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

Good morning, everyone, and thank you for joining us to hear about Fever-Tree 2023 performance. 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 would like to start by highlighting some of the key points that I hope you'll take away from the presentation as well as updating you on our progress as part of our comprehensive ESG agenda. Following this, Andy will take you through the financial review before Charles and I present the regional strategic update. So over the page, Slide 3. The group delivered good revenue growth during 2023, especially in the U.S., which has grown to become our #1 revenue-generating region for the group. Our focus on quality and innovation ensures that the brand continues to grow in strength and reputation. This was clearly demonstrated by the fact that we are recently named the best selling and top trending mixer for the 10th year running by the world's top files in restaurants. We have also successfully driven share gains in each of our regions, expanding our premium mixer category leadership globally. In addition, we started to broaden our total opportunity beyond our core mixes with products such as flavored sodas starting to contribute meaningfully to our growth around the world and more recently, our move into adjacent product categories, such as our cocktail mixers and soft drinks has shown early success and are ensuring that we expand our portfolio to an ever greater number of drinking occasions. As we've been executing against the global opportunity, the group has experienced significant macro cost headwinds over the last few years, resulting in significant gross margin pressure on the business. However, we started to turn an important quarter in 2023, doubling EBITDA in the second half of the year by mitigating the inflationary cost pressures alongside driving operational efficiencies. In addition, we've now secured a new glass contract for 2024 with fully hedged energy pricing, which alongside lower trans-Atlantic freight rates and our measured consistent approach to pricing means we're confident of doubling EBITDA in 2024. So over the page. The next few slides demonstrate the strength of the brand today, how we're diversifying our portfolio to drive growth as well as reminding you of the significant global opportunity. As you can see from the left-hand side of this slide, we have grown share in our core mixing categories over the last 4 years in all our key markets. With the exception of Tonic in the U.K., where we have maintained an incredibly strong market share position. Our share growth in the U.S. has been particularly noticeable and Charles will go into more detail later this morning about how we have gained the #1 share in both the Tonic and Ginger Beer categories in this market. The right-hand side of the slide highlights how the brand is growing in terms of awareness, household penetration and distribution gains across all our markets, from our mature U.K. market, where we continue to grow our penetration despite our maturity to our high-growth market like Australia, where we're growing awareness and distribution at pace. Over the page, Innovation has always been at the heart of the Fever-Tree proposition. From initially revitalizing the Tonic category in the U.K. to broaden the brand in more premium mix occasions and more recently, entering new adjacent categories. We now have a strong range of Tonics, Gingers and Sodas, which all contribute meaningfully to our growth and give us the ability to flex our portfolio to cater to differences in consumption habits by market. Consequently, we now have a much more balanced global sales mix than we did 4 years ago with around 40% of our sales that are coming from products outside of Tonic, up from just 24% in 2019. We expect the portfolio to continue to diversify as we grow across different markets, innovate to cater to trending drinking occasions as well as entering significant new categories, all of which mean we are confident about driving growth long into the future. Slide 6. We continue to sit as a confluence of a number of strong long-term global trends. From the continued premiumization of spirits and their growth ahead of wine and beer to consumer preferences for craft and quality ingredients and easy to make cocktails to the trade desire to drive premium experiences and margins. This is why we are confident that we'll continue to premiumize and expand the mix category in our next wave and white space markets using the same blueprint that has driven our success in our stronghold markets. Furthermore, we also see growing opportunities across many of our markets beyond our core carbonate and mixes, and we'll continue to develop products to cater to trending categories, such as cocktail mixers and adult soft drinks, leveraging the power of the brand. Over the page, Slide 7. Before I hand over to Andy for the financial review, I'd like to update you on our progress under 3 of our 5 branches as part of our ESG agenda. As you can see from the slide, we are driving action across the ESG spectrum, both directly within our business and through our global supply chain with a particular focus on reducing our carbon footprint, increasing our recycled content and the area that I'm most passionate about our work with Malaria. Here, we are helping to fight one of the world's oldest and [deadliest] diseases, a campaign that we have committed to for the last 10 years. Alongside our work with Malaria, we continue to work with charities close to our home markets, such as Future Frontiers and Earthwatch in the U.K. and One Tree Planted in the U.S. Finally, we make sure we're supporting the most important part of the business, our people. Over the last year, we have made great progress on our diversity, equality and inclusion agenda, where our committee has developed a 3-year strategy to drive progress in this important area. I'll now hand over to Andy to take you through the financial review.

