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

Welcome to the Fevertree Drinks preliminary results presentation. At this time, I would like to turn the conference over to Tim Warrillow. Please go ahead, sir.

Thank you, and good morning, everyone, and thank you for joining us today. My name is Tim Warrillow, Co-Founder and CEO of Fever-Tree. I'm joined on the call in the U.K. by some familiar voices, CFO, Andy Branchflower; our Head of Communications, Oli Winters; and I'm delighted to introduce Ann Hyams, our new Director of Investor Relations; and all the way from the U.S., our North American CEO, Charles Gibb. Clearly, it hardly needs saying, but these are unprecedented times evolving on a daily basis. And I first want to just say how proud I've been of our team and how fantastically, alongside our partners and suppliers, they have responded over the last 1.5 months. This morning, I intend to talk first about COVID-19 and how Fever-Tree as a business is responding. We will then turn to the group's performance in 2019 with a particular focus on the U.S., with Charles providing an update on the overall U.S. strategy and the steps we announced in January regarding our pricing optimization. So turning to Slide 4. Firstly, it's important to say that we entered the current crisis as a strong business. We are the #1 global premium mixer brand, more than 20x the size of our nearest competitor. We saw good growth in 2019, especially in our key international markets. And the first 2 months of 2020 were in line with our expectations. The U.S., in particular, saw a strong start to the year, trading ahead of expectations. However, clearly, the scale and impact of COVID-19 has posed some significant challenges across our regions. The On-Trade has been severely impacted, with most of our regions being in total lockdown since the middle of March. As you will imagine, we're remaining in contact with our On-Trade customers with our focus on offering support as and when it is needed most. But as you'll be aware, there is no clarity yet on when this channel is going to reopen. Trading in the Off-Trade, on the other hand, has been strong. Andy will provide a bit more detail shortly, but the week ahead of lockdown was characterized by very strong sales as consumers took the opportunity to pantry-fill, and sales since lockdown have remained robust. Clearly, a good gin and tonic is proving a much-needed, much-deserved treat in these challenging times. And as a result of the increased demand, we are working very closely with our key Off-Trade customers to ensure we're not only able to meet the demand, but also the different buying patterns that have been emerging. We have also up-weighted our online presence to reflect the strong demand we are seeing across this channel and continue to redeploy promotional spend accordingly. From an operational perspective, our unique, asset-light, outsourced business model provides for agility and flexibility, which has served us well. We are working very closely with our bottling and canning partners across the U.K. and Europe as they have enacted their own business contingency plans. We have good contingency of raw materials, and our partners have continued to be able to produce with our key bottlers and canners operating through segregated shift patterns. I'll now hand over to Andy to discuss some of the financial modeling we have been undertaking.

Thanks, Tim. So moving to Slide 5. Clearly, there's a high level of uncertainty with regards to the impact of COVID-19. Therefore, we are running multiple scenarios for 2020 in order to assist with our planning. We thought it would be helpful in this slide to set up at a high level how we're building these scenarios up. So firstly, we break down revenue by month, with the quarterly splits from last year shown here on the slide. Then we split each region's revenue into On-Trade and Off-Trade with, again, the split shown here on the slide. So firstly, taking the On-Trade. We've seen pretty instant impacts on revenue as soon as lockdowns have been enacted globally, reducing to 0 sales in most markets from mid-March. As we model On-Trade revenue scenarios going forward, we're considering factors such as the period of lockdown; how restrictions will be relaxed, whether there'll be an immediate or more gradual opening of the On-Trade; whether there could be structural impacts with regards to the number of outlets reopening; and whether consumer behaviors will take time to revert to pre-lockdown norms. Then we take the Off-Trade where sales have been strong. As described by Tim, initially, we saw very strong sales as consumers prepared for potential lockdowns by increasing the frequency of their shops and purchasing more per shop. For instance, in the U.K., in the week ending 22nd of March, which was just ahead of the lockdown, we saw an almost 70% uplift in till sales year-on-year. Since we've been in lockdown in the U.K., weekly sales uplifts have moderated from that level, but overall remains strong, with circa 15% to 20% year-on-year uplift over the lockdown period so far. In the U.S., we've seen similar patterns. Nielsen data, which covers approximately 30% of U.S. revenue, and so just under half of our U.S. Off-Trade revenue, shows that Fever-Tree till sales in the 4 weeks to 21st of March were up 71%. Now we don't have the same breadth of visibility on weekly till data in the U.S. as we have in the U.K. But based on the data we do have, which shows variation in till sales across retailers but typically over 50% uplift and, in some cases, much greater uplift, overall, we expect to see perhaps some moderation in that 71% growth rate, but still very strong sales uplift in the next 4 weekly data. We're seeing similar patterns in Northern Europe, in Australia and in Canada. So going forward for the group as a whole, in the Off-Trade, we're continuing to model strong sales during lockdown periods. But of course, also considering factors such as the extent to which we'll continue to see these uplifts and volume switches from the On-Trade as lockdowns continue and extend, and also whether there will be any moderation in uptake as we will have early summer public holidays in May and periods where typically we see heightened at-home entertaining. Overall, the scenarios you can run for the On-Trade and Off-Trade across our regions still give a relatively broad range of outcomes on revenue for 2020. Then we're considering the impacts on gross margin. Now whilst costs here are largely variable, there could be some headwinds, depending on shifts in territory and channel mix, potential for increased storage costs. Equally, against that, there could be some FX upside. So again, lots of moving parts at gross margin level. On OpEx, when we consider the circa GBP 60 million of overheads we originally budgeted for in 2020, broadly, half of this is staff costs and central overheads, which will remain in line with budgeted levels. The other half is marketing spend, which is more variable. Initially, as you'd expect, during lockdown, we're considering areas where we will naturally cut back on expenditure or redirect it. However, equally, given we have the benefit of a strong balance sheet, we're also assessing where there are opportunities to reinvest any of these savings later this year as our focus remains on pursuing a long-term opportunity. Therefore, independent of impacts to the top line, most of our scenarios imagine that we will continue to spend in line with previously budgeted A&P levels this year. So hopefully, this is helpful as a way of providing a framework to run scenarios for our 2020 outturn. But clearly, it is too early, and there remains too high level of uncertainty for us to narrow the range of outcomes sufficiently to quantify the financial impact on 2020 trading. I'll now hand back to Tim.

