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

Hello, everyone, and welcome to the Fever-Tree Interim Results 2021. My name is Bethany, and I'll be coordinating your call today. [Operator Instructions] I now have the pleasure of handing over to Tim Warrillow, Co-Founder and CEO of Fever-Tree. Tim, over to you.

Thank you, and good morning, everyone, and thank you for joining us to hear about Fever-Tree's performance during the first half of 2021. My name is Tim Warrillow, Co-Founder and CEO of Fever-Tree. I'm joined on the call by Andy Branchflower, CFO; Charles Gibb, all the way from New York, our North American CEO; Ann Hyams, Director of Investor Relations; and Ollie Winters, Head of Communications. So this morning, I will start by reminding you why the long-term opportunity for the business is so compelling as well as giving you a positive update as part of our sustainability agenda before Andy takes you through the financial review. I'll then present our strategic update along with Charles, who will update you on our performance in the U.S. So summary. Group's strong financial position, along with our asset-light flexible business model, has enabled us to act on the front foot and maintain our investment throughout the pandemic. As a result, we remain in a very strong position relative to our competitors around the world. From the support we provided our On-Trade customers during difficult months last year to the focus we place on driving success in the Off-Trade and the investments we continue to make in our brand, products and operations, we demonstrated our confidence in the long-term opportunity for the business and ensured we continue to take advantage of growing consumer interest in making long mixed drinks. Most pleasingly, we've been able to build on our success during 2020, driving further value share gains across all our key markets at the start of 2021, both in the Off-Trade and as the On-Trade reopens. We therefore look ahead optimistically to the future. Our long-term strategy remains unchanged as it continues to be underpinned by the strong global trend to long mixed drinks. As you can see from the chart on this slide, the value of the global spirits market has been growing over the last 5 years with the most premium segments in our top 15 markets growing from just under 1/3 of the spirit category in 2015 to 40% in 2020, significantly outperforming the standard and value segments, a trend which is expected to continue for the foreseeable future. Over the page, even more encouragingly, mix of categories across all our key markets have also been growing and premiumizing. In the U.K., Europe and the U.S., the mix of categories have all grown by over 10% CAGR over the last 2 to 3 years with the premium segments once again outpacing mainstream. This is especially the case in the U.S. and Canada, where the premium mix categories have grown over 3x faster and almost 10x faster than the mainstream categories, respectively, with Fever-Tree making good progress in these markets. Our excitement stems from the fact that Fever-Tree not only sits at the heart of this fast-growing global movement to premium long mixed strength, but is the primary driver of growth of mix of categories across the world. Our first-mover advantage, our strong track record against the competition, our international footprint, tools, range, global brand recognition and relationships are second to none and make us confident that we can continue to drive these trends forward. Slide 6. As I highlighted in our results in March, sustainability remains a key area of focus for the brand, and the first 6 months of the year has seen some exciting developments across the business. Of probably greater significance is the work that is being carried out under our climate branch that will enable us very shortly to confirm that all Fever-Tree products sold in the U.K. are carbon neutral, the first mix of brand to be able to make this statement and part of our wider commitment to become carbon neutral across all our regions by 2025. This commitment has been a real focus for the team over the past 12 to 18 months, working with third-party experts to carry out an in-depth life cycle analysis across our entire range of mixes, setting ourselves stretching, but realistic reduction targets in line with climate science and taking steps in the near term to ensure we are offsetting our impact on the planet as much as possible through investing in nature-based projects. We're very proud of taking this step and look forward to communicating it more widely with our customers and consumers in the coming months. Elsewhere, we continue to make progress under our other branches, such as conservation, where we have planted London's first Tiny Forest and circular economy, where this week, we're one of the founding brands to take part in a reusable packaging initiative with Tesco. These examples are just a small part of the fantastic work our team are doing behind the scenes, which we look forward to sharing with the market in due course. I'll now hand over to Andy, who will take you through a financial review of the year.