Thank you, Tim, and good morning, everyone. On this summary slide, we set out the key financial metrics. I'll talk to the detail this morning, including particular focus on the building blocks that will drive margin recovery in 2024 and provide a platform to deliver strong profitable growth going forward. So turning the page. Before we take a closer look at gross margin, I'll touch briefly on [indiscernible] , which increased marginally to 23.7% of revenue, reflecting continued investment behind the brand and increased staff costs as we built a local team in Australia. At interims, I spoke of our confidence in driving an improvement in profitability in the second half, and we delivered this with absolute EBITDA doubling in H2 compared to H1. Alongside these interims, we recognized an exceptional item in relation to the one-off U.S. production issue. At full year, this expense has subsequently been offset by a receivable in respect to the claim, which is in progress. Turning the page. Working capital increased ahead of expectations to 28.5% of revenue. This was driven by the phasing of receivables, reflecting stronger November, December trading year-on-year. And whilst elevated working capital impacted year-end cash, it has quickly unwound post year-end, with cash improving to $74 million at the end of last month. Looking forward, revenue growth combined with margin recovery and working capital normalization will drive improved cash flow conversion in 2024. And as a reflection of our confidence in the business, we're recommending a full year dividend, which is up 2% year-on-year. The main drivers of 2023 gross margin were in line with what we guided to this time last year. We drove margin improvement through net price increases across regions and through increased U.S. local production, alongside softening trans-Atlantic freight rates on product delivered from the U.K. to the U.S. However, as expected, these improvements were offset by significant inflationary cost headwinds, most notably in glass. And whilst these were partially mitigated by efficiency, optimization and procurement initiatives, the net 740 basis point headwind drove an overall reduction in gross margin across the year. Importantly though, we saw a change in the margin trajectory as we progress through 2023. The 30.7% gross margin we reported in the first half represented an inflection point in the headwinds we've experienced over the last few years of macro volatility. As can be seen here, we delivered an almost 300 basis point improvement in the second half, and we expect this trajectory to continue this year, and that gross margin improvement will drive a significant uplift in EBITDA with consensus expectations pointing to a doubling of EBITDA in 2023 to 2024. So turning the page, we've set out the drivers of gross margin improvement in 2024. Firstly, glass pricing. During 2023, we completed a tender process for our U.K. and European glass. And contracted with a new primary partner. This long-term strategic partnership will underpin greater security of supply, the ability to work together on carbon reduction initiatives and importantly, full transparency and involvement with regards to energy hedging with 2020 for glass energy costs hedged at significantly improved rates year-on-year. And so following the impact in recent years of extraordinary levels of glass cost inflation, we're confident of driving a significant year-on-year reduction in glass cuts in 2024. Secondly, U.S. trans-Atlantic freight rates have normalized back towards historic levels, and we've locked in pricing with our primary freight partner for 2024. This normalization gives us optionality this year with regard to fulfillment of U.S. demand for the U.K. or the U.S., while still driving margin recovery. And finally, we'll continue to realize net price increases across our regions this year whilst offsetting wider inflationary cost impacts through our efficiency, optimization and procurement initiatives. And we will continue to drive margin recovery over the medium term and remain comfortable with an expectation of circa 200 basis points of gross margin recovery each year as we look out beyond 2024. Breaking this down into 3 areas. Firstly, as the more significant inflationary headwinds that we've been specifically impacted by the business, continue to recalibrate. The full benefit of these movements will flow through to our P&L in 2025 as balance sheet positions and supplier hedging contracts online. Secondly, the recalibration of trans-Atlantic progress now affords the flexibility to produce across our U.K. and U.S. production networks at a similar margin. Going forward, we will build out and scale our local production network in the U.S. at the right pace with the right partners and at the right pricing. And as we do this, local U.S. production costs will improve, and this will drive margin recovery in the medium term. Finally, across 2021 to 2023, when we were exposed to significant transitory inflationary headwinds, we chose not to take [indiscernible] pricing actions. [indiscernible] we stated consistently through this period, our strategy is to work in partnership with our customers and take regular, steady price increases. This course of action was the correct one. As Tim and Charles will describe, the brand is in a very healthy state, building market share across our regions at the expense of the competition and retaining its premium price point without recourse to increase promotional intensity. And this puts us in a strong position to continue to improve net price steadily going forward whilst working hard to offset some of the more established inflationary cost increases we've seen over recent years. There's no question that the challenges we face against such a volatile macroeconomic and geopolitical backdrop, forced us to accelerate our focus on driving continual improvement across our operations. We've learned important lessons. But as we stand here today, our global supply chain capability, procurement processes and operating business models have improved significantly over this challenging period. And as we look forward, a stronger, more resilient supply chain will help us to mitigate the challenges of ongoing volatility to deliver further margin recovery. And most importantly of all, allow us to continue to capitalize on our global potential of the brand in years to come. Finally, though, with regards to the outlook for 2024, we're comfortable with consensus revenue expectations of circa 10% growth for the Fever-Tree brand. And taking into account a reduction in GDP portfolio brand revenue, this will deliver circa 8% revenue growth for the group. I've talked to our confidence in delivering circa 600 basis points of gross margin improvement this year, and we remain comfortable with consensus EBITDA margin expectations, so to 15% for 2024. And with that, I'll pass back to Tim.