Thank you, Andy. So turning to Slide 6. Whilst there remains a great amount of uncertainty ahead and the impacts are extremely difficult to predict, Fever-Tree is well placed to navigate this period by virtue of the fact that we have our globally diversified business, the spread of our sales across both the On- and Off-Trade, our low fixed cost base, the flexibility of working with multiple international production partners and our strong balance sheet. And perhaps most importantly of all, the long-term trends that are driving the growth of long mixed drinks and premium spirits consumption remains well embedded and continues to grow across the globe. So finally, turning to Slide 7, our all-important people and communities. Fever-Tree has always been a small, close-knit team, and we value the contribution of every one of our employees, and this remains integral to how we run our business. Our position since the beginning of this crisis has been to offer support and certainty to all in terms of their jobs, and we have no intention of furloughing any of our employees regardless of their role. In fact, those that have some spare capacity, we have encouraged to sign up to support their local communities for initiatives such as the NHS volunteer army. In addition, we have been redeploying our On-Trade team to different departments across the business to broaden their knowledge and skill set as well as launching new products and initiatives as we look to 2021 and beyond. As well as employee volunteering, we are offering support to communities and groups across our regions. This has included financial support to local charities in West London where our head office is based, donations to initiatives supporting key workers in the U.K. and U.S., as well as support for our On-Trade customers. We are determined to come out the other side as an even stronger business, but also one that has made a difference during the crisis. So turning now to Slide 9 and a brief overview of our 2019 results. We delivered a strong performance in many of our markets, resulting in double-digit growth for the group. We will go into more detail in each region shortly, but the progress in the U.S., which grew at 33%, Europe growing at 16% and strong growth as far as sales in Australia, reflects the fast-growing global outlook of the business. As we reported in January, the U.K. faced challenging second half of 2019, but we once again finished the year as the #1 mixer brand in both the On- and Off-Trade. And we have continued to invest across the business and across our regions, reflecting our global reach and the multiple opportunities that are in front of us. So with that, I'll now hand over to Andy, who will take you through the financials.

Thanks, Tim. In 2019, we delivered group revenue of GBP 260.5 million, representing growth of 10%. Tim and Charles will provide more detail on performance across the regions. But as an overview, whilst on one hand it was a more challenging year for us in the U.K., which saw a 1% decline in revenue, against that, we had a strong performance across our international markets with blended growth of 24% across them, with notable acceleration being in Europe and the U.S. If we turn to Slide 12 and take a look at our operating performance. Gross margin remained strong, but reduced to 50.5%. And whilst there was some marginal FX upside due to the strengthening U.S. dollar, 2 of the main drivers of the retraction were increased glass costs and elevated inventory levels for periods during the year, which impacted storage costs. Moving on to OpEx. And despite the fact we saw a deceleration in U.K. revenue growth as we progressed through the year, we continue to up-weight investment in our international regions, which grew about 24% blended rate. The main area of increase was in marketing spend, now up to 11% of group revenue, with the most notable increases in the U.S. and Europe. As a result of this increased investment in our growth regions, total OpEx increased from 18.7% to 20.9% of revenue. And combined with the lower gross margin, this meant our EBITDA margin retracted to 29.6%, achieving EBITDA of GBP 77 million, down 2% year-on-year. We are continuing to adopt a progressive dividend policy, and so proposing a final dividend of 9.88p per share, which will bring the total dividend to 15.08p per share, which is 4% up year-on-year and a reflection of our confidence in the financial strength of the group. We turn to Slide 13. On the balance sheet, our working capital profile improved to 20.8% of revenue. And whilst we held elevated inventory levels during the year, by year-end, inventory was lower than have been the case at the end of 2018, whilst alongside this, we continue to improve our trade debtor profile. Clearly, currently, we're focusing very carefully on our debtor book, but striking the appropriate balance of risk management alongside supporting our importers and key customers through this extremely challenging time. The overall improvement in working capital meant that our operating cash flow conversion was strong at 103% of EBITDA. And we ended the year with net cash of GBP 128.3 million, which was 54% up year-on-year. Moving to Slide 14. We set out our capital allocation framework in today's statement. As a growth business, we believe a strong cash balance is hugely important. Not only does it give us the security to navigate the current situation, it also puts us in a strong position to stay focused and continue to pursue a long-term growth strategy on the other side of the crisis. And so first and foremost, we intend to retain sufficient cash to run the business and to allow for investment against the opportunity ahead. We primarily foresee this investment taking the form of OpEx, and within that, increases in marketing spend across our growth regions at the appropriate stage. Thus, we want to remain in a position to take advantage of opportunities to up-weight and accelerate investment as they arise. And in fact, we increasingly see our strong cash position as an advantage over many of our premium mixer competitors globally. Then, whilst not a priority or an essential component of the group's plans, we also remain vigilant with regards to M&A opportunities that could further assist with the delivery of our strategy. But where beyond that, the Board considers there to be surplus cash held on the balance sheet, it will consider additional distributions to shareholders. However, clearly, given the current uncertainty around COVID-19, the Board is not considering additional distributions at this point in time. With that, I'll hand back to Tim.