Thank you, Tim, and good morning, everyone. Revenue of GBP 141.8 million, growth of 36%, is a very strong result in the first half in which we've continued to make strategic progress whilst navigating ongoing COVID-related disruption and uncertainty. The result benefits from the inclusion of GBP 4.7 million of GDP portfolio brand revenue and some phasing of sales into our European and Rest of the World importers. But even allowing for these factors, it remains a very strong performance, especially given the On-Trade was closed or under restrictions for much of the first half across our regions. Tim and Charles will talk in more detail on that performance and the progress we've made across our regions. But turning the page, I'll first talk through the components of the movement in gross margin. On the left-hand side, we begin with the gross margin we achieved on the Fever-Tree brand in 2020, which was 46.9%. As the bridge clearly demonstrates, whilst FX and changes in sales mix have had a marginal impact, the main driver of the reduction in gross margin has been elevated logistics costs. It has been widely reported, this year has seen increasing levels of disruption to global logistics networks, whether it's sea freight, port congestion or driver availability. Operationally, our focus has been on ensuring continuity of supply against that backdrop and ensuring we can service the strong global demand there is for the brand. Whilst we haven't been immune to disruption and increased cost due to HGV driver availability in the U.K., the main driver of costs in the first half was increased transatlantic shipping rates from the U.K. to the U.S. and increased storage costs as we increased U.S. inventory to mitigate the impact of uncertainty in the availability and lead times of transatlantic freight. The current environment remains extremely challenging, and we anticipate that disruption and elevated costs will continue to impact for the rest of this year and into 2022. Although local production in the U.S. with both East and West Coast bottling lines operational next year, we'll increasingly reduce our exposure to those elevated transatlantic freight costs and will also allow us to reduce inventory levels and associated storage charges. Turning to Slide 10 and moving down the P&L. We're continuing to invest in the brand with marketing spend at 9.9% for Fever-Tree brand revenue with TV advertising campaigns in the U.K. and Spain increased co-promotional activity across regions and up-weighted On-Trade trade spend as the half progressed. Staff and other costs represented 13.9% of group revenue. And whilst this year, we've recruited less, we're consolidating and annualizing the 35 new hires we made in 2020 alongside the addition of the GDP team. The results of these continued investments in the brand and our people was a 34% increase in operating expenses, which alongside the movement in gross margin, meant our EBITDA margins reduced to 20.6%. Turning the page, as we looked to the balance sheet, working capital has increased in the first half of the year. This reflects our strong momentum and a very different set of circumstances compared to the 2020 half year, at which point, we are still in the process of emerging from that initial period of global lockdown. And so this year, we have elevated receivables following a very strong month of sales in June, which included that sell-in to our European and Rest of the World importers. Alongside this, we also have elevated inventories as we've built stock in the U.S. to mitigate the impact of logistics disruption. Operating cash flow conversion reduced to 22% due to the increase in working capital during the first half of the year. Subsequently, we had a GBP 10 million net cash outflow, albeit clearly, the cash position remains strong at GBP 133.2 million. We anticipate the working capital will reduce in the second half, particularly as we begin to bring down inventory levels in the U.S. But overall, it will remain elevated compared to the position at December 2020. Looking forward to 2022 in a more normalized year trading, we'd expect to drive working capital improvements and a return to strong operating cash flow conversion. As a reflection of the continued confidence in our financial position, the Board are recommending an interim dividend of 5.52p per share, is up 2% year-on-year. Turning to Slide 12. We are reiterating the guidance we gave in our July trading update. That increase in revenue guidance to a range of GBP 295 million to GBP 304 million reflects our strong first half performance. It also assumes a continued relaxation of On-Trade restrictions globally through the second half and does not factor in any further rounds of restrictions and lockdowns. In the U.K., we expect an acceleration in the second half as the On-Trade returns. We're pleased with our On-Trade performance since reopening. We're trading at circa 75% to 2019 levels across July and August, and our guidance continues to reflect a gradual recovery of the On-Trade as we proceed through the year. Meanwhile, we expect our Off-Trade performance to continue to moderate as the On-Trade reopens and as we lap the Q4 lockdowns from last year. However, overall, we expect full year Off-Trade revenue to remain ahead of 2019 levels, reflecting the progress we've made over the course of the pandemic. In the U.S., our continued Off-Trade growth, as well as the strong return of the On-Trade, gives us real confidence in continued momentum in the second half in that key growth market. Meanwhile, in Europe and Rest of the World, we expect the phasing benefits from the first half to unwind, whilst we'll also be lapping tough comparatives. However, we remain confident in the underlying momentum in both regions, which underpins the revenue growth ranges we're guiding to for the full year. With regards to margins and logistics disruption, clearly, this remains a very live, and in many ways, unprecedented situation with disruption and cost inflation currently showing no indication of leveling off. There remains a potential that these external factors, which were impacting the whole industry, could intensify as we progress through the year. However, we anticipated the logistics challenges would have a more marked impact in the second half, and we remain comfortable with our full year guidance of a circa 43% gross margin. As we look forward to 2022, we anticipate that the cost environment will remain challenging. We expect the logistic costs will remain elevated whilst we also anticipate product cost increases as we renegotiate our current pricing with production partners and key suppliers. We will then look to mitigate these impacts through price increases in certain markets. We also expect to benefit from a full year of the On-Trade. Finally, local production in the U.S. will increasingly reduce our exposure to those elevated transatlantic freight and U.S. storage costs. These mitigating factors should allow us some marginal improvement in gross margin next year, which will drop down to an EBITDA margin of circa 21% in 2022. Whilst we can't be certain of timings, we are confident that the current disruption to global logistics will recede and with it a recalibration of costs. And we will, of course, be deploying all necessary levers to improve gross margin over the coming years with local production, strong procurement, logistics optimizations and price increases where appropriate. However, our focus remains resolutely on investing for growth and driving the opportunity with a continued conviction that scale in key markets will provide the opportunity to fully optimize those margins in the future.