Well, thanks, Andy. Charles and I will now take you through some of our regional specific highlights as we continue to make great strides across the world, starting with the U.S., in recognition that this is now the group's largest market. So over to Charles.

Many thanks, Tim. Good morning. Fever-Tree delivered GBP 117 million of revenue in 2023, a strong increase of 24% on a constant U.S. dollar currency basis. As we continue to gain market share and popularity amongst U.S. consumers. We're making great progress against the substantial opportunity in this market with the premium spirit category is 12x the size of the U.K. We're driving growth on multiple fronts, significantly outperforming our competitors and extending our market-leading value position in both Ginger Beer and Tonic Water as the brand goes from strength to strength. Moving on to Slide 19. Our diverse drink strategy remains the cornerstone of our innovation pipeline and ensures our portfolio caters to multiple mixing categories and drinking occasions in the U.S. focused on U.S. consumer spirits. We've seen particularly strong growth in our sparkling mixes through our new flavors, including Pink Grapefruit, Lime & Yuzu and Sicilian Lemonade all of which tap into trends towards longer, lighter serves, particularly with tequila and vodka. This combination of our deep knowledge of the U.S. consumer alongside our strong execution has delivered a plus 67% CAGR growth in our sparkling range over the last 4 years with further innovation identified to drive growth into the future. In addition, we've entered the cocktail mixer category with our classic and light margaritas and Bloody Mary, all of which are performing well. This category is larger than either Tonic, Tonic Water or Ginger Beer, and that's a significant longer-term opportunity with the ability to attract new and existing Fever-Tree consumers as well as leverage our strong network to drive distribution gains and sales growth. Moving on to Slide 20. We've done a great job of expanding our distribution reach across both channels over the last few years, but only -- but are still only partway through the journey in terms of both the number of accounts and our presence within each account as detailed on this slide. In the on-trade, we've more than doubled our presence in hotels, bars and restaurants since 2019, led by our progress in our national account business. We still see a strong opportunity in the on-trade with the potential to significantly increase the number of venues where Fever-Tree can be present. Equally, we're working closer with our Bartender network to increase the number of drinks per account by educating them about the diversity of our portfolio, creating more cocktail menus than ever before to bring this to life. As a result, we've grown a number of accounts where we have 4 or more points of distribution from 11% in 2019 to 17% in 2023 with a future ambition of ensuring that the [indiscernible] have 4 or more drink offerings. In the off-trade, we now have a very strong presence in national grocery and have strengthened our position as a clear category leader and adviser to some of the largest retailers across the country. We've also made huge strides in terms of the number of points of distribution per account. As we continue to innovate and introduce new flavors and formats such as our 150 ml cans, we will continue to increase our presence within each off-trade account with the aim of achieving almost 50% of our accounts with 14 or more points of distribution at grocery. This combined with our ability to effectively promote alongside our spirits partners has driven significant growth in 2023. Alongside this, we've also transformed our online business, in particular, through Amazon, which nearly doubled in 2023, a further positive reflection of the brand's increasing popularity. Finally, moving on to Slide 21 and formally. I wanted to illustrate how the brand -- how the strength of the brand, our keen and our ability to innovate is building a considerable competitive advantage, enabling us to drive growth well ahead of the category. We remain focused on building brand awareness through targeted campaigns, growing our household penetration from 2% to 5% since 2019 through a combination of brand activations, targeted online media and advertising, through promotions with a wide variety of spirits brands across tequila, Bourbon, Vodka, [Mezcal] and Gin as well as [non alcoholic spirits]. This, along with our innovation expertise is why we are now the go-to mixer brand in the U.S. for retailers and spirit companies alike. Fever-Tree's growing popularity across a breadth of mix of categories has enabled us to grow our presence and having won a significant number of accounts in all channels over the last few years. We are incredibly focused on driving deeper depth per account over the medium term. Finally, the combination of our product quality, innovation, distribution gains and optimal price point has driven superior sales [porosity] compared to our competitors. This, in turn, means that we deliver higher sales and better cash margins for our customers incentivizing them to prioritize the brand for promotions, display, menus and visibility and thus facilitate further growth. The U.S. remains the biggest medium opportunity for the group. And as I hope you can see from the last few slides, whilst we've made fantastic progress over the last few years, there is still a significant runway ahead. I'll hand back to Tim to talk about the U.K., Europe and rest of world.

