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

Hello, and welcome to the Fever-Tree Full Year 2022 Results Presentation Call. My name is Alex. I'll be coordinating the call today. [Operator Instructions] I'll now hand over to your host, Tim Warrillow, Co-Founder and CEO of Fever-Tree. Please go ahead.

Thank you, and good morning, everyone, and thank you for joining us to hear about Fever-Tree's performance during 2022. My name is Tim Warrillow, Co-Founder and CEO of Fever-Tree. And I'm joined on the call by Andy Branchflower, CFO; Charles Gibb, our North American CEO; and Ann Hyams, our Director of Investor Relations. So this morning, I'd like to start by highlighting some of the key points that I hope you'll take away from the presentation before taking a step back to remind you of the unique formula that's driven Fever-Tree's success since IPO and what the brand has achieved in our stronghold markets and importantly, why we're still at an early stage in the global opportunity. Following this, Andy will take you through the financial review before I present the regional strategic update for '22. So over the page. Firstly and crucially, the group continues to grow strongly, driven by our international markets as we extend our presence and distribution across the world with our carbonated mixes. We've also made great strides in exploring and launching new products in adjacent categories with the potential to drive incremental growth, both in the U.K. and further afield. And once we made important strategic progress during '22, the macro backdrop has remained uncertain, resulting in gross margin pressure on the business. Our team has and continue to be very focused on mitigating the inflationary and logistic cost headwinds we continue to face. And despite these headwinds, we have remained absolutely focused on the long-term opportunity and we, therefore, continue to invest in the brand through marketing, product development and exploring significant new adjacencies. Before we get into the main part of the presentation, I'd like to take a moment to set out why we remain so confident in the opportunity ahead. So over the page. If I step back and look at what this business has achieved over the last 20 years, I'm incredibly proud of what's been accomplished. Future is the clear #1 premium mixer brand globally, creating the premium category from scratch and revolutionizing drinking habits all over the world from the U.K. to as far off as Australia. Our success to date has not been achieved by accident that through a well-thought-out strategic blueprint as outlined on this slide. The cornerstone of the brand is the quality and breadth of our products. No other brand goes to the lengths we do to source the very best ingredients from around the world. And no other brand has the breadth of the portfolio we have, ensuring we have the right products for the right trends in the right markets. The cornerstone of distribution strategy is that we set out to recruit loyal, lifetime consumers. We do this by initially positioning the brand solely in the high end on- and off-trade and engage first and foremost with opinion formers in each market, be the bartenders, chefs and drinks [indiscernible], winning their endorsement and driving brand awareness through word of mouth, the most valuable form of consumer recruitment. This careful quality positioning allows us to establish a premium but accessible price point, which in turn delivers superior margins for all our customers throughout the chain, creating a virtuous cycle of enhanced margin and growth. And only once we have started to drive category growth, we've broadened our distribution footprint, always ensuring rate of sale drives further distribution gains. And finally, only when we've well-established distribution, do we increase our marketing spend. All these factors combined with our first-mover advantage across the world creates a very significant barrier to the competition which has been demonstrated by the now hundreds of copycat brands, big and small, that have come and largely gone over the years, leaving us with a market leadership position, which now stands at over 15x the size of our nearest premium LIBOR and indeed the only mix of brands, premium or mainstream with a global footprint and single ownership which means we're the preeminent partner of choice for the global spirit brands. However, just as importantly, the business model ensures we generate strong cash flow, which enables us to keep investing behind and focus on the long-term opportunity, especially in our next wave markets as well as giving us optionality to retain cash to shareholders alongside growing the business. As a result of our blueprint, Fever-Tree now has a unique position at the center of a number of strong global trends, which are laid out on the right-hand side of this slide from the premiumization of spirits, and their growth ahead of wine and beer to consumer preferences for quality ingredients and easy-to-make cocktails. So over the page. The U.K. is the best example of where we have executed against our strategic blueprint. Fever-Tree has not only grown its market share from 5% in 2014 to over 40% in '22, but we have driven the growth of the entire mix category, which has almost doubled over the same time period. Beyond the U.K., the U.S. market presents the most significant opportunity for Fever-Tree in the near term. The brand has come a long way over the last few years since we took control of the business and the building blocks are now firmly in place. And as we did in the U.K., our focus on building the brand's reputation with consumers and the trade is resulting in driving category growth and premiumization. We currently only have about 5% value share of the total U.S. mix of category, which is equivalent to our show in the U.K. back in 2014, highlighting the runway we believe we have in this market. Next page. This is why we remain so excited as a business because Fever-Tree is still early on in a significant growth journey with an ever-lengthening runway ahead. The combination of our track record of success and the supportive macro trends, alongside the white space we can see across a number of markets around the world, gives us confidence and size of the opportunity ahead for the brand. In our stronghold markets, such as the U.K., Belgium and Denmark, the brand is not only premiumized but significantly expanded the category. And while we now have a high share in carbonated mixes, we see future growth opportunities beyond our core mixes by leveraging the power of the brand. In our next rate markets, such as the U.S., Canada, Australia, Spain, Italy and France, where we already have a strong footprint and will drive the majority of our growth in the near term, we are using our blueprint to invest behind innovation to induce the right product range at the right price, build credibility and distribution and then increase the brand's awareness. Beyond this, we also see good and extensive opportunities within our white space markets, including Asia and LATAM, where we focus on ensuring we are working with the right partner for the right age and stage of development such as our new partnership with Asahi in Japan. I'll now hand over to Andy to take you through the financial review for '22, but what I hope you have seen from this introduction is that the combination of the brand's achievements to date our unique formula for success, the supportive macro trends and the size of the globe of opportunity make us incredibly confident and excited about the next few years of growth for the business.