Thanks, Andy. So turning to our strategic update on Slide 14, starting with the H1 highlights. All our regions delivered strong sales growth in the first half of the year, demonstrating the strength of the brand in our more mature markets and how we continue to gain traction in our growth markets. The most notable strategic tests we have taken over the first 6 months of the year are the launch of our premium soda range in the U.K. On-Trade after their successful launch in the On-Trade last year -- Off-Trade last year, the launch of both Sparkling Lime & Yuzu and Distillers Cola in the U.S. to expand our drinking occasions and elevate popular serve, the execution of our first TV ad in Europe, which we released in Spain and our entry into a brand-new market with the first cases of Fever-Tree sent to the South Korean market. I'll go into more detail on each of these as I talk about each region. But as you can see, we're making great strides across the world with important strategic progress in every market. So turning the page to the U.K. We delivered a good Off-Trade performance in the U.K., generating GBP 35.8 million revenue through this channel, which is flat year-on-year and an encouraging performance considering last year included the benefits of stockpiling and elevated sales as we entered the first lockdown. The last 18 months have seen a considerable increase in at-home consumption of both spirits and mixes. The spirit category grew strongly at retail last year and has continued this strength into 2021, growing by 7.6% in the first 6 months of the year. The growth of the mix and market is being driven by both frequency of purchase and higher basket sizes with Fever-Tree attracting more buyers to the brand by purchasing larger quantities more often ahead of the mixer category. We are extending our #1 position at U.K. retail, ending the second quarter with a 38.5% value share, which is about 1% higher than our share at the same time last year. In addition, our sales value has increased by almost 20% over the last 2 years, well ahead as all other premium mixes have declined by around 12% over the same period. Just as pleasingly, the chart in the bottom right-hand corner of the slide highlights the strength of Fever-Tree's Off-Trade performance during the first half of '21 versus '20 with the mixer category, Schweppes and own label declining slightly as they lap the strong stockpiling months in 2020. Conversely, Fever-Tree has continued to grow and drive the premiumization of the total category. Over the page. As we all know, the On-Trade remained clear from a substantial part of the period, gradually reopening from mid-April onwards with some restrictions still in place until mid-July. And despite being subject to restrictions for longer than during H1 '20, Fever-Tree's On-Trade revenues increased by 16% during the first half of the year, a positive performance as the channel starts to recover. As the On-Trade is reopened, as expected, we saw initial signs of pent-up demand in the market with around half of consumers returning immediately as restrictions were lifted, followed by a more gradual return to normality as the period progressed and since the period end. Encouragingly, Fever-Tree has increased its value share over the last 2 years. While Schweppes and Britvic have slightly lost share as consumers become more discerning about the quality and type of mixer they are served in the On-Trade. We have driven these results by strengthening our relationships across our accounts when the On-Trade was closed and being incredibly proactive as the channel has reopened, targeting summer staycation hotspots and large sporting events such as Royal and cricket test matches. Over the page. For the final slide on the U.K.'s performance, I wanted to take you through the exciting new mixes we have been creating and the initial success we've gained as they've been launched. Firstly, our premium soda range, which we launched in the Off-Trade last year, followed by their On-Trade launch during the first half of '21. The aim of this launch has been to expand premium mixing beyond the Gin & Tonic, using versatile liquids to elevate and simplify the Spritz serve. There are also all low-calorie options, which enables consumers to create lighter, longer mix strengths. After the initial positive response in the Off-Trade with new listings secured and very encouraging rate of sale performance across retailers, we launched the soda range in the On-Trade this spring with the marketing campaign Summer of the Spritz. Early signs in both channels have been very encouraging with new, often younger consumers being attracted to the brand and substantial interest in spirit partners who are especially keen to target the large vodka category in the U.K. Our second significant launch over the last 12 months has been our sweet Rhubarb & Raspberry Tonic, which aims to capitalize on the growing trend towards both flavor gins and pink drinks, which have become prominent over the last few years, as well as providing a sweeter twist to elevate a standard Gin & Tonic serve. We supported the launch of this new tonic with a multichannel marketing campaign, including co-promotions with spirit partners at retail, delivering very positive initial results as consumers responded well to the taste and messaging of the liquid. So like the soda range, our Rhubarb & Raspberry Tonic is attracting new, younger consumers to the brand and exciting the category, becoming one of our fastest-selling flavors at a number of large retailers. As I hope you've seen from these last few slides, we continue to be very confident in the long-term success of the U.K. business. We remain the market-leading premium brand by a significant margin in both the On- and Off-Trade, supported by the wider market trends towards long mixed drinks and continue to focus on and invest in innovation, creating new products to excite and elevate popular serves as well as attracting new consumers to the brand. The emphasis we place on our relationships with our customers and spirit partners, alongside the fantastic work our marketing team does across retail, online and in the On-Trade, puts us in an unrivaled position with the U.K. market going forward. I'll now hand over to Charles to take you through our progress in the U.S.