Thanks, Andy. So we will now take you through each region's performance in 2019. And as requested, we will give particular focus to our U.S. market, hence, asking our U.S. CEO, Charles, to wake up at some very unsociable hour to talk to us this morning. So starting with the U.K. on Slide 16. 2019 saw us maintain our category leadership in both channels despite it being a more challenging year for the category as a whole. I'm particularly encouraged about the performance in the On-Trade where it extended our #1 position. We are now in around 45,000 On-Trade accounts. And we've continued to gain new listings at the same rate as 2 years ago, and that is in spite of the increased competition and aggressive promotional tactics from our competitors. We traded well with our larger national partners and have seen excellent progress in building our regional footprint over the last 12 months, a testament to the brand's strength and our On-Trade team who continue to offer best-in-class support to our customers. In the Off-Trade, we performed in line with the category. We lapped strong summer 2018 comparators and faced macro headwinds in H2, driven by uncertainty of the Brexit and the timing of the general election. And despite these challenges, we maintained leadership position, ending the year with 40% value share at retail. In terms of premium competition, despite significant promotional activity throughout the year, they continue to have very little impact and still account for under 5% of the whole category in the Off-Trade. While our range of tonics remain central to our formats, I'm pleased to say that our Ginger Ales performed strongly, demonstrating progress against our stated strategy to start to grow our range beyond tonic. Marketing remains a strength of Fever-Tree, and 2019 saw us continue to invest behind the brand, alongside spirit partners or through our own initiatives, be it our unique gin and tonic pub gardens, our highly successful long mixed drink menus, our online interactive pairing well, multiple event activations, including the second year of the Fever-Tree Championships or our gifting, which once again proved a sellout success. In short, the brand's awareness and reputation have continued to grow strongly with consumers across the U.K. The gin category as a whole remained robust in 2019, albeit the growth moderated versus the exceptional levels seen in 2018. But it's important to remember that it is now a GBP 2.5 billion category, broadly established as the second biggest spirits category in the U.K. and, as such, remains a key focus for spirit companies and continues to be invested in and strongly supported by both the On- and Off-Trade. So turning to Slide 17. Looking ahead, we remain confident in the longer-term outlook for the U.K. First and foremost, the long-term trends underpinning the move to long mixed drinks remains firmly in our favor and are only set to grow. While we remain confident in the continued popularity of the gin and tonic, our strategy to continue to invest in broadening our range of mixers is providing us with the opportunity to extend across more and more drinking occasions, appealing to a new and wider customer base. Serves such as whiskey and ginger are gaining popularity and are starting to be visibly invested in by the spirit producers and, as such, are a growing focus of our plans going forward. As indeed are the new emerging trend of vodka and soda in the spirits. And to this end, we recently launched our new range of premium flavored sodas to meet this growing movement. This range has been very well received by our spirit partners and our On-Trade partners. We are planning on some notable launch activations with us this spring and summer. However, understandably, but sadly, these plans have had to be delayed due to the current shutdown. We also, I have to say, have some other very interesting product opportunities in the pipeline, which we will tell you more about at the appropriate time. With regards to distribution, our long-term relationship with our retail partners remains very positive, and we're working closely on new distribution opportunities and some encouraging revenue growth management plans and strategies. Furthermore, we continue to invest in the online retail opportunities that we see fast-growing potential for. In regard to our On-Trade business, whilst COVID is clearly causing major disruption, we believe our brand strength and financial ability to support our customers will put us in a strong position as and when this channel reopens. So as I mentioned in the previous slide, marketing remains a key focus for the brand in the U.K. And while others are cutting back on marketing, this is not our intention. Our focus, whether it be above or below the line, remains on reaffirming our ingredient point of difference as well as driving awareness to a broader audience. And in the near time, while many of our summer events and other activations such as the Fever-Tree Championships have been canceled, we are looking to redeploy this spend, and the current situation is creating some interesting and cost-effective marketing opportunities that we are considering. Furthermore, we will continue to develop our point-of-sale presence and build on the success of initiatives such as our gifting range to broaden the brand's presence and penetration. So with that, I will now hand over to Charles, who will take you through our progress in the U.S.