Thank you, Tim, and good morning, everyone. So on this first slide, we set out the key financial metrics for 2022. Tim and Charles will talk to the progress we're making across the regions, but I'm going to focus this morning on gross margin, the various impacts we saw in '22, what we're expecting in '23, but then I'll talk through the reasons we're confident of driving margin improvement from 2024 onwards. So turning the page. Firstly, I'll walk through the 2022 gross margin bridge. Starting from the left, we drove 270 basis points of margin improvement through pricing, improved U.K. channel mix and FX upside from the strengthening dollar. But as discussed throughout last year, we faced significant inflationary pressures across categories as we enter 2022, which was then exacerbated by the situation in Ukraine and extraordinary levels of inflation in European energy pricing, resulting in surcharges being passed through by our glass suppliers in the second half of the year. On top of this, U.S. port congestion and a delayed ramp-up of our East Coast bottling line resulted in inventory bench points in the U.S., which we alleviated through increased U.K. production and, therefore, continued exposure to Transatlantic Shipping pricing at well over 4x historic levels alongside other disruption costs, such as demurrage charges at the ports and internal stock transfers as we balance inventory between case. And so as a result of these cost headwinds, we ended the year with a 35% gross margin for the Fever-Tree brand. Moving on to 2023. This year, we're taking more widespread pricing actions across markets with a net 5% increase in the U.K. and U.S. and a market-by-market approach in Europe and the Rest of the World. We're continuing to increase U.S. production and reduce exposure to Transatlantic freight costs, including cans, which remain U.K. produced for now, we expect to swing from 1/3 to total U.S. production last year to 2/3 total production in 2023 with 80% of our glass locally produced in the U.S. Alongside this, a further tailwind is provided by reductions in transatlantic freight rates with a 30% decrease in rates secured in Q1. Therefore, pricing and local U.S. production should provide circa 600 basis points of upside. Against this, we continue to face material inflationary headwinds. Outside of glass, we expect circa 12% increases in product costs as particularly U.K. and European suppliers are passing through the impact of increased energy costs alongside other inflationary pressures. But as we flagged in January, the most significant single driver of margin dilution will be glass bottle pricing. We're a glass-led business with 80% of our sales mix in glass bottles and as such, any significant move in glass costs has a material impact on our overall P&L. And this year, we're facing a circa 44% increase in glass costs driven by our U.K. and European glass suppliers. To put this in perspective, just the pass-through of the increased cost of energy to run furnaces is responsible for 350 basis points of our gross margin dilution this year. The rest of the increase relates largely to raw material costs which again are being driven by underlying energy cost increases. The reduction in European energy pricing so far this year has certainly helped, but our glass suppliers average energy price for 2023 remains significantly ahead of current levels due to the effect of hedges placed in 2022, and therefore, any significant benefit from energy price recalibration won't be felt until 2024. And so standing back and reflecting on the movements in gross margin over recent years. The most notable impacts have been inflationary cost pressures, notably on glass and exposure to materially elevated transatlantic freight charges. We're confident that these external factors, which we have been disproportionately exposed to the transitory and beginning to show signs of softening, any sustained recalibration in energy pricing, just as we've seen so far this year, will provide a significant tailwind to 2024 glass costs as well as across other categories. Likewise, we're already seeing a sustained recalibration of global shipping rates and the beginning of a reduction in those transatlantic freight rates. However, clearly, we are not standing still and relying on external factors. We are very focused on the proactive steps that will improve our operational capabilities, increase the resilience of our supply chain and enhance profitability with a focus in four key areas. Firstly, pricing. As we've always stated, we're very careful with our pricing architecture and in our growth markets, we ensure we hit premium at accessible price points as we recruit consumers and build relationships with customers. In our more mature markets, as we've demonstrated in the U.K., our market-leading position and strong premium brand allows us to enhance net price through frontline price increases and promotional optimization. And finally, as we scale in growth markets across Europe and rest of world, we can evolve the route to market, moving from distributor models to subsidiaries, capturing more of the value chain and driving gross margin improvement. Secondly, glass. Whilst we note the benefit of any continued energy price recalibration will immediately compare to 2024 pricing, we're currently running a global tender for our glass volumes for 2024 onwards, which will allow us to work more strategically with a more consolidated supplier base, ensuring glass availability and recapturing and driving economies of scale into our glass pricing. Thirdly, U.S. COGS improvements. Increased U.S. production and the reduced level of supply chain disruption will remove significant costs from our P&L. We plan to have capability for 100% local U.S. production across glass and cans from 2024 and we will then drive economies of scale through our local U.S. production network in a market that clearly has the potential for significant growth. And the recalibration of shipping costs and unwind of port congestion also gives us flexibility to balance production across our U.S. and U.K. production networks to ensure we can deliver against any peaks in demand, whilst delivering the best blended cost of goods for the U.S. market over the coming years as we build towards scale. And finally, we're running a wide-ranging program of projects with a focus on cost management and operational improvements. The projects go within four categories: expansion of our production footprint, essentially moving production closer to our key markets, such as Australia, where we'll be producing locally in 2024. We're working with our key bottling partners to drive longer run length and manage our complexity more effectively. We're driving improvements in logistics efficiency through our network. We have a multitude of procurement projects focused on cost reduction, reduced wastage and technical optimization across raw materials and packaging. And finally, all of the above is underpinned and enabled via programs to invest technology across our global operations with the key elements of this rolling out from Q2 onwards this year. So we are resolutely focused on driving improvements in our operational capabilities because doing so underpins our ability to deliver against the opportunity ahead, and it sets us up to benefit from the economies of scale that we'll follow. And whilst the last few years have certainly taught us to be weary of the macro environment, we're seeing signs of the headwinds that have specifically impacted us so significantly in the last few years starting to soften. But regardless of the external environment, we're confident that the many levers we have to drive margin improvement in 2024 and beyond. Turning the page, moving on the rest of the P&L for a recognizable pattern. And we've once again emphasize that despite the recent gross margin headwinds, we continue to invest in the brand and the team to ensure we're driving the growth opportunity with OpEx increasing to 23% of revenue in 2022. Turning the page to the balance sheet. Working capital increased in 2022, driven by inventory as we built U.S. stock levels. Due to that working capital increase and the reduction in EBITDA margins, operating cash flow conversion decreased 36%. But even after payment of the GBP 50 million special dividend, the balance sheet remains strong with GBP 95 million of cash at year-end. As a reflection of the confidence we have in the business and its prospects for continued cash generation, our total ordinary dividend is increasing by 2% year-on-year. And finally, our guidance for 2023 is unchanged from January. We included here some details on the revenue range broken down by region. We anticipate a return to low single-digit growth in the U.K. with adult [softs] and the recent cocktail mixer launch providing opportunities for incremental growth. We expect U.S. growth to be driven by strong ongoing demand, distribution benefits and new product launches, including our U.S. cocktail mixer range, all alongside the benefit of operational improvements as we lap comparatives impacted by inventory pinch points in 2022. I've spoken in detail on the various factors impacting gross margin this year, but also our confidence in driving improvements from 2024 and beyond. With OpEx at GBP 85 million to GBP 92 million, we're guiding to an EBITDA range of GBP 36 million to GBP 42 million for 2023. With that, I'll pass back to Tim.