Good morning, everybody. I'm delighted to be speaking to you from New York this morning, where the team here have continued to deliver a strong performance in the first half of 2021, following on from the great growth achieved during 2020. The brand continues to go from strength to strength in the U.S., delivering GBP 36.2 million of revenue in the first half of the year, an increase of 32% compared to the first half of 2020 and more importantly, plus 42% on a U.S. dollar constant currency basis. We've seen continued growth in both premium spirits and premium mixes, giving us great confidence in the acceleration of premium long mixed drinks and Fever-Tree's prospects, therefore, within this. As you can see from the chart on the left-hand side of this slide, the spirit's market has grown by over 30% from 2015 to 2020 and the premium segment by 11% in 2020 alone. Alongside this, premium mixes are growing 5x faster than the mainstream segment with Fever-Tree leading and driving this significant growth. Fever-Tree remains the largest premium mixer brand in the U.S., and we've now established a strong #2 position in the total tonic water market behind Schweppes and #2 behind Goslings in the total ginger beer market. In both cases, we are growing faster than the market leader with the brand having established tonic or ginger beer leadership in a number of key cities, including San Francisco, Dallas, New York, Phoenix and Washington, D.C. We were the #1 value contributor to the total ginger beer and tonic water markets, demonstrating the growing strength of the brand and our important role in driving long mixed drinking trends. Our recent success can be attributed to a number of factors, with 3 important aspects of our growth highlighted on the right-hand side of the slide. Firstly, we have a significantly higher rate of sale on shelf than other mix of brands, incentivizing our customers to, therefore, give us more shelf space and expand our range; secondly, we're increasing our household penetration ahead of our competitors, which means that Fever-Tree is appearing in more consumers' fridges than ever before; and thirdly, we continue to add new distribution, both in terms of number of accounts as well as, importantly, the depth within each account, including space on shelf and expanding into new flavors and new formats. Moving on to Slide 19. As you'll be aware, our U.S. strategy is designed to tackle a variety of drinking occasions through our 4 drink strategy, and this slide illustrates how successful we've been in each one of these key categories over the last couple of years. In addition, we're now seeding Distillers Cola as a fifth drink with focus in high-end, On-Trade and liquor stores, targeted rum and bourbon drinking occasions. We continue to grow in our strongholds, tonic water and ginger beer, where we've increased our sales value by 90% and 100%, respectively, over the last 2 years. And whilst the ginger ale market is largely mainstream, we've managed to grow our sales by almost 70% in the last 2 years. Most significantly, our low-calorie sparkling offerings, Pink Grapefruit and Lime & Yuzu have been specifically targeted at tequila and vodka occasions and now represent a significant third pillar for the business going forward. To support, enhance and accelerate this, we've continued our strong investment in targeted digital media campaigns with millions more views of our brand story videos alongside our how-to series, which are driving consumers to stores to trial and purchase the brand. In addition, the strength of our relationships with our spirits partners means that we're now featured in TV advertising alongside Jim Beam, with our Ginger Ale, Bombay with our tonics range and Gray Goose with the Spritz occasion, most notably, recently during the U.S. Open. Moving to Slide 20. The On-Trade started to open state by state throughout the second quarter of the year with strong initial sales as consumers were excited to get back out and the vaccine rollout program advance quickly, instilling consumer confidence. Consequently, in the 12 weeks to the end of June, On-Trade sales were 26% higher than our pre-COVID levels. Encouragingly, consumers have been choosing spirits over wine and beer with vodka and tequila gaining share ahead of other categories. This is particularly pleasing to see as our 2 new sparkling launches, Pink Grapefruit and Lime & Yuzu have been specifically created to mix with these 2 spirits. It's been the success of these new products, the growing strength of the Fever-Tree brand last year in the Off-Trade as well as the refusal to furlough any of our On-Trade team, despite the forced closures in this channel, which have contributed to our success in the first half of 2021. As you can see from the chart on the right-hand side, our sales started to surpass pre-COVID levels by April, accelerating towards the end of the period and continuing in July and August. We've also managed to secure new distribution on the On-Trade with notable new agreements with [ National Gastrobar ], Bar Louie, Hilton Luxury Hotels, IHG as well as multiple other restaurant bar and casino accounts across the country. Moving on and looking at -- specifically looking at Sparkling Pink Grapefruit. Innovating and creating new exciting products is one of the cornerstones of the brand. So I thought it was worth taking you through our journey to create the Sparkling Pink Grapefruit, which we launched in March 2020 during the worst of the pandemic. It's quickly become our most successful new product launch in the U.S., getting significant attention from retailers and consumers and now making a significant contribution to our sales growth. Sparkling Pink Grapefruit was crafted to pair with tequila for the perfect lower-calorie Paloma, leveraging the exceptional growth and premiumization of the spirit category. It was launched using a prominent social media and digital campaign alongside retail displays, tequila brand partnerships and more recently, featuring on bespoke menus we've created within the On-Trade. Just over a year after we first launched it, we're already driving over 20% of grapefruit category growth through the elevation of mixing occasions in both tequila and vodka. This has been achieved through a combination of strong distribution gains in large grocery chains as well as a high rate of sale once the product is on shelf, in some cases, matching our ginger beer velocity. The successful launch of the low-calorie, versatile mix that gives us more confidence in the brand as we continue to expand in the U.S. market, capitalizing on the local market trends and transforming the mixer category. As I trust you can see from the last few slides, not only are we delivering a strong performance across all mixer categories, but long-term trends continue to work in our favor with spirits taking share from wine and beer and increasing appreciation of authenticity, quality, premium drinks as well as low-calorie drinking. Consequently, we still see a long runway ahead and remain incredibly excited about realizing the significant opportunity that this market holds. Thank you very much for your time. I'll now hand back to Tim to talk about Europe and the Rest of the World.