Thank you, Tim, and hello. I'm delighted to be speaking to you from New York this morning despite the hugely challenging times we're facing in the city today. Our team is safe and healthy. I've now been running the business remotely for 6 weeks without any disruption to our ability to import and deliver product to our customers. Innovative new trading solutions are emerging, and we're well placed to deliver to our customers and consumers in these unprecedented times. Moving on to Slide 19. Whilst 2018 was a transition year, the focus in 2019 was expanding and growing the strong foundations for the brand with distribution and activation at the core of all we did. We enhanced our spirits partnership with the likes of Bacardi, Beam Suntory, Diageo, Pernod and Campari, enabling us to bring the brand to life in the On-Trade and liquor stores like never before. Fever-Tree continued to drive the premium mixer category, contributing 2/3 of the full year category growth, growing our share and remaining just less than 3x the size of our nearest competitor. All of this drove revenue growth at plus 33% with multiple future opportunities identified. Moving on, a quick reminder of the history of Fever-Tree USA. In the first half of 2018, the focus was on the start-up of operations and warehousing through to recruiting a team. In the second half of that year, it was all about adjusting our distribution network, consolidating our On-Trade and liquor business with Southern Glazers Wines and Spirits across 29 states and resulting in 24 distributor changes being made in 4 months as well as, of course, our initial meetings with retail and On-Trade national accounts. Moving into 2019, it was all about the following: firstly, expanding our distribution footprint. Our focus here was both on the number of accounts we are selling in, but increasingly importantly, the number of points of distribution per account. In total, we grew our On-Trade universe to 24,000 accounts. We always look at about approximately 100,000 account universe. And in Off-Trade, we expanded to 17,000 accounts, and again, with expanded points of distribution per account in both channels. Secondly, we successfully activated our marketing agenda with more than 160 media articles in trade and consumer publications, alongside multiple trade and consumer activations, including bar shows, food and wine festivals and, of course, the opening of our very own Fever-Tree Porch at Bryant Park in New York, seen by 12 million people a year as well as sampling over 75,000 cocktails. We also increased our spirit partner activations. Through national and local alignments, we've been able to expand visibility, increase activations through partnerships with multiple different spirit brands and, of course, relying on our Southern Glazers network for the critical aspect of local execution. And finally, we'd expanded visibility through our 6,500 bespoke Fever-Tree racks. We've been able to secure secondary displays and additional visibility in store, plus helping communicate brand messaging at the point of purchase. Moving on to 2020, it is all about tailoring our approach to the U.S. consumer and the U.S. market. And the cornerstone of this is our ability to leverage our now strong foundations and relationships with both our distribution network as well as our key customers in the On- and Off-Trade. Beyond this, we have 3 core strategic pillars to drive the next levels of growth in the U.S.A. as follows: firstly, to optimize our pricing and formats to make these most appropriate and relevant to the U.S. market, and I'm going to cover this in more detail on the next slide; secondly, aligning our portfolio against 4 core drinking occasions, such that we can drive growth against multiple consumer opportunities in the U.S. market; and finally, driving incremental trial and awareness through our marketing programming with continued focus on trade activation and now adding particular focus in the online space, where we can effectively target and measure results quickly. To this end, we've actually established a direct relationship with Google and are piloting a program with them on everything from search through to driving education, drink suggestion and sales, obviously, via Amazon. So looking at our pricing. We looked at pricing from day 1 as an incremental opportunity, mainly due to the higher price differential in the U.S. compared with many other markets. But naturally, we prioritized building the team, establishing the distribution network, founding retailer relationships as well as mining sufficient data to inform our decision-making before then investigating our price and format architecture. We did this starting mid last year, initially by understanding consumer behaviors through research and a deeper analysis of all our Nielsen data, looking at our price and format architecture dynamics, followed by crucially researching, testing and engaging our distribution network before finally implementing this starting from Feb 1 of this year, and now rolling out and thus visible on shelves over the coming months. Moving to Slide 23. Our research and analysis, please appreciate that this is commercially very sensitive. And as such, we're giving you a snapshot of some top lines in a significantly robust project. Our initial insights clearly illustrated that we were positioned as a luxury drink ideal for early-stage brand image development, but we were mainly suited for the very few or only on special occasions more so than an everyday item. The project had 3 main work streams: firstly, doing significant elasticity modeling from our Nielsen data; secondly, looking at intent-to-purchase research with 10,000 consumers; as well as finally and critically, trials in different retail chains, all of which gave us confidence that this could accelerate growth by enabling access -- by enabling easier access to trial the brand as well as greater levels of pantry stocking. Our retail trials saw strong growth in the likes of Publix, Target, Wegmans and Ralphs, increasing the rate of sales significantly. And this robust process has been well received by our retailers and our distributors alike, enabling them to own the changes as we've been presenting them over the last month. Most importantly, the U.K. has already demonstrated success at this affordable premium positioning, further adding to our confidence in this move. In the U.S., this new pricing ensures that our products are targeted at the most popular consumption occasions for the local market and clearly positions our various pack sizes against these. Our 4x200 ml remains our lead SKU, critical for brand image and initial positioning. But we can now target the 500 ml more effectively against 1 liter business from our competitors. In addition, any future formats that we launch will be similarly targeted at specific occasions and trade-up opportunities with price, format and configuration driving all our thinking. To conclude on the retail aspect of pricing, this has been an integrated part of a longer-term strategy that was only right to investigate once the business was up and running effectively. Research and analysis took place over the majority of the second half of last year with implementation from Feb 1 this year. Engagement of our key trade stakeholders, both distributor and retailer, has been crucial to a successful rollout. Implementation has been going well with both direct retailers and distributors, and we're already having discussions about extending our range, increasing our phasings with certain key chains during the next reset periods. That said, we had planned that this would roll out from Feb 1, and it was always going to take time to be truly seen on shelf due to a lining date with multiple retailers, and please don't forget the significant fragmentation in the U.S. market as well as managing stocks on hand at distributors and in the retail chain. We're naturally seeing some delays in implementation with some retailers due to COVID-19, and thus, we'll see the full national benefits once there's a return to normalcy. Moving to Slide 25. Finally, the new pricing in the On-Trade enables us to activate our Four Drinks strategy by incentivizing bar owners across multiple drinks, thus broadening our offering in any outlet. Whether the consumer is looking for a tonic drink, a ginger highball, a mule or a sprint, Fever-Tree is not only able to satisfy every occasionally, but equally importantly, we can now offer bars incentives to carry more SKUs, list more drinks and give better incentives to their staff when they consider our full portfolio offering. Talking innovation targeted at the U.S. market, our new grapefruit addresses the Paloma occasion, and thus, it's tailored to the tequila mixing opportunity which is significantly larger than in the U.K., approximately 11% of all spirits by value in the U.S. Early indications have been excellent with both On- and Off-Trade, including a number of significant listings in the likes of Target, Publix, BevMo!, Spec's and Total Wine. Our On-Trade focus will clearly resume once the business reopens, but has strong initial feedback from the work we were doing earlier this year. That concludes on the U.S. And with that, I'll hand you back to Tim to talk matters European.