Thanks, Andy. I'll now update you on our progress across our broad sustainability agenda before taking through some of our regional specific highlights as we continue to make great strides across the world with important strategic progress in every market. So turning to Slide 17. We continue to make good progress as part of our sustainability agenda with a focus on the climate and community branches of our strategy over the last 12 months. We've now been carbon neutral in the U.K. for over a year and are on track to achieving global carbon neutrality by 2025 with operational changes such as localizing production in the U.S. and Australia expected to contribute to our progress. In addition, we've been taking an in-depth look at the processes involved in making our products throughout the supply chain and have started several initiatives to reduce the impact of these as much as possible including moving to HBO fuel at one of our key suppliers and considering a variety of upgrades relating to insulation lighting efficiency. Our employees continue to support and help to drive our sustainability efforts through various fundraises, mentoring schemes or voluntary. A great example of this is our work with future frontiers to support disadvantaged young people in West London, alongside our work with Earthwatch to support and promote the tiny forest movement across the U.K. and further afield. So over the page and turning first to the U.K. As you can see, spirits are forecast to continue to premiumize with the premium and super premium categories forecast to grow significantly over the next 5 years, supporting the growth of premium long mix strength. Over the last few years, whilst gin has softened since 2019, it remains a very significant and premium category in the U.K. Vodka has been the primary driver of the spirits category who's run also growing quickly from a lower base. Fever-Tree has built an unliable portfolio to cater to a broad range of mix occasions across a number of spirit categories, which is demonstrated on the right-hand side of this slide. This has meant that not only do we remain the mix of brand of choice in the U.K. by substantial margin with around 44% value share of the total mix and market across both the on and off trade but we also command a strong market share across all of the top mixer categories. Our share is materially higher than the next largest competitor in mainstream brand reps and almost 20x larger than the next largest premium brand. Over the page. Both channels continue to recalibrate following the disruption over the last couple of years, which was reflected in our sales growth of 28% in the on-trade as this channel recovered and a decline in the off-trade as we analyze tough comparatives when due to lockdown, consumers are drinking more at home. And whilst there is no question that the Christmas industrial election had a notable impact on our end of year trading, a 2% decline in our total U.K. revenue was disappointing. However, we are confident of returning to growth in '23. Our brand is stronger than ever. We have increasingly diversified portfolio and have launched into new significant adjacent categories. In the on-trade, spirits continue to form strongly, growing ahead of wine and beer and Fever-Tree as the nation's mix of choice continue to increase its value share with around 50% shares in the mixer category, an increase of 2% compared to pre-COVID levels. In the off-trade, Fever-Tree continues to drive volume share gains with just over 14% volume share of the category, up from 12% in 2018, driven by a strong distribution and increasing rate of sale on shelf, a real demonstration of the strength of the brand. Fever-Tree's repetition in the trade and our strong presence across both channels is not only a testament to the quality of the product, but also the investment we've made in marketing the brand and part with our customers and spirit partners to promote different servers. The right-hand side of this slide gives you a small insight and fantastic work our team has done across multiple channels to showcase the brand's credentials, ensure we remain front of mind for customers when they're making purchasing decisions. So Slide 20. Following the announcement of our launch of premium soft drinks last year, I'm delighted to share with you another exciting launch, the Fever-Tree cocktail mixer range. Sales of the cocktail have been accelerating in the U.K. on-trade. And I'm sure you're familiar with all of the popular drinks highlighted on the left-hand side of this slide. However, in a similar way to the carbonated mix category before Fever-Tree, many of the current offerings do not appeal to increasingly sophisticated adult drinkers. So now for the first time, the U.K. consumer be able to enjoy these cocktails using the finest ingredients sourced from all around the world. Moreover, we believe we've been able to revolutionize the simplicity of making these popular cocktails at home, ensuring that all that is required is to add the spirits, thus making a superb quality Margarita, Mejita or Espresso Martini is now as easy as making a G&T, opening up new opportunities for the serving the off-trade and extending the reach of high-quality cocktails across the entree. And it's not just Fever-Tree that believe in this opportunity, but so do the retailers. And as a result, we instantly launched the range into two of the U.K.'s leading retailers as well as into a number of the largest on-trade brands last week. And so I encourage you all to go and try and enjoy a simple, high-quality premium cocktail with your friends and family this spring. I wanted to finish the U.K. section by updating you on our progress with the premium adult soft drink category, which we've demonstrated -- where we've demonstrated the need for quality, sophisticated flavor profiles and low calorie options, which alongside the size of the category presents a significant opportunity for Fever-Tree. After initial encouraging trial results of the major U.K. retail in the first part of the year, we've launched a new 4x250 mill can format specifically catered software implications and have gained around 2,500 new points of distribution of soft drink U.K. retail as a result. Our initial success in the category has encouraged us to invest further in adult soft drinks, increasing our distribution in new compact as well as launching a new 275 ml glass bottle format for the on-trade and adding new flavors to the range, such as our cloudy British Apple with a twist of government, which is just on the shelf at U.K. retail. So as I hope you see from these last few slides, we have made significant strategic progress in the U.K. during '22 and remain the market-leading mix of brand by a significant margin. We strongly believe the opportunities in cocktail mixes and our soft drinks will help pressing even bigger opportunity for the brand in the U.K. as well as further afield, putting us in a stronger position than ever to realize further and future growth. I'll now hand over to Charles to take you through our progress in the U.S.

