out in those markets, nothing changed and there was no softness in terms of end-of-year trading. In terms of your second question, which was around, I think, the volume for the U.S. that I think I'm afraid we're going to have to talk more about in March. We're not going to be giving separate revenue and volume growth guidance for the U.S. So I think when we are able to talk a bit more in detail about this, we can reassure how these clearly are going to interact and combine from the 10% net revenue growth we're guiding to. And finally, on Rest of the World, it's a very similar picture to Europe. Our sell-in to our international importers is slightly behind expectations. But that doesn't really reflect how they traded in Christmas, particularly markets like Australia and Canada, where we're talking about their end market depletions, which actually performed ahead of our expectations in market. But in terms of the shipments that went out the door and on the boats at today's market, they were mildly behind where we're expecting.

Okay. Our next question comes from the line of Saranja Sivachelvam.

Just a couple for me. Starting with the U.S., I mean we had a performance of about 33% this year and coming down to sort of low double digit next year. Can you help us understand, firstly, whether this slowdown is a reflection of the price positioning or a reflection of it's a slightly challenging market? And sort of going forward from there, where do you kind of expect the trajectory to land down on? The second question is on your competitive intensity. So you've mentioned key competitors, like Schweppes. But what about the sort of niche brands, the kind of smaller brands? Are you feeling any kind of competitive pressure from them? And finally, on your innovation pipeline, can you elaborate them? I'm just trying to understand where aside from the slightly easier comparators, where the growth might come from in the U.K.

So I think your first question, Saranja, is broadly what I just said to Ned really. I think we're going to have to spell that out more in the detail we can in March. But of course, the guidance, which has come down from 30% to 10%, is largely a reflection of that price investment we're talking about. And we are reiterating in outer years, a return and acceleration back to 30% growth for the U.S. But I'm afraid again we just need to talk more about that in March.

And then your question with regards to our premium competition, look, as I mentioned, broadly speaking, they account, if you look in the U.K., for about 4% of the Off-Trade category. The last cutoff number shows that we're at 37%, 38%. And they're 4%, despite the fact that they've been given a greater more shelf space over this last year. And indeed, they've been promoting very hard, hasn't changed very much. I mean it really is fair to say that on an individual basis, they're really not having much effect. At our last sort of trading update, we gave some examples. The fact that Fentimans, which we hear quite a lot, we're over 40x larger than. Their growth has been slowing over this year-to-date. Merchant's Heart, which was at 80x larger than, they have declined quite dramatically. Schweppes premium, which is Schweppes 1783, its latest guise, we're about 40x larger than. And actually, they've lost distribution in Sainsbury's at the last part of the year from 500 stores or 100 stores, which is a reflection of the fact that they are not rotating or performing as hoped. So I mean our position in amongst the premium set only strengthened. And so as a result, as I mentioned, we think we're in a good position to talk to the retailers about why we can drive that shelf space much harder than they can going forward. And that leads on to your question about innovation. We launched some new products over the latter part of the year, rolling out our ginger range. And that is proving successful and performing well. So I think that puts us in a good stead to talk to retailers about giving us more shelf space of those products. And we've got some others in the pipeline we can't talk about at the moment, which we also think are going to be well received by consumers. So we've got a full pipeline, and we're busy out there explaining to retailers why they generate more money from us than they do from those premium competitors that are not performing.

Okay. Your next question comes from the line of Fintan Ryan.

Just one real question for me, please. Just in terms of your margin guidance for -- I think you said for 2020 and also for the next 3 years, I'm wondering around specifically your gross margins, how much of this -- the sort of implied year-on-year decline is exclusively these U.S. price investments for this year versus bringing back the new U.S. capacity online? And should we expect these gross margins to continue to trend downwards as U.S., I guess, ramps up and more U.S. capacity is added?

Yes. Look, we were previously guiding to a 50.5% gross margin for 2020. And bringing that down to 49% is largely a reflection of this reposition in U.S. price. That's the impact. We spoke before about the fact we're bringing online U.S. production, that's West Coast and that's in the latter stages of 2020. And initially, we don't expect to see that drive margin improvement for the various reasons I've outlined before around the fact that you're not initially getting the scale benefits that you benefit from, from the current U.K. production. Over time, we would hope to get obviously some improvements in that. But that's not factored into the 2020 margin guidance.