Thanks, Charles. So turning now to Slide 27. 2019 was another year of very good progress across the region. In our more established markets, such as Benelux, Ireland and Denmark, the last 12 months have seen the group maintain its #1 position and reinforce its relationship across the On- and Off-Trade. While we remain focused on the gin and tonic movement, these markets also offer opportunities to drive further distribution across our wider range of mixes, most notably our gingers, as we leverage our brand strength and category leadership position. For example, in Belgium, we've seen our Ginger Beer grow by over 30% in 2019 as the New Orleans Dark 'n' Stormy sales have grown in prominence. In addition to these markets, there are a number of markets such as Germany, Italy and Spain, which should all deliver growth of over 25%, with each market seeing a promising uplift in distribution as well as encouraging rates of sales across existing accounts. Spain is particularly notable. This is a market where we saw rapid growth when we first launched, which was then followed by a more steady-state period as the category moderated. With our decision to strengthen our route to market through our relationship with Grupo Damm, we've seen another acceleration in our performance with our On-Trade footprint seeing a notable increase over the last 12 to 18 months as our partnership has evolved. Germany is another market that saw good growth in 2019, with national and regional listings in major retailers like ReWe, Edeka and Kaufland secured and providing good momentum in the second half. In Italy, 2019 provided a great opportunity to further the growth of our tonics, especially our Mediterranean tonic, as the gin and tonic serve continues to build momentum. Closer partnerships with major national wholesalers has allowed us to develop our routes to market and build upon our notable ginger success. We've continued to build out our dedicated European team. And we have regional expertise and focus across Northern and Southern Europe as well as the Nordics and Ireland. This is complemented by in-market Fever-Tree marketing personnel, ensuring best-in-class marketing execution and co-promotion activities with both global and local spirit brands. We're looking ahead in Europe and turning over to Slide 28. We entered our first European market 15 years ago and can use the markets where we have established a market-leading position as a great blueprint for what can be achieved across the rest of the region. Fever-Tree is the only premium brand with the scale, the distribution footprint and track record across Europe, and as a result, gives us a clear advantage over our premium competitors. Clearly, the current crisis is providing challenges across the region, especially those in Southern Europe, which are more On-Trade weighted. However, we are broadly split between channels across the region overall and remain confident in our ability to manage the short-term impact as best we can. But then, clearly, the On-Trade will be severely impacted. The performance in regions such as Spain and the ginger growth in Belgium demonstrates our ability to deliver growth across multiple markets at different levels of maturity by ensuring we have the right products and the right route to market for each territory. In our more mature markets, there are a number of secondary growth drivers across our wider range of mixes that will get increasing focus and investment in the next 24 months. Alongside this, and as mentioned earlier, there's a significant group of markets such as Germany and Italy that offer real potential for future growth through broadening and deepening our penetration and taking advantage of the white space still ahead. And then beyond these, there are markets where, while the brand and the category is in an earlier stage, we are growing fast and looking at opportunities to build out head count and ensure we have the right route to market to support our growth ambitions. So underpinning this all, we will continue to build the brand's presence across the region, both through co-promotion activities with global and regional partnerships, but also developing the events and other marketing opportunities, depending on the age and the stage of the market. So turning to our final territory to the Rest of the World and Slide 30. The premium mixed drink trend continues to spread around the world with Fever-Tree's global market position growing alongside it. Australia delivered a very strong performance in 2019. Growth was driven both through increased rate of sale as well as further distribution wins. We ended the year with good momentum, reflecting excellent trading over the Christmas period. Australia is a market that is displaying many of the same trends we saw in the U.K. 4 to 5 years ago. Mixes were the fastest-growing categories in soft drinks, and the last 12 months has seen Fever-Tree drive the majority of this growth. As was the case in the U.K., these dynamics are not being lost on the 2 major retailers in the country. And this market has real potential for the brand in the years ahead. In the other key market, that's Canada, we also saw a strong performance, widening our distribution footprint across the country in both the On- and Off-Trade. Our Off-Trade business performed especially strongly with further distribution gains within national retailers. There remains significant potential to increase our presence within the On-Trade and liquor channels, both of which will be a key focus in 2020. And as such, we're adding further resource in this market and are working closely with our distributors to optimize our route to market. And outside of these markets, Asia remains a region of real interest, where we continue to see the brand across a growing footprint of influential On- and Off-Trade outlets. Reflecting this, we appointed our first Regional Director for Asia during the year. And under his guidance, we've established a clear strategy focused on key cities in the region as we look to build and enhance our distribution network while working closely with spirit companies on the long-mixed drink opportunity. So turning to our final slide and in summary. So 2019 saw Fever-Tree strengthen its global leadership position and in doing so established a strong platform to deliver long-term sustainable growth. We started 2020 strongly in a number of markets, most notably the U.S. We are the #1 global premium mixed brand, more than 20x the size of our nearest competitor. We have built an enviable track record in our ability to drive the growth and premiumize the mixed category across numerous markets. 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 well as our success in more mature markets such as the U.K. and Belgium, where we're still seeing opportunities to drive further growth, there are markets such as the U.S., Germany, Australia and Spain that are growing strongly and offer near-term opportunities across multiple drinking occasions. And beyond them, there are markets, while earlier stage, offer longer-term growth. And so while the current crisis creates challenges and will clearly have an impact on our trading this year, we have a fantastic team in place, and we are able and willing to invest ahead in terms of people, route to market, portfolio and marketing to ensure we are well positioned when we come out of this period. So thank you very much. Thank you for listening, and we will turn it over to any questions that you might have.

[Operator Instructions] We will take our first question from Richard Felton from Goldman Sachs.

And thanks very much for the presentation, particularly with the detail on the U.S. My first question is on the U.S., where you've had a very impressive start to the year, and particularly the Nielsen data has been exceptionally strong. Is there any comments that you can share with us to help us disaggregate the recent strength between what is pantry loading and what is the result of your new pricing architecture? Then staying in the U.S., I'd also be very interested to hear any comments on the overall pricing dynamic in the premium mixer segment. In particular, have you seen any response from your main competitor as you've adjusted pricing? That's my first question, then I'll have one follow-up afterwards, please.

Thank you, Richard. I think as Charles has got up at this unearthly hour, we have the benefit of him on the phone. I think we should have the benefit of his answer for this. So Charles, over to you.