Thank you, Tim, and good morning. Fever-Tree delivered GBP 95.6 million of revenue in 2022, an increase of 23% year-on-year and plus 13% on a U.S. dollar constant currency basis after another successful year for the brand as we extend our presence and popularity amongst U.S. consumers. We continue to grow strongly in the off-trade, with significant sales increases in every category over the last few years, contributing to us more than doubling the size of the brand. In addition, we've been able to sustain category price leadership with a strong price premium versus all of our competitors. We've seen particularly strong growth in our sparkling range, driven by the success of our sparkling pink grape fruit, which we launched to target the fast-growing tequila segment through a perfect low-calorie sparkling Paloma. Equally, our value leadership position in Ginger Beer has grown with now a 10-point lead over our nearest competitor, whilst Tonics continue to expand further, driven by our light and flavored range. Moving to the next slide. We continue to outperform our competitors in the off-trade, growing 3x faster than the total mixer category over the last 3 years and faster than the next newest premium competitor despite the already around 2.5x their size in retail sales value. In the on-trade, we continue to drive strong growth, both in terms of the number of accounts as well as points of distribution with notable wins this year with Marriott and Four Seasons Hotels, Tower Group and TGI Fridays as well as being on board with Delta Airlines for both domestic and international flights to name just a few. We are writing more cocktail menus than ever before, thanks to our multiple drink strategy reaping rewards, increasing our depth of distribution per account in the on-trade. Equally, we are supporting our growth and driving further distribution gains by investing behind the brand to increase awareness through digital channels as well as in-person activations, pop-up valves, and in collaboration with retailers and a wide range of spirits partners. One of the highlights of this year has been the journey of our Fever-Tree mixer truck, which travels across the country from L.A. to Miami, working with on-trade accounts, bartenders and other partners to engage directly with consumers through cocktail sampling across 4 cities, showcased in the quality and range of our portfolio. Moving to Slide 24. Another way in which we are investing behind the brands growth is through innovation and new product development, with two examples highlighted on this slide. Firstly, Blood Orange Ginger Beer, our first flavored ginger beer in the U.S., which we launched in Q3 with the aim of replicating the success we've had and adding flavors to Tonic range in recruiting new consumers and exciting those already loyal to the brand. In order to increase the visibility of Blood Orange Ginger Beer, we partnered with Maker's Mark and co-branded point-of-sale assets in-store, online and in the on-trade as well as hosting cocktail creating sessions with Maker's Mark ambassadors and conducting a number of media launches. We've already won a significant amount of new distribution with this product, including around 2,500 new points of distribution at major retailers as well as significant wins in the on-trade, and we look forward to see how it performs as we continue to base our U.S. expansion on local consumption trends to elevate the mixer category. Another exciting set of new products we've just launched are part of an enticing new opportunity for the brand as we start to explore the noncarbonated mixer category in the U.S., which includes Margarita mixes, Bloody Mary, et cetera. This category is already significant. It's growing and it's premiumizing. The category value is larger than either tonic, water or ginger beer with growth being driven at the premium end. Although no premium brand has yet has a dominant share, we believe with Fever-Tree our brand conventionals, strong relationships within the trade, broad distribution is in an unrivaled position to take advantage of this tremendous opportunity. We've created three cocktail mixes, A Margarita, a light Margarita and a classic Bloody Mary to target new and existing Fever-Tree consumers, and we're excited to build on the existing distribution we acquired from Powell & Mahoney after acquisition of this brand during 2022. As I hope you can see from the last few slides, the group's ambition and confidence in the U.S. opportunity continues to grow. We are increasing our distribution and brand presence, enabled by the quality of our ingredients and strong relationships with the trade and continue to innovate as we see a lot of white space in this substantial market. I'll hand back to Tim to talk about Europe and Rest of the World.