Thanks, Charles. So turning to Slide 22 and Europe. We had an incredibly strong start to the year. Our revenue for the first half was GBP 41.3 million, an increase of 102% year-on-year or 79%, excluding the revenue contribution of GDP's portfolio brands. And while this excellent performance is a testament to the progress we've made in both the Off- and On-Trade channels, it's also important to note that our underlying growth was closer to 30%, whilst the impact of imported stock builds and weak comparators are taken into account. This is clearly still a very strong performance, driven by our increasing brand strength and presence at retail across the region as well as good initial trading in the On-Trade as it started to reopen towards the end of the period. And what's most pleasing over the last couple of years is the value share gain Fever-Tree has achieved within the European mixer category as the chart on the right-hand side demonstrates. Fever-Tree's value share has grown to be around 15% of the mixed category at European retail whereas, over the last 2 years, the brand has contributed to almost 30% of the category's growth with most brands losing share. Over the page, Slide 23. This slide also highlights our strong growth across Europe in all of our key markets, increasing our confidence and optimism about the medium- and long-term opportunity in this region. Importantly, the trend along mixed strength is growing in Europe with the retail mixer category growing by 10% in the last year. Fever-Tree far outpaced the category, growing 2.5x faster as well as increasing our value share by 2 percentage points to reach 15% value share of all mixes at European retail, comfortably maintaining our position as largest premium mixer by value across the region. This puts us in a very strong position, not only to capitalize on the supportive underlying trends, but also to drive these further by premiumizing the mixer category and partnering with spirit brands to promote specific serves. In addition, as you can see from the chart at the bottom of the slide, we're growing our market share in all of our key markets, increasing our presence across the region with an especially strong value share growth in Denmark, Switzerland and France over the last year, demonstrating the significant amount of white space in our core next wave and earlier-stage markets. Over the page, I wanted to use the final slide on Europe to highlight some of the great co-promotions we've executed to drive the success of multiple serves across different markets as well as the success we've had after launching our Rhubarb & Raspberry Tonic in various markets during the first half of the year. In our core markets, where we have a strong market position in established tonic categories, we have the opportunity to drive growth beyond the Gin & Tonic with co-promotions such as vodka and soda Smirnoff and our premium Mexican Lime & Yuzu Soda. This not only expands our mixer arrange into new drinking occasions, but also meets consumers' demand for lighter drinking options and elevates the popular vodka Spritz serve. In our next wave markets where significant white space still exists, our focus is both continuing to drive the growth in Gin & Tonic as well as taking advantage of popular dark spirit serves, which pair well with our ginger beer and ginger ale mixes. As a result, our co-promotions in these markets are including executions with Bombay Sapphire alongside our light tonic in Germany as well as the successful cooperation with Jack Daniel's whiskey in Italy. I'm also excited to share that we have completed our first TV ad campaign in Europe, executing a spring campaign in Spain. The 32nd ad was based around our 3-quarter message, with a focus on our ingredients, provenance and high quality. It's one of our strong digital PR campaign. It has had some great initial results, growing our prompted awareness by 44% for our target audience. And then finally, in our earlier-stage markets, where we're focused on establishing the optimal conditions for growth as long mixed drinks start to gain popularity, we've looked at co-promotions with gin brands to establish and elevate the Gin & Tonic serve, such as the work we've done with Tanqueray in Sweden, alongside our sweet Rhubarb & Raspberry Tonic. But it's not just Sweden, where we've launched new tonic, we have had great early success promoting this sweeter innovative gin and tonic across the region with activations using pink vibrant displays at retail and initial sales exceeding our expectations. We've already managed to build significant distribution at retail across Europe and look forward to driving the growth of this mixer going forward alongside other mixers, which expand our occasions and maintain excitement in the category. So over the page. So our last region is Rest of the World, where we've had another strong performance, increasing our revenue by 73% year-on-year to deliver total revenues of GBP 14 million for the region, 80% of which comes from Australia and Canada. And while this number was slightly flattered by a degree of stock building ahead of our sales, our underlying sales are strong, growing at around 40%. In both Australia and Canada, which I'll go into more detail on the following slide, we continue to drive premiumization in the mix category and remain the premium category leader with a particularly strong presence in tonics. In Asia, we continue to focus on our key city strategy and have entered the South Korean market first time with tonic to pair with their local spirit, soju. So Slide 26. In Canada, the mix of market continues to grow and premiumize at pace. The premium segment grew by over 30% in the first half of the year, almost 5x faster than the total market growth. Fever-Tree is driving growth across all 4 key mixer categories, which combined have delivered a retail sales growth of 150% for the brand over the last 2 years, through a combination of expanding distribution, increased rate of sale on the shelf, the introduction of new formats and multichannel marketing to drive consumer engagement. Our tonic sales have been particularly strong over the last 12 months. We're now the #1 tonic brand with 1/3 of the market share by value at retail ahead of both Schweppes and Canada Dry. In Australia, long mixed drinks continue to gain popularity and premiumize, led by the Gin & Tonic, with the total mix of market growing by 4% in the first half of the year, the premium segment growing at 28% and premium tonics growing at 34%. Future continues to be the clear premium mix category leader and is responsible for driving growth within this segment, especially within the tonic category where we grew by 48% in the first half of the year, well ahead of the category. To build on the success of tonic and to cater consumer preferences for lighter drinks, we launched our refreshingly light Mediterranean Tonic in 2 new formats, both 500 mL bottles and multi-pack cans, with the aim of attracting new consumers and creating new occasions, both of which increased our brand presence in the market. While the On-Trade had a positive start to the year in Australia with little to no restrictions throughout the period, enabling us to organize the large Gin & Tonic festival in Sydney with over 3,000 visitors, they have since gone into a period of strict lockdowns across the country, which refocuses our efforts in the Off-Trade for the second half of the year. Our priority in both of these existing markets remains to drive the momentum in premium mixer segments, drive incremental distribution across all channels and increase our range and formats to appeal to a broader set of consumers. So coming to our last slide, Slide 27. I'd like to finish with the same important message that I started with this morning. Fever-Tree's strong business model allowed us to act on the front foot throughout the pandemic, taking proactive steps to mitigate against short-term impacts as well as continuing to take advantage of the long-term supportive trends, which have been accelerating around the world. And whilst COVID impacts and global supply chain disruption continue, our diversified channel mix, our strong financial position and operational flexibility ensures that we are in a strong position to navigate the current cost pressures and logistical disruption impacting the entire industry. Our long-term strategy remains unchanged and continues to be underpinned by a number of well-established long-term global trends, namely the strong growth in premium spirits, our consumers increasingly choosing spirits ahead of beer and wine and consumers' increasing desire to drink this both long and mixed. I continue to be proud of our fantastic team and our ability and willingness to invest ahead in terms of people, route to market, portfolio and marketing. We remain focused on the significant long-term opportunity for the business, which is increasingly being supported by our retail and spirit partners, and I have great confidence that we will emerge from this period of global disruption in a very strong position. So thank you for listening this morning, and we are now happy to answer your questions.

[Operator Instructions] The first question comes from Edward Mundy of Jefferies.

A couple of questions from me, please. The first one, perhaps for Tim on the U.K. There's clearly been a lot of disruption these last 18 months from a channel perspective, but your Off-Trade performance is still going well. Is there any structural reason why you can't get back to the high watermark of GBP 130 million worth of sales in the U.K., in particular, as you're broadening your offering with premium sodas? And I guess as part of that question, assuming the vaccine rollout program is effective and we don't get further lockdowns, could this take place in 2022? Second question is perhaps for Andy. You're guiding for marginal margin improvement in 2022. As you think over the next, I don't know, 3 to 5 years, what do you think is a reasonable medium-term margin expectation for the business as we exit the pandemic. And then the third one, perhaps, for Charles. Perhaps you could give us a bit of a split as to what's driving the growth by category between tonic, ginger and soda within the U.S.? And what are you most excited about?