Dawn is just breaking here. Thanks for that. So I mean the first point to make is all of the growth that we've seen really for me in the first 2, 3 months of the year is really reflective of the strong momentum that we finished 2019 with because we didn't change our pricing to our distributors until the 1st of February. And in many cases, this hasn't gone live in the market until the 1st of March, mid-March, because these things take time to implement. And obviously, there was significant inventory in the system, in the distribution network and at the retailers. So a lot of the growth really is reflective of -- certainly in the first couple of months of this year has been reflective of the distribution gains from last year, which came in kind of Q2 last year, let's say. So we're still cycling against those. So we've got certainly some coming from distribution, some coming from rate of sale, absolutely as rate of sale has been increasing, and some coming from expanding our portfolio into the -- into new customers and new parts of the business there. So to date, I would say less impact from the pricing and more impact from the momentum that we gained in the second half of last year. We're still very early in the stages of implementation. I mean some of our major customers only went live with our new pricing in the middle of March, and some won't go live until April. And as I said, because of COVID, we are seeing some delays and people pushing these back potentially into the middle of Q2, maybe as late as May in some cases because people are not wanting to make significant changes to their sets at the moment. So I think it's too early to comment really on what our competitors may be doing or thinking in that space.

Great. Charles, that's very clear. And...

Does that answer your question?

Yes, it does. My second question is on the slide that you showed on your capital allocation priorities, where you mentioned assessment of M&A opportunities that would further assist the delivery of your strategy. I was wondering if you could maybe comment a little bit more on that. Is that looking at brands that would fit with your portfolio or potentially ways to enhance your route to market? Any comment on that would be very helpful.

Andy, I think that was your slide in point, so probably best coming from you.

Yes, of course. Of course, Richard. I mean we set out our capital allocation framework for the first time in this morning's release. And the main emphasis of that framework from our perspective is the fact that we want to continue to hold cash, be able to deploy against opportunities that arise, principally in OpEx and marketing. And I hope that came across earlier. I think the fact of the matter is this is a framework that we wanted to put in place for going forward for the future. And we put that point about M&A in just because, just as we said in the past, we'll remain vigilant to opportunities if they arise. But fundamentally, we're not changing our strategy here. Delivery of our plans aren't contingent on M&A. So look, if opportunities come up, we'll take a look at them, but there's no difference. We're not signaling here any shift in our overall strategy.

And Richard, I would just like to add that, I mean, it really is important to note that we are very confident of the opportunities that lie ahead with the Fever-Tree brand and the product opportunities that we see growing ahead of us. So don't think for a moment this is signaling a change in the strategy.

We will now take our next question from Jemima Benstead of Citi.

It's Jemima Benstead from Citi here. I've got 3 questions, please. Firstly, a question on the Off-Trade. Obviously, this channel has been pretty strong in the last few weeks, and I appreciate you've said that you've seen or expect to see some moderation. But could you quantify this any more? One of your peers have said that nearly 40% of Off-Trade sales of alcohol are consumed in social gathering and that this channel should weaken once we're through the stockpiling. So I was wondering if this is something you could comment on. My second question is on your end consumer. Obviously, weaker consumer confidence was an issue for your U.K. business in the second half of 2019. So I'm just trying to think about how that weaker consumer environment as we come through COVID-19 might impact consumers potentially trading down and how the competitive dynamic might play out and how you're thinking about it. And then finally, I've got a question for Charles on your U.S. distribution. Obviously, the On-Trade is very important for raising brand awareness and engaging and trialing with customers to support your rollout. And obviously, with this channel effectively closed, in-store trial in the Off-Trade likely halted. I just wanted to ask how you're adapting your plans. Or is everything just on hold at the moment?

Well, look, Tim here. Let me take your first one with regards to U.K. Off-Trade sales and Off-Trade sales in general and how they are likely to hold up. Clearly, it's got to be said that we don't have a crystal ball, of course. But what we can point to is the data we're seeing, and that is that in the sort of lockdown, the pantry filling in the U.K., we saw growth of 70%, an enormous growth. And since then, we have seen it still very strong at 20%. So what we can't foresee is how this behavior will continue. But it's clear that Fever-Tree and the gin and tonic and the simple long-mixed drink meets this sort of everyday affordable treat. What we're hearing anecdotally is what's keeping people going during the day, the sort of that drink at night. So no one knows. These are unprecedented times, but we do know as a drink and as occasion, we are very well placed to enjoy this treat, a moment and occasion amongst our consumer. And this is absolutely being seen just the same way in the U.S. And as Andy mentioned in his presentation, we're seeing this across Northern Europe as well. So there seems to be the same pattern, stockpiling, but then moderating to still strong growth. And I know in the U.S., when we say strong growth, we're talking about sort of 50% growth that we have seen in the last couple of weeks in the U.S.

Tim, do you want me to take the...

I'm going to ask Charles now to talk about your U.S. question.

Sure. I think the first thing I'd say is absolute: listen, nobody wants the bars back more than we do. But in the meantime, what we're doing with a lot of our bars and with our bartenders is we're actually working with them and redeploying them to actually become our ambassadors. And we're using this time to train them, to educate them. We've actually engaged a lot of them to be running a series of online how to make a gin and tonic or how to make a mule at home. So we're staying very much in touch with our bartenders. But as you say, with that environment closed down for the foreseeable future, we've had to look at other ways to get our brand message and to get our brand experience to our consumers. And the first space we've really looked at is clearly the online space. We've recently, as I mentioned, partnered with Google. We've launched a series of videos which are now being seen on YouTube, which are all about educating the consumer about Fever-Tree, about our authenticity, about our ingredient hunting and, most importantly, about how to make drinks, how to make great-tasting, delicious drinks at home using the Fever-Tree brand. So we've pivoted a lot of our spend that would have gone into experiential and events in the On-Trade into this online world and actually talking really, really strongly to consumers there, whilst working with bartenders and using their voices to do so as well. So that's what we're doing at the moment, and we're seeing extraordinary results from that, not only with our Amazon business, which is going extremely well, but also in things like ReserveBar and Drizly, both of which deliver alcohol and mixers to consumers at home. And the results in both those -- in those channels are going amazingly well. But let's not forget the liquor store because the liquor store is a really important marketing avenue for us and, in some cases, as important as the On-Trade because this allows us to pair a spirit and our Fever-Tree mixes when a consumer is walking in to buy their alcohol. And alcohol in, I think, almost every state has been considered an essential item during COVID. And therefore, consumers are still going to the store. They are still buying alcohol, and we're seeing our strength in the liquor channel actually emerge even more as a result of this. So we can actually look at pairing our Pink Grapefruit, for example, with tequilas, and we're co-merchandising them together in-store to help the launch of that product. Something we'd probably normally have done through the On-Trade, but we've now flipped into this liquor store environment. So I hope that answers your question there. And I think the only other one I would just add to what Tim was saying on the end consumer. 100% agree with what Tim was saying about this affordable treat. The trends of provenance, authenticity, of people drinking less but better and actually having a quality drinking experience at home, I think, all plays to the strength of the Fever-Tree brand, which is why I believe we're seeing both our liquor store and grocery sales expand during this period.