Thanks, Charles. So turning to Europe. The Fever-Tree brand delivered GBP 89.2 million worth of revenue, and our total revenue, including GDP portfolio brands is GBP 101 million, an increase of 15% year-on-year and 16% at constant currency. This performance is a testament to the strong rebound in the On-Trade channel during the year as well as Fever-Tree's increasing brand strength, which is driving the growth of mixed category at the premium end. Fever-Tree is extending its #1 premium mix position and has grown 2.5x faster than the mix category over the last 3 years, driving the premiumization of the total category. Over the page. This slide highlights that our growth across Europe is coming from all our key markets and how Fevertree continues to grow its market share in almost every market. As you can see, we're increasing our presence across Europe with especially strong retail value growth in France. And over the last 3 years, putting us in a very strong position, not only to capitalize on the supportive underlying trends as the spirit market continues to grow, premiumize, but also to drive further growth of the mix category through premiumization and partnering spirit brands to promote specific serves. On the right-hand side of the slide, I've highlighted two of our most significant growth markets, Italy and France, where we're building on supportive market trends, including the strength of the On-Trade to increase the brand's presence, awareness and distribution. We have particular success in Italy this year with our first TV ad in this market, highlighting our 3-quarter message, resulting in an increase in our brand and awareness from 14% to 20% immediately following the campaign. As I hope you'll have seen from the last couple of slides, we have made significant -- we have a significant opportunity across Europe to extend our position as the hard quality and market-leading premium mix of brands and have achieved impressive growth so far, but still have a long way to go. We have a clear plan to access this opportunity, which includes maintaining and extending our lead in tonics through new flavor innovations by market, continue to grow our portfolio with a focus on gingers and sparkling and expanding the number of occasions our portfolio catered to through format evolution and finally, by driving trial of awareness through a range of marketing activities across all markets and channels. Due to the size and our conviction in the opportunity, we're committed to investing behind the brand in Europe with a focus on working in the range of spirit partners on co-promotion activity to promote specific sales, with retail programs leading to increased sales and distribution gains and On-Trade activations, increasing our brand awareness with consumers and the trade. So over the page. Our final region is the Rest of the World, where Fever-Tree performed well, growing by 18% year-on-year to deliver total revenue of GBP 31.5 million. Our focus this year has been on three significant route-to-market changes across the region. Firstly, in Australia, we're establishing our own operation just as we have in the U.K., U.S. and Germany, and we'll be working on a new distribution partner from the second half of 2023. This is an exciting step for the brand and will enable us to drive more profitable growth at a faster pace. In Canada, we have transitioned to a more heavyweight distribution partner who will support our long-term growth ambitions in this attractive market, using their 70-plus years of experience in the Canadian market, their strong sales team and broad coverage across all channels and geographies. And finally, the brand has agreed to take on Asahi Breweries is our new distribution partner in Japan, with a 3-year exclusive deal from January 2023. This move is reflective of Asahi's belief in the significant future opportunity for the premium mixer and adult soft drink category and their strong belief that future is the brand to unlock this opportunity. Asahi is the largest beer company in Japan, and as such, has very significant reach across both the on- and Off-Trade. And to this end, we are excited about working with them in this potentially very valuable and significant market. So overall, we remain focused on driving the momentum in the premium mix segment across our Rest of the World region and have made excellent progress this year to set the brand up for future growth. We also continue to gain incremental distribution in our 2 largest markets, Australia and Canada, increasing our range of formats to appeal to a broader set of consumers and continue to invest in a range of marketing activities to ensure we're driving further growth from a stronger platform. So finally, over the page. I'd like to finish by once again reminding you of the magnitude of the opportunity ahead for the brand. As I laid out at the beginning of the presentation, we are confident that we can replicate the brand's success in our stronghold markets around the world by expanding and premiumizing mix of categories, focusing on the qualified ingredients, innovating and developing new products that excite the category and enhancing its value through superior margins for our customers. We have demonstrable pricing power in our stronghold markets, which, along with the endorsement that we've received and the reputation we've built with both consumers and the trade, means we are not only a very valuable part of the category, but extremely hard to compete effectively against. Just as importantly, the business model ensures we generate strong cash flow, which enabled us to keep investing behind and focus on the long-term opportunity, especially in our next-wave markets as well as giving us optionality on to return cash to shareholders alongside growing the business. And whilst we are mindful of continued inflationary cost pressures and current macro uncertainty, our strong financial position, along with the benefit of the strategic actions Andy outlined earlier, makes me confident that we will emerge in a sustained period of extraordinary global disruption in an even stronger position. So thank you for listening this morning. Andy and I, along with Charles, are now happy to answer your questions.