Well, Ed, Tim here. Let me answer your first one. I'll keep it short because of the number of questions, but in short, no. There is no reason that I can foresee that we couldn't reach that, and yes, we could very well reach that next year. I mean time will tell, but you make the point is that, obviously, our tonic business continues to grow very strongly. Our market position grows. This Gin & Tonic category is still growing, but what's exciting is these new products that sit alongside it and these new spirit and mixer opportunities that we're opening up and are also being pushed heavily by the spirit brands. So for all those reasons, I think we can certainly get back to that. And in time, we believe, notably exceed it.

And Ed, on your second point, I think as we look out beyond 2022. As I mentioned in the presentation that there's levers that continue to drive margin improvement beyond FY '22 in terms of significantly local production, particularly in the U.S. and scaling through that local production, optimizing logistics. Again, with U.S. production, we take away that significant transatlantic logistics step. And then -- and so I think when we then think about operational costs, we're continuing to invest to grow. And so we're not necessarily anticipating significant operational gearing over the coming years. So what that amounts to is a gradual recovery in EBITDA margins. We've got 100 basis points expected for next year, and we continue to see that pattern up 100 basis points to 200 basis points per year over the coming years. I still think when we look to the longer term, we're comfortable with a sort of 50%, 30% margin split at scale. But in the near term, we're really focused on driving the significant growth opportunity ahead. And so we don't anticipate returning to that, let's say, within 3 years.

And Ed, I mean, asking me to choose between tonic, ginger beer and the sodas is like asking somebody to choose their favorite child. I -- look, I'm excited by all three. I think tonic remains a very dynamic, very exciting category, I think, particularly with the flavors. Ginger beer is really a staple and becoming a real powerhouse. The sodas really excite me because of their alignment against tequilas and vodka, particularly tequila at the moment because that category is just on fire in the U.S. I think the bit that excites me the most is the lower calorie aspect of all of these, if we look across our portfolio to our lower calorie products that are growing faster, whether that's tonic, ginger beer and then obviously, of course, within the soda. I think, most of all, it's -- for me, it's the diversity of the portfolio that means that no matter what -- which spirits partner we're talking to or whether we're talking to a bartender or a buyer, it's the diversity of the portfolio and the fact that we're able to tackle so many opportunities that excites me the most. And of course, with our latest creation, the Distillers Cola, that's an exciting new innovation, albeit very, very limited at this stage.

Our next question comes from Jemima Benstead of Citi.

My first question sort of picks up on one of Ed's around those input cost pressures into 2022. I appreciate there's still a lot of moving parts, but can you talk about the ways in which you can mitigate higher inflation in your business? I'm thinking about your pricing power, when and how often you have negotiations with retailers and how you might act in the On-Trade as well. It would be great to have a bit more detail there. And then my second question, I'm just wondering if you can quantify a little bit more around the U.S. local bottling benefit. If you can help us understand how this can actually benefit margins in the medium term. And then my final question, again just on that U.K. market. It would be great to hear a little bit more about what you think is really driving your market share gains in the U.K. I'm wondering how important those innovations are for this or if you're seeing broad-based growth across your brands there.

Sure. Yes, I'll pick up on your first couple of questions there. Look, as we said, we are anticipating some input cost pressure on product costs. We're negotiating those currently. Understand I won't be talking about the percentages we're anticipating, but we're in a very strong negotiation position with our bottlers, our glass providers and our raw material suppliers as well. When it comes to mitigation, look, we're expecting a full year of the On-Trade next year. And really linking to your second part of your question, U.S. local bottling will alleviate a considerable amount of what's been driving the margin dilution this year because we removed that transatlantic freight charge, and we also allow ourselves to optimize our U.S. stock holdings. Now those 2 have been significantly elevated this year. And when we think about our full year guidance this year, we anticipate about 250 basis points of margin dilution coming through logistics, about 2/3 of that is coming from that U.S. line. So with U.S. production up and running, and we anticipate next year, once the East Coast is fully operational, aiming to bottle about 80% of our glass requirements locally that will alleviate that margin dilution we've seen very quickly. So there to say the On-Trade coming back and local U.S. production will allow us to mitigate against those input cost pressures. Finally, on price, we have -- we are looking closely at price across all of our regions. I think we'd caveat that in the U.S., having just repositioned our pricing architecture last year. That's something we're minded not to move. It's working incredibly well as you can see from these results, but when we look at the U.K., pre-COVID, we were in a pattern every year. We're putting through increases in the On-Trade, and that's something we'll be looking at very closely for next year. And also in the Off-Trade, we believe there's opportunity there as well. And we're looking also at our European market. So we do believe across multiple markets, there's the opportunity to pass through some of those input cost pressures through price as well. But alongside, as I said, the local bottling in the U.S., that's what gives us confidence that we can, despite these ongoing pressures, still drive some improvement in gross margin next year.

And then Tim here. Just a sort of quick answer to your question about the U.K. and what's driving this growth. Look, I mean, it comes down to product quality, number one. This is what we see in all our research, is how our consumers value the taste and quality of our product. And that leads to this fantastic rate of sale growth that we're seeing in the U.K. and that gives, obviously, our retailers great confidence when it comes to giving us new shelf space, and the On-Trade are very clear about the fact that having the Fever-Tree product range helps them drive their mixed drink sales. So that gives us greater opportunity with them. And the points that I've laid out is, what is -- it's very exciting. We've got this fantastic position in the world of Gin & Tonic, where all the spirit partners wanted push and promote our brand alongside theirs, but so are the spirit partners now in these other spirit categories that we're developing these products for. So the vodka category is big in the U.K., and the vodka categories looked on in great envy at the way gin has been able to premiumize. So they are keen to work with us to help develop that. And we're seeing growth with our gingers, which is reflective of the growth that's happening in the dark spirit categories as well in the U.K., and we see real opportunity and future opportunity there. And this, of course, is really all underpinned by the fact that spirits versus beer and wine is growing and growing. It is a category that young consumers are coming into. It's more exciting. It's cooler. It's more in vogue. So there's all of this growth and energy around the spirits category, and we're very well positioned to make the most of it. So it's exciting times ahead. It's making me thirsty just talking about it. Shame it's at this time of the morning.