We will now take our next question from Nico Von Stackelberg from Liberum.

Two questions for Andy and one question for Charles, please. Andy, if shutdowns until, say, the end of August or whatever your base case is really for that matter, could you help me understand how channel mix will impact gross margins? So I guess it's reasonable to assume that you make higher margins in the On-Trade, so perhaps 100 to 200 basis points of a drag on gross margin on your base case. Is that reasonable? And the second question for you, Andy, is on working capital. Not sure if you can provide any color on how you see this just flowing out this year or working capital in general, but that would be incredibly helpful if you can offer it, my apologies, with your own guidance. And then finally, Charles, a quick question for you. So as Americans would, I do like tequila. But Paloma isn't really my drink. It's much more of a margarita when it comes to tequila. Why did you decide to go for a Paloma grapefruit drink to tackle the situation rather than, say, a carbonated sweet rum beverage that might mix into sort of a margarita occasion?

Okay. Nico, it's Andy speaking. Look, I'm afraid the line on my end, to your question, was slightly foggy. So I think your first question was around if I can give more color on gross margin on the various scenarios in COVID. Is that correct?

Yes. Yes, I was wondering about the channel mix, if you foresee channel mixing impact? And if so, how much might it be?

Sure, sure. Look, Nico, clearly, I'm not going to put numbers on it because the principle at the moment is it's very high. We're not going to say we have -- there's one specific thing that's a base case because it depends on assumptions around lockdowns and recoveries post that. What I would say is just very simply on gross margin headwinds, I talked briefly about territory mix and channel mix. So on territory mix, we talked in January about the fact this price movement in the U.S. is going to have an impact on gross margin at the group level. And we -- I also talked earlier about the fact that 70% of our U.S. business is Off-Trade. So the U.S. is well placed to be resilient through these current periods of lockdown. And subsequently, we'd expect some regional mix to temporarily go towards the U.S. Because the U.S. has that lower margin, there could be an impact. On the channel mix, because of the way we sell into either direct customers or distributors and how it varies around the world, the only region where we see really any significant kind of delta between -- and I say significant is probably the wrong word, but any notable delta between On- and Off-Trade margins is the U.K. And -- but then again, you need to see a very sustained shift towards Off-Trade away from On-Trade for that to have a notable impact on gross margin at group level. But I think it's what -- I just wanted to flag it because we are going to see a shift from on to off in the U.K. while we're under these conditions. And we're also going to see a shift towards U.S. in the sales mix. And those 2 factors combined could create some headwinds on gross margin. But I'm not going to put a number on it, but I would say I don't expect these to be hundreds of basis points. I don't want to flag a significant reposition on gross margin. The other thing on working capital is that, yes, absolutely, temporarily, you would expect debtors to extend a little bit. But again, it depends on where we are at the end of the year with respect to kind of lockdowns and where we've come out of it. But on the assumption we've come out of lockdowns and we've perhaps been out of lockdowns for a period of time, I don't see any reason why our year-end working capital position would be significantly different from the 2019 year-end position. Thank you.

And to answer your Paloma question, obviously, look at everything that's available and all the opportunities. I think in discussions with many of the tequila producers, a lot of them are keen to go beyond the margarita as the only drinks. So they're actually looking for other solutions themselves and ways to elevate tequila drinking constantly. And the Paloma is one of those, I think, sort of unsung hero drinks which they all believe in. So it's not only what we think, but it's also what our tequila partners are telling us and what they've been saying to us here. And of course, with this particular product, we've actually also focused it as a low-calorie offering. So it's only 30 cals in every bottle, which means you're making a drink for under 100 calories, which in the current environment is really important and in terms of filling that consumer trend of lower-calorie drinking. And you will be delighted to hear, I'm sure, that we're using Florida grapefruits as the core ingredient here. So that gives a nice local spin to it.

We will now take our next question from Charlie Higgs from Redburn.

A few questions. The first one, please, on the U.S. I'm just trying to put together Slides 23 and 24, where it looks like on Slide 24, we've got about a 17% price cut in the U.S. And then if we use Slide 23 and the R-squared of 0.85, it feels like net-net, the actual sales uplift in the U.S. from this price cut isn't going to be too dramatic. And actually, the sales acceleration has more to do with this 4-pillar strategy. Is that the right way of thinking about it? And then a second one for Andy, just generally thinking about going into 2020 and potential recession, depression. I know Fever-Tree was young back in the day, but are there any lessons from the global financial crisis that you think are relevant now?