[Operator Instructions] Our first question for today comes from Edward Mundy from Jefferies.

I've got three questions, one for Andy, one for Tim and one for Charles. Andy, when you look at Slides 9 and 10, I guess, there's two bits to it. The first is on Slide 10. Are you signaling that gross margins in 2023 could be down as much as 300 basis points. Is that the right read from that slide? And then when you look at consensus for 2023, where I think your -- sorry, for 2024, where you're comfortable with some margin expansion. I think the Street is modeling 300 basis points of gross margin expansion, yet the size of the price based on Slide 9, could be significantly higher than that. So any commentary on both 2023 and 2024 gross margins would be very helpful? Second question really for Tim. As you get this margin tailwind going into 2024, how do you weigh up the balance between margin recovery and then reinvestment to accelerate growth? And then one for you, Charles. When do you think big picture around the tipping point for the U.S., do you think the portfolio is ultimately going to be growing the Off-Trade through co-promos? Or will it be through driving trial and awareness within the On-Trade?

Ed, I'll take the first one on the sort of '23, '24, yes, broadly speaking, on Slide 10 on breaking out the main factors and yet -- and that sort of 300 basis point headwind is kind of what we're expecting. That's implied as well by where consensus is sitting currently to 2023. When we go into 2024, yes, absolutely, at the moment, there's 300 basis points of improvement. We can have a very sensible place to be, given we're so early in '23, looking ahead to 2024. And look, what we're trying to get across this morning is our confidence that there are multiple opportunities to drive margin improvement and recovery over the coming years. The exact timing of that is going to depend on the implementation of all those projects and some of those macro factors, which are softening as we stand. But as we've learned in the last couple of years, we're living in a pretty volatile [well]. So I think it's too early to build in more. But we're optimistic of the various levers we have and hopefully setting out that there's a broad range of days now that can drive good margin recovery over the coming years.

Ed, this is Tim. So look, a very short answer really to your question about the '24. I mean we are very comfortable with our broad 10% marketing contribution. We are very confident that we can achieve what we are setting out to achieve in '24 without changing that dynamic. But as I've always said in the past, we do have a growing amount of opportunity in a growing amount of markets. And so we will not be shy to invest behind opportunities if we see an exciting return. But as I say, that sort of 10% bracket is what we're forecasting at the moment. And final one to Charles.

Yes. And -- Ed. So in terms of sort of where we're going to see the growth in the U.S., whether it's going to be Off-Trade or On-Trade, the simple answer is both and everywhere. In the Off-Trade, it's going to come through expanding distribution, but more in terms of format distribution. We're seeing exceptional growth in our can business at the moment. And obviously, as the consumer adopts the brand, the can is the most convenient and easy format use at home. So expanding our cans and seeing our can growth, I think, is really going to be the core driver, if you like, of our Off-Trade growth. But in the On-Trade, we've got a very long way to go. The market last year was still recovering from COVID, the covid pandemic loss of the On-Trade. And we're seeing that expansion to grow further and faster this year. And here, it's about both number of accounts that we're in, but more importantly, the depth distribution per account. Once we have 3, 4, 5 different offerings in [indiscernible], we cover multiple drinks occasions, we see an exponential growth in our negative sale. So it's going to be about depth distribution in the On-Trade for shorter than we can target multiple drinks occasions. And then finally, I would say, in both channels and all channels, growth is going to be driven by innovation as well as the core portfolio. We've already seen this with the launch of our Blood Orange Ginger Beer being, frankly, one of the most successful launches that we've had so far. We've also launched our sparkling facility in lemonade, which targets absolute vodka and bourbon drinkers. And we're very excited about continuing to innovate and target where the American consumer is already drinking.