And is there anything implied in terms of input cost inflation, like sugar or glass?

Well, look, I mean there's a number of different factors that go -- that went into the original 50.5% guidance, which relate absolutely to the input costs and negotiations we're having with our suppliers and with our bottlers ongoing. Nothing has changed there from late November in terms of what was guiding our original margin.

Okay. And then in the mid-term, I guess, you'd hope to see greater scale and operating leverage could get the margins back towards the mid-term previous guidance around 50%?

We would hope to say absolutely nothing's changed in our view, then over the longer term, we can protect the 50% gross profit margin.

Okay. Our next question comes from the line of James Edwardes Jones.

Yes. First of all, I think you mentioned gross margin was hit by a post year-end revaluation. What was that all about? And how substantial was it? And secondly, can you give us some idea of what you think a sensible EPS growth level medium to long term is?

Yes. On the former, I mean I was talking about the difference between the margin we landed on 50.5% and where the expectation was. And there are a couple of different factors that combined. Individually, none of them were material or substantial. But together, they were the reason why we went from a sort of 51.2% to 50.5%. The year-end valuation is very simply a pretty standard year-end reconciliation and standard cost valuation. And when it creates a movement on your balance sheet, there's obviously an opposite effect on your P&L. It wasn't something that was built into our forecast. It's a typical thing you do at year-end. But it moved against us, and in light of the lower revenue, had an impact on that gross margin.

So just to be clear, there was no material stock write-downs or anything like that?

No, no, no. And it certainly wasn't a stock write-down, it was just a standard cost value -- revaluation. But it wasn't something that we factored into our forecast in November. But as I say, we also had FX headwinds and some other unforecast movements. And that's why we ended up with 50.5%. On the second question, I don't think we can talk in detail about EPS guidance over the longer term.

Okay. Our next question comes from the line of Doriana Russo.

I have a couple of questions, if I may. First of all, the change of strategy in the U.S., is that primarily coming from a price positioning? Or are you also changing the way you invest in your platform on the ground in terms of promotional impact or events on the ground or anything else, in the number of people that you have employed? And similarly, in the U.K., now that you have reset your growth expectations, are you also reviewing your cost base? Or is that still going to stay the same?

Well, firstly, with regards to the U.S., make no mistake, this is not a change in strategy. This U.S. business is performing extremely well. We grew at 33% last year and it's accelerating. This is just a slight adjustment to price because we believe this will open up even more opportunity, even more growth and make it even more appealing to a wider audience. So that's all this is. And hence, we are very excited about it. But in terms of further investments of team, we've already made a considerable investment in our U.S. business in our team. We've got a very good, very strong, very well resourced team out there. So no, we're not looking to change that alongside it.

I'm sorry, just to clarify. You said that the price decline should open up more opportunity, yet the outward forecast have stayed the same.

Yes. Look, I think, as I said, look, this is a reposition from super premium to premium, and over the longer term, it can unlock a much larger potential base of consumers. But this is something over the longer term. And we're very early. We're just having these conversations. We've got to implement this change. It's got to flow through the system, through the value chain. And so at this point in time, we don't want to change that outcome, which is still 30% growth in outer years is still very strong growth in that region. But we're making this change now because we believe, ultimately, we'll be able to unlock a larger opportunity in the longer term.

So just a sign of you're being cautious at this point in time, not so much because you don't know...

Look, I don't know whether 30% growth is cautious. But look, it's very -- as we say, we're talking to you now very early on in the implementation of this change. I think, Doriana, I think in March, you'll get a much greater idea in terms of the outlook and the reason for where we are in the forecast and the reasons for doing it.

Okay. Our next question comes from the line of Nico Von.