Yes. I'll take the first one regarding U.S. pricing. So our pricing is coming down by approximately 14% to 15%. Essentially, we were sitting at $5.99, $6.99 with our 4-pack. We're now going to be sitting at $4.99 to $5.99. And what -- I mean what our trials and what our tests showed us and certainly what some of the initial results were showing us, I'm going to say pre-COVID, is that we're getting significant rate of sale increase as a result of price repositioning. All of our tests and trials with the likes of Target, Publix saw growth rates well in excess of that. But of course, on top of that, what we're looking to do here really is, firstly, it's about getting new consumers into the brand. So this is about accelerating the amount of trial that we get for the brand as well as getting those people who've already tried us to adopt us and to have us as an everyday item in their homes. And we believe strongly that this price repositioning is going to achieve that as a result. But I would just add, probably still a little bit too early to tell because we're only in sort of the first and the second months, and of course, we've been impacted by COVID as a result. So still very early to tell, but we're confident certainly for the future.

Sure. And Charlie, on your question, I mean, happy to answer, but I wonder whether Tim might want to, given that he was running the brand through the previous financial crisis, so he might be better placed to talk about it.

Well, look, I mean, I've got a couple of observations about it. I mean through the last crisis, of course, like everyone else, we were concerned, we were a much smaller business. But what was encouraging for us is our sales grew, and they grew both in the Off-Trade and the On-Trade. The Off-Trade for this very reason that I mentioned earlier that is relevant for now, it is this sort of low-cost, affordable treat. It was very clear that people were treating themselves in this way at home. And we know it in the world of FMCG goods, premium coffee, premium ice creams. These products actually tend to weather recessions not only well, but sometimes they actually grow in recessions, and that was certainly our experience. And then in the On-Trade, which was interesting, is that actually, they were suffering from less people coming in to their accounts. And so they were very keen to ensure that they were making as much margin offering as good an experience as they possibly could to their customer base. And so actually, we found ourselves getting clues from people who are keen to upgrade their products ahead of our expectation, I might add, because they're wanting to offer something better quality to give this better experience and then, ultimately, be able to drive a higher cash margin from it. And the other side of it is that it tended to be the sort of mainstream middle On-Trade that weathered the recession extremely well, for that same reason that the pub, the more casual dining restaurant and group, these are things that people will look forward on these occasions. And that is where the majority of our business is and where the majority of our opportunity still lies. So for those reasons, I think we are as well positioned as you can be when you're going to another potential recession.

We will take our final question from Emma Letheren from RBC.

I have 2 questions. Firstly, for Charles, do you think the ongoing lockdown in the U.S. will affect the pace of distribution gains you've been seeing? I'm guessing it's possible that retailers and indeed consumers as well might be less likely to be trying something new during this period of uncertainty, and this might continue if there is significant economic deterioration post lockdown. And one for Andy and Tim. I understand there's not been a significant shift in focus on M&A. However, I'm wondering, what exactly are the opportunities you're looking at? Is it different brands to help you enter new markets or other premium brands in the markets you're in already? Or is it more about strengthening that route to market?

I'll take the distribution U.S. question first. We're not seeing a -- I mean, clearly, obviously, On-Trade is a completely separate animal, so I'm not going to talk about that. But in the Off-Trade, the majority of our distribution gains which, of course, took place during category reviews that were in the second half of last year, mainly in sort of Q3, Q4, the majority of those have been honored or in some cases, yes, they're being delayed, but they've been delayed probably a month or maybe 6 weeks. So we're securing the new distribution that we wanted to get and that we were getting anyway as a result of our previous negotiations. The best example is our Pink Grapefruit, which we've just launched, starting in January, February this year. And I think I mentioned in the presentation, that we've already got listings there at Target, at Publix, at Wegmans, at BevMo!, at Spec's, at Total Wine. All these people have bought in this new product. And it's up to us now to make sure that in store, particularly where there's alcohol in the same store, that we're marrying that alongside the tequila. And again, we've got a huge focus on that at the moment because next month is Cinco de Mayo, so it's a huge celebration and a big tequila occasion for the American consumer. So we're making sure that we're co-merchandised in store alongside some of our tequila partners and able to activate the brand accordingly.

And Emma, on the M&A point, I think just to reiterate what we said earlier, the -- we set out our capital allocation policy. Our focus is on areas to up-weight really marketing spend. And we've always talked about, when asked about M&A, that we would never say never. And if opportunities came about, we would take a look at them. But we really aren't signaling here a change in our focus or strategy or approach. It's just part of that framework that, of course, we would consider it if opportunities arose. But look, the key part that we had flagged on capital allocation is that we want to keep cash to be able to invest in really what we perceive to be A&P and up-weighting marketing opportunities in the future.

I would now like to hand the conference over to Oliver Winters for any webcast questions.

Thank you. We only have -- we have a couple of analysts with similar questions. So I'm just going to give you one question that's come up a couple of times around the launch of our new soda range and how that was received by the On- and Off-Trade, obviously, pre-COVID. And if we can give any thoughts on how that rollout would have been impacted by the COVID crisis.

Yes. Look, as I already mentioned in my talk, and I don't have much more to add to the fact that it's a bit of a shame. The spirits occasion is growing fast around Europe and around U.K. and particularly in the U.S. And so we've been working on this range for quite some time, and we're very pleased with it. And the U.K. On-Trade, where the initial launch was due to take place, it was received extremely well. We had hundreds of listings, menu listings, menu focuses on this spirits range. But unfortunately, as we said, that these are all, of course, now delayed as they have shut down these accounts. So we will all be making a collective decision, depending on when they open up again, as to whether this is something that we put our shoulder behind this year. So it's too early to say in the U.K. It also is worth saying that this range was developed with very much the U.S. in mind as well because the vodka spirit, vodka soda movement in the U.S. is just gaining momentum. And we think we've got some fantastic products that will be well received in that market. But as Charles has already pointed out, he's been doing a lot of innovation launches over the last 18 months. And so his innovation pipeline is quite full, but it will be going across the pond to the American market as soon as we feel appropriate.

That's great. I'm conscious of time and other calls or meetings that obviously need to be done today. So with that, we'll hand back to the operator.

Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.