Charles, while you're on, I think you're relaunching the Paloma product under the Fever-Tree brand name in April. Are you taking a price recalibration as part of that relaunch?

We've -- yes, we fixed essentially their pricing, so that pricing will now be consistent nationally. So we'll have a consistent national pricing policy on it. We're able to take it into more markets. But let's be very clear, this is the Fever-Tree product. This is a Fever-Tree product that we're launching. And essentially, what we've done is we've used the Paloma distribution that they've achieved as an accelerator to enable us to accelerate much faster into this category versus taking a longer, slower buildup option.

Our next question comes from Damian McNeela from Numis.

I have a couple of questions from me, please. Just in terms of just gauging the sort of the growth opportunity in the U.S. and last year's performance. Is it possible to sort of quantify how much of an opportunity you left behind because of your supply chain issues and sort of how we should expect that sort of recovery to play out in sort of first half, second half this year? Then perhaps maybe one for you, Tim. Just can you quantify the quantum of sales of adult soft drinks for Q4 last year, please, if you can? And then for Andy, are you able to quantify the efficiency savings that you're targeting with the sort of various projects that you've got underway, please?

So -- Charles, I'll start with the sort of question on the U.S. in terms of, I suppose, really confident in this year and obviously, relating to the inventory challenges that we had last year. In terms of timing, the key time and the time period really is sort of summer and summer onwards. That was when the key out of stocks hit us. Now the impact of that is that we weren't able to promote as much we wanted to. We had to push promotions and push activation back. So automatically, this year, we're going to see an uplift by being able to promote the brand on a more regular basis and obviously, through those key summer months. Secondarily, we were -- we've got our innovations, which we're bringing in, which we brought in, in Q3, Q4 last year, but we're really seeing great expansion in terms of distribution on those innovations. So again, I think that's a key part of how and where we're going to see growth this year. In terms of the On-Trade, and that's probably the biggest and greatest opportunity where we were restricted in the amount of distribution expansion that we're able to achieve last year, whereas this year, we're able to go full guns blazing into the On-Trade and therefore, grow and expand our distribution exceptionally fast. And finally, obviously, the cocktail mix is a new addition to the portfolio, which gives us tremendous confidence, obviously, as we launch those into the market, really starting from next month onwards. So that's why those are the reasons why I've got great confidence in the 2023 numbers and probably where the impact came in from the out-of-stocks last year.

Damian, in answer to your question, I think, as you know, we don't get sort of quarterly sales out first. But what I would say is that we have had a hugely encouraging start to our move into adult soft drinks. I mean I look at it in Tesco, 30-odd other products, we're already the #1. In fact, our Ginger Beer is the third best performing product overall, and so setting lemonade closely behind. And so this, of course, has not been lost on the other retailers. And so we're very optimistic that we're going to keep increasing our distribution points and hence, the fact that we're already rolling out other formats and other flavors. But so, so far, in the Off-Trade, it's been a very encouraging start. And also in the On-Trade, we're picking up lots of good distribution, again, straight away. So we're increasingly encouraged by the opportunity that this is opening up for us.

Sorry, and Damian, on your question, I mean, sitting beneath that kind of fourth legged of the kind of 4 areas that are going to drive margin on, we've got a long list of sub-projects. Each of those has a target sort of opportunity. So -- and look, within that, some of them are significant. I mean just, for instance, something like Australian production removes a big logistic cost that currently sits in our P&L, lots of them are -- we've got a widespread number of smaller games that add up to a relatively significant number. What I won't do at the moment just is put a quantum around that, because I really don't want to be giving a 2024 margin bridge at this point, but I do want to, again, underpin our confidence in the fact there's plenty of things here to go that we're going after. And it's not just about reducing costs, it's about improving capability, ensuring we're really well set up for the next stage of growth and even more resilient supply chain and operational model that allows us to cope with what is at the moment, a relatively volatile world.

Our next question for today comes from Yubo Mao from Morgan Stanley.

Firstly, on the U.S., Charles, I wonder if you could talk about the competition dynamics there. How has the pricing environment evolved recently? And how is the future performing relative to your key competitors across the key channels? And secondly, just turning to the U.K., Tim, I wonder if you could please talk about the latest consumer environment here. What is related, you are seeing? You suggested confidence in our returning the business to growth this year. How do you think about U.K.'s growth profile on a more medium-term basis?