Our next question comes from Mitch Collett of Deutsche Bank.

I've got 3 questions, please. So first of all, on the U.K. On-Trade, I think you made the comment that there was a bit of pent-up demand to begin with, and then it got a bit softer. I wondered if you had any perspectives on maybe why it's softening a touch. And you also said within the U.K. On-Trade commentary that it's up versus 2020 despite a greater level of shutdown. And I wondered if you had any views on why it was up more -- why it was up when there was more shutdown? I guess, the months of the shutdown probably paid part, but I'd be interested in your perspective there. And you also said that specific locations and demographics are doing well. So which locations and which demographics are you seeing better demand from? And then 2 further non-U.K.-related questions. One is just, can you give us a timing on when East Coast production is likely to go live in the U.S.? And on Distillers Cola, which you launched in June, can you give us some color on how you think that's going to compete with obviously the very established brands of cola products?

Of course. Let me take your U.K. On-Trade ones first. And sort of quick answer to one of your questions, no, you're right about the 2020 versus '21, is it was the months of lockdown that were relevant as to why '21 has performed better. But the point about the pent-up demand, absolutely. Look, of course, we were all fueled with excitement when Freedom Day came, and we were finally allowed to go out to the pub. So that was where we saw some of this pent-up demand. But what we've seen since is, in truth, what we forecasted and predicted and actually is absolutely in line with CGA, who produced the On-Trade data. And they're showing that it is sort of gradually picking up, and we saw actually in August some very strong sales for us in the On-Trade, which is reflective of the way it is picking up. And obviously, what's behind that is, there is a bit of hesitancy, particularly amongst an older age group to return in the same numbers with the same frequencies they did before, but that is -- that's developing. But actually, it's really partly because the city centers have been very quiet, and that's because, obviously, tourism is down. And at the same time, people haven't been in their offices to the same degree. But if my cycle in this morning was anything to go by, I went alongside an enormous traffic jam of people coming in. So I think people are returning to the office now in greater numbers than ever, and I'm also pretty optimistic that this will start to improve notably. And then finally, I think you asked about some hotspots, and that was really the sort of staycation holiday areas and the South Coast being the most notable. And I have to say, I think as a business, we did a fantastic job. Our team clearly predicted this and so we did all these takeovers of holiday hotspot areas, Cornwall, the South Coast, Brighton. It was awash with Fever-Tree umbrellas, Fever-Tree Gin & Tonic and Spritz menus. And so we really benefited from that.

Yes. And in terms of timing of U.S. bottling, the East Coast line is scheduled to be commissioned in Q4 this year and then would be allowing ourselves probably some time to ramp up in Q1 next year, and then we should be fully operational from Q2 onwards. Obviously, we'll be aiming to do it sooner, but we're still having to do this, a lot of this remotely from the U.K. So it just takes a little longer as we learn with the West Coast. But as I say, we'd be very confident from Q2 onwards, having both East and West Coast production fully underpinning our U.S. requirements.

And then finally, the last question about Distillers Cola. This -- we've launched this specifically to target bourbon and rum occasions in particular, and as a result, we're going after the On-Trade business. We're going after the liquor store business. We're going after high-end accounts and high-end environments because really what we want to do is to seed this. We're going after the big, the broad, the largest slug of the cola market, which we know is consumed as a soft drink. What we're after here is the high-end mixing occasion, where consumers are drinking fantastic spirits, where they're aged bourbon and aged rums, and where we believe we've got a real right to win because of the fantastic locally sourced ingredients, including sort of Caribbean kola nuts within the 11 ingredients that are -- that sit within our Distillers Cola. And that gives us, if you like, a story to tell that is really balanced exactly alongside those premium bourbons and premium rums. And at this stage, we're seeding it. We're putting it into a limited number of cities, into a limited number of accounts and gaining the learnings and then rolling out very slowly over time.

Our next question comes from Nicola Mallard of Investec.

A couple of questions from me. Just on the margin guidance, Andy, just to sort of put a few numbers on the sort of headlines that you've provided. I mean you've talked about hopefully channel mix, assuming, obviously, hopefully, that COVID is not a present factor in 2022. Can we assume that the channel mix, that 200 bps that we saw, sort of disappear in 2020, that all comes back. And then also putting some maths around your logistics as well if you've got 2/3 of the 250, let's say, 200 bps is the U.S. logistics cost, and that's absent for the second half. So we've got 300 bps coming back in growth. And then obviously, we need to make an assumption around raw materials. If those are sort of the bigger number movements is the first question. Second question is, there was something mentioned for Tesco in the U.K., reusable bottle, not a recyclable bottle. I just wondered if you could share more about that. How do we reuse it?

Sure. Yes, Nicola, on your first point, I'm sort of -- we're not quite giving a sort of specific margin bridge for FY '22 at this point, and as we mentioned, we are expecting some drags in terms of input cost increases and reflecting the fact that underlying those logistics costs are going to stay elevated. But yes, look, in terms of U.K. channel mix, we expect to get some more of that back in -- clearly, in the second half of this year. So actually, when we look to next year, we won't be getting -- we're anticipating, frankly, more like about 50 basis points of improvement from U.K. channel mix coming through next year. And then in terms of the 2/3 of the 250 this year, we won't get all of it back just because of the phasing of that East Coast production. Like I said, it's going to be kind of ramping up in Q1. And also, we are intending to retain 20% of our overall bottling requirements in the U.K. as a contingency. So -- but we'd hope to get the lion's share of that 2/3 back next year, if that helps with the bridge.