Nico Von Stackelberg from Liberum. Just a quick question. I'm a bit confused by the U.S. update here because my understanding is the issue is primarily brand awareness. So I would have thought you want to spend your marketing dollars on things like key sponsorships; the 4 major sporting events; gin and tonic gardens that you're -- it's working so well in the U.K. and it's working for you in New York; tastings events, pop-ups; more promotional activities, not resetting the price. I mean, look, you guys are already in line with a lot of the peers like White Rock, Maine Root, Navy Hill, Q Drinks, Reed's. Why are we cutting price when we should be investing in the brand and building awareness?

Look, Nico, we are investing in awareness and brand-building. And that's proving effective. We've been generating an enormous amount of PR. You mentioned about the garden initiative here in the U.K., we're doing similar things in the U.S. And we will continue to do that. And make no mistake, this price is just a readjustment, it's not a significant price move. We are not losing our premium positioning credentials, quite the opposite. All we are doing is bringing it more in line with the price differentiator we have with the mainstream products in our key markets and very successful markets, like the U.K. and Europe. So we will remain a very premium player and position in that market. But we know that this is going to open up more opportunity, more occasion for us and a broader audience. But we will continue to invest in awareness alongside it.

Okay. So do we have a new brand that we're sort of targeting to compete with? I mean are we no longer competing with the likes of the brands that I've mentioned before and you're looking for now more of the cheap Schweppes and Polar and what have you out there? Is that the new idea?

No, Nico. I think you're overestimating the price adjustment that's happening. But again, I really think we're better off waiting and giving the real detail on this in March. But make no mistake, we are remaining a very premium proposition in the U.S. It's just that as it currently stands, it has been -- it sort of drifted towards the super premium position, which is not the architecture which we think is best for this brand for the medium to long term. We just do not think it's going to capture the size of opportunity we know we can deliver. But as you rightly point out, with our current positioning, we're still growing at 33%. So make no mistake, this brand is very well revered in the U.S., and this is only going to improve the opportunity we have.

And can you just -- obviously, when you cut price, it's going to have an impact on your top line and that -- does that fully explain why growth should be at 10%? Is that the full reason why?

Well, look, again, as I said to Ned and someone else, look, we'll talk about this more in March. We're not going to give a volume and revenues breakout of our guidance. But it's fair to say that a good degree of the -- a large degree of the reason behind the reduction in net revenue guidance is this price repositioning. And as I said, the reality is we have to reposition our price in terms of what we invoice. That then takes time to work its way through the system, through distributors, through retailers, through value chains to be implemented and then to get the elasticity and volume uplift we'd expect from that repositioning. We have to allow for that. And subsequently, we can't build in too much return on that investment during 2020, particularly as we speak to you today, and we're very early in the conversations and implementation of that change.

Okay. Our next question comes from the line of Saranja Sivachelvam.

Sorry, just a follow-up question for me. In terms of your OpEx guidance of 21%, if you're reinvesting back in the business, what's your confidence that your reinvestment of, I think, typically you've guided to when it was 20%, 10% marketing spend and the other 10% for other stuff? Going forwards, how do you think -- how are you thinking about the A&P and the reinvestment back in the business? What's driving the confidence that you can stay at 21%?

Well, I suppose the confidence comes from that's where we're setting our budgets and deciding to allocate our investment. And within that, absolutely A&P does increase as a proportion of that spend. You'll see that in 2020 -- 2019, sorry, R&D spend has increased. It's become close to 11% of revenue. And over time, as we expect to get a little bit of operational gearing of our overheads, our people costs, the proportion of spend towards marketing will naturally increase within that 21%. But we have confidence we can retain 21% because that's how we set our numbers. And I think, like I said earlier, the reason we've seen sort of lower proportions of OpEx as a percentage of revenue in previous years has largely been a result of the fact that we set our budgets, then we had super performance in the U.K. Christmas, which extends our revenue line and reduces that proportion of [ profit ] and EBITDA margins. Built into our guidance going forward is that same approach and that same level of investment in those growth markets: U.S., Europe and Rest of the World.

Thanks, Saranja. Thanks, everyone, for your time on the call this morning. We will obviously be available for follow-up questions and conversations throughout the day. So look forward to speaking to you further in the course of the day.

Thank you very much for your time, much appreciated.

Okay. That does conclude your conference for today. Thank you for participating. You may all disconnect.