You cut out a little bit during one of your -- one part of your question, but I think you're asking about basically competitive position, price and the impact of price and price increases, if I'm not mistaken. Is that correct?

That's right, Charles.

So in terms of competitors, we have -- I think as they have in the U.K., we've seen a lot of competitors come into the market, whether they've been smaller sort -- of smaller disruptive competitors or whether they've been the large companies such as Schweppes launching their own premium versions. The only one that is really stuck in the market and remains a good competitor for Fever-Tree at this stage is Q Drinks. They essentially make our portfolio. They mimic our distribution footprint and network, and they are -- they've been growing strongly over the last year. That said, Fever-Tree continues to grow ahead of them and is already 2.5x their size. We command a price premium versus Q Drinks, which I think is really important. And most importantly, I think we've got the best access to the market through our unique wine and spirit network with Southern Glazers at the core of that, which gives us unparalleled access to the On-Trade, particularly in national accounts. So when pitching for national account business, we're pitching alongside essentially the lion's share of the Diageo, Bacardi portfolios which means that Fever-Tree's automatically elevated into their cocktail menu discussions and into their drinks programming, et cetera, and as well as being able to target if you like, sort of the core liquor store channel with unique copartner spirit promotions. So when we're doing an activation with a major spirits brand, such as Maker's Mark, we know that we can get the execution that nobody else can get, thanks to the size and scale of the Southern Glazers network. So competitors absolutely exist. There's room for them certainly in the U.S. market and particularly in the Off-Trade, because it gets more [ buyers ] thinking about this category and the opportunities within this category, but Fever-Tree remains sort of clear premium market leader. In terms of price, we -- as you know, we repositioned price a few years ago. We believe that's done a fantastic job of bringing new consumers into the category, new consumers into the brand. But absolutely, we feel that now is the right time to take price. And whilst as ever price negotiations have been tough, and it's been well received generally across the trade and people understanding our rationale, and we haven't lost any business or lost any promotions or lost any activation as a result of that. So I hope that answers your question there.

So this is Tim. You had a question about sort of consumer confidence in the U.K. I mean, look, as of course, we've all seen the H2 last year, there was a real squeeze on consumer confidence. We are in this fortunate category that I think is the sort of low-cost luxury item, which tends to be quite well insulated against the sort of broader issues. But there's no question that, that has a bit an effect on some frequency of purchase and indeed the sort of frequency of which people go out to the On-Trade. So we certainly saw that more broadly at the end of last year. But we are already starting to see a little bit more sort of confidence return, when we talk to our On-Trade partners about people returning to the On-Trade. And so we're optimistic about that. And also forget that there were habits that were formed in locked down, particularly amongst the sort of middle-age older generation, who is tended to stay more at home. But we're also starting to see this change and also change with more people returning to offices as well. So we're optimistic that we're going to see more frequency return to the On-Trade. So it's all those factors on top of all the other points that we've laid out that the sort of new products, the way spirits are growing, our new categories we're entering into that give us this confidence as we look ahead this year and then, certainly in '24 and beyond.

And our next question comes from Nicola Mallard of Investec.

A couple for me, if I may. Just one on the change in status in Australia going from the distributor model to subsidiary. And I just wondered, what makes you do that, or what triggers change? And how many other markets do we think we might see that happening in the sort of not-too-distant future? And what will it mean in terms of either investment or performance? And then secondly, on your U.S., you said local production 100% by 2024. I just wanted to check the scope to accommodate growth, because clearly the slides this morning suggesting that the U.S. is a real growth opportunity still, and we could see significant growth coming through. So are you comfortable with the local bottling and can accommodate that growth within the U.S.?

Nicola, Tim. I'll take the Australian one of those. So look, actually, what we're doing is a bit of a hybrid. We of setting up our own sort of distribution, very specifically focused on the liquor store entree and then, we've got an agency model with another premium brand out there for the Off-Trade. So we're sort of combining that resource there. And what triggers it is very simply because we've reached a good size in this market now, which can support our own people, and we see a real opportunity ahead. So the math starts to work at that point about running your own subsidiary model. And so that's why we believe this is going to generate a greater profitability and greater opportunity going forward. So we've been warming up to this for the last couple of years in Australia. So we're excited that we're now doing this, and we're combining it with local production as well. So it should make quite a difference to the dynamic of the market as well as the profitability of it. Andy, do you want -- you asked.

Yes. Just in terms of the U.S., yes, look, I think, look, we're building -- the network we're building, we're comfortable we can scale with us. We're going to have to continue to evolve it, given the quantum of the opportunity we see in the States. And I think the other aspect I mentioned this morning is with those transatlantic rates, recalibrating and port congestion alleviating, we still have the opportunity to sort of supplement that U.S. network with U.K. production as well. So I think we're comfortable from an operational perspective, we're going to be well set up to service the growth in that market.

And there are no further questions. So at this time, I would like to conclude today's call. Thank you, everyone, for joining. You may now disconnect your lines.