And Nicola, with regards to our Loop and Tesco partnership, actually, Ollie is here and he's the expert because he's been leading this. So...

Nicola, just on that, yes, you're right. So it's a small -- I would caveat, it's a small-scale trial that Tesco are putting in across about 10 or 11 stores from this week. It's about a returnable scheme. So we've got our Indian Tonic and our Med Tonic in the trial. And it's about the consumer purchase it and adds on a 20p deposit, which then they get returned to them as they return the bottle to store or through the Loop system. That then gets taken away, cleaned and refilled and put back on the shelf. So it's not about recyclability. Obviously, with our glass bottles, they are infinitely recyclable, but this is a sort of returnable and reusable scheme that is a small-scale trial that Tesco's and Loop are putting together.

Our final question comes from Damian McNeela of Numis.

Just a couple of quick ones for me. I don't know, Andy, whether you can give us any sort of indication of what next year's raw material input cost inflation looks like, please? And then just also, can you help quantify, from reading the statement, sort of the number of co-promotions seems to have gone up. Can you confirm that? And is there any way of sort of quantifying that and how we should think about that going forwards, please?

Sure. So Damian, on kind of input costs, we have parameters we're working to. We're currently in those negotiations. So -- and look, it really does depend whether we're talking about bottling, glass, canning, ingredients, cargo packaging, some of those lines are subject to -- ahead of inflationary increases. Others, we'd be looking to keep within inflationary increases because it also depends on the status of our contract with those suppliers. So at this point, we're not giving the percentage overall we're expecting to absorb because, clearly, it's just commercially sensitive, but we should be able to -- clearly, we'll be able to give that later in the year, if not ahead of giving full FY '22 guidance.

And Damian, a quick one on the co-promotions. No, you're quite right. I'm glad that's come through, is the fact that the number of co-promotions have increased and also the depth of the co-promotions. When I say depth, I mean, as Charles mentioned, in the U.S., we find ourselves on some above-the-line marketing with 3 different spirit brands. Here in the U.K., we've been doing some fantastic in-depth work with Smirnoff and quite a number of other brands. So what we are seeing, the spirit partners are seeing, retailers are seeing is, how effective this is when you get 2 brands investing together to push and promote the same message. And the shelf space that, that then generates and the rate of sale return that generates is very encouraging. So that's why we've been doing more of it and you can anticipate that more of this will come in the years ahead.

We have one last question from Doriana Russo of HSBC.

I was more interested in the medium-term outlook that management sees for the brand, whether in the U.K. And what would be the main driver to demand post normalization? Let's talk about FY '23 onwards. And also where do they see the most opportunity outside of the U.K., whether it is still in the U.S.? Or there might be opportunity for you to open up a much bigger share of the soft drinks market in the European market, which seems to be accelerating some of them. And my second question would be mostly on the cost. I was wondering if in the transition between U.K. production and U.S. production, if there is any one-off costs that we might take into account? Or whether it is all due to the inflated freight and warehousing costs that you're having? Just wondering if there was any one-off sort of contributor that we should be aware of?

Andy, do you get the first part of that?

So Doriana, your first question is, in the medium term FY '23 onwards, where we believe the drivers of revenue growth will be -- will come from regionally?

Yes. I was just wondering whether the sort of ongoing top line growth that you expect in the different region might be different from what we have seen pre-pandemic.

Yes. Well, look, I know Ed's initial question was about whether we can hope to see good growth in the U.K. going forward to which my answer is, absolutely. And I gave the reasons as to why. So certainly, we think there's growth to come in the U.K., but absolutely. Look at the way this business is growing in the U.S. Charles and his team are doing a fantastic job. When you look at a 2-year stack in the U.S., so triple-digit growth, which is fantastic and is a reflection of the way the brand and the category is growing in that market, and we see lots of potential ahead. But as we do in Europe, as I hope you picked up from our presentation, we've seen triple-digit growth for the first half of this year, and we're seeing growth across the board. So we see lots of opportunity there. And as far as Australia, Canada, we talked about seeding some new markets in Asia as well. So look, the short answer is that we see growth really across all of our regions, and that is clearly what's very exciting for this opportunity that lies ahead.

And Doriana, in terms of your...

Sorry to interrupt because maybe I was a little bit vague in my question. I was just wondering whether whatever revenue expectations that you've got -- you've given for FY '21 could be extrapolated to FY '22. And because, sure enough, some markets will sort of settle to more normalized rates and some others will accelerate. So I was just looking to find -- to get a sense of where do you see sort of long -- medium-term growth expectation lending by region? Is that something that you're prepared to share?

So Doriana, at this point, we're not giving sort of regional growth guidance FY '22 onwards at this point in time. I think like as Tim said, I think the growth opportunity remains broad and across regions. We're not giving specific regional-grade guidance on, for instance, U.S., Europe, et cetera, over the coming years. In terms of your question on P&L, we're not anticipating any one-off P&L hits as we transition from kind of U.K. to U.S. bottling. The way that it will impact the P&L, I suppose, is just around the timing and the phasing of getting that line commissioned and bringing it the East Coast up speed and then obviously, bringing down our U.S. inventory levels. But fundamentally, as I was saying, what it does do is reduce our exposure to what at the moment, a highly elevated transatlantic freight costs. And because of this disruption, the requirement on our side to hold high inventory levels in the U.S., that is where we will see some immediate benefits as that phases in through next year. In the longer term then, we'll be looking to scale through that local U.S. bottler and drive further improvements in margin over the longer term.

This concludes today's Q&A. So I will hand the call back to Tim to conclude.

Well, simply to say, thank you very much for everyone for listening. I hope we've done a reasonable job in informing you of the great progress we've made and answered your questions, but thanks again.

This concludes today's conference call. Thank you for joining. You may now disconnect your lines.