Thanks, Charles. So turning to Slide 22 and turning to the U.K., where we have delivered GBP 114.8 million worth of revenue. This was marginally down year-on-year following a summer trading period that was impacted by adverse weather, but we finished the year well and are confident of returning to growth in 2024. Fever-Tree continues to extend its lead as the mix of brand of choice in the U.K. with 45% value share of the total mix of market across both the on- and off-trade, over 50% higher than the next largest competitor, Schweppes. In the off-trade, we command a higher rate of sale than any other mix of brand and around 7x higher than the average premium brand, making us the clear choice for retailers up and down the country. And in the on-trade, we continue to increase our value share with over half the mix of market by value and have grown to over 10x the size of the next largest premium mixer. Slide 23. Fever-Tree has built an unrivaled portfolio to cater a broad range of mixing occasions across a growing number of spirit categories. In 2023, our Non-Tonic products grew by 20% and accounted for 25% of our portfolio, up from just over 10% in 2019. Two products have done particularly well in recent years are our Ginger Ale and flavored sodas, which have gained significant distribution and are driving growth of their respective categories, supported by the growth of rum and vodka that paired perfectly with these products. Slide 24. Our innovation has always been centered around the latest drinking trends. And recently, this has taken our efforts beyond our core carbonated mixes to explore 2 adjacent categories, cocktail mixers and adult soft drinks, which we believe both have significant potential. We launched our cocktail mix arranged during the first half of 2023 and have already secured over 4,000 distribution points across major U.K. submarkets as well as good interest from our on-trade customers winning distribution in a number of the largest U.K. on-trade chains. By revolutionizing the simplicity of making popular cocktails, we're attracting new consumers to the Fever-Tree brand as well as enabling the on-trade to offer high-quality Margaritas, Mojitos and Martinis serves that were previously limited to high-end bars. Our adult soft drink range has been gaining traction over the last 18 months as we have utilized the strength of the brand and well-known quality credentials to enter this sizable category. Having introduced our first specific soft drink format of 4 x 250 mL can pack to the off-trade in '23, our adult soft drinks have gained over 9,000 distribution points at U.K. retail, and grew by over 30% during the year, contributing meaningfully to our retail sales mix. And beyond the off-trade, in the on-trade, we've launched a 275 mL bottles to cater to soft drink occasion with our lemonades proving particularly popular. And as such, we are now exploring the opportunity for on-the-go occasions, including train stations and convenience. Slide 25. I want to give you a small insight into the fantastic work our team has done across multiple channels to showcase the brand's credentials and ensure we remain front of mind for customers when they're making purchasing decisions, with a focus particularly on co-promotions and digital platforms. At retail, we secured our first fully branded bay in Waitrose, which enabled us to co-promote with a number of different spirit brands to showcase our full range of tonics through a variety of pairing suggestions. And beyond Tonic, we did our first co-promotion with our adult soft drinks and a snack item through Ocado's online platform. The success of these dedicated co-promotional retail spaces is an area that is gaining interest from other retailers and is likely to result in additional off-shelf space going forward. We've also successfully and very cost effectively use the rather overlooked medium of radio to showcase the breadth of our portfolio alongside other digital platforms to increase the awareness of our new cocktail mix of range with a focus on how to serve and to demonstrate their simplicity. Furthermore, we haven't lost our old campaigning routes as demonstrated by our print campaign, highlighting the dangers of artificial sweeteners. As I hope you have seen from these last few slides, we continue to make good progress in the U.K., extending our market-leading position and diversifying our portfolio with a focus on the most popular drinking trends. So Slide 26. Turning to Europe. The Fever-Tree brand delivered GBP 94.6 million worth of revenue, an increase of 6% year-on-year and 4% at constant currency. Once we continue to extend our premium mix of leadership position across Europe, our revenue growth is impacted by subdued consumer sentiment in several markets, most notably in Germany. This meant our total European revenue, including GDP portfolio brands in German market increased by 4% to GBP 105.4 million. During the year, we significantly outweighted our distribution partner in 2 key markets, France and Greece, where we've transitioned to larger beverage outfits with strong national account coverage to support our growth ambitions. These changes have already resulted in very positive momentum in these 2 important future markets. Over the page. The brand continues to grow well across Europe, and Fever-Tree now holds just over 15% value share of the total off-trend mixer category, increasing our share by over a quarter since 2019. And in the premium segment, we're extending our dominance with 68% value share at the end of 2023. Specifically, we are driving growth in our 2 categories of Tonic and Ginger Beer, delivering growth well ahead of the total market and other premium brands. We've seen particularly good progress in Ginger Beer over the last 2 years and now hold 37% value share of the total category, having contributed to almost 80% of the [indiscernible] value growth since '21. Over the page. Our success in our European markets has been underpinned by our investment in marketing across various channels and categories to build awareness of our increasingly diverse product range. During '23, we focus on far-reaching above-the-line campaigns such as billboards in Paris, along with TV ads in several markets, all of which showcased our ingredient quality. We also use launch events from most recent innovations such as Sparkling Pink Grapefruit to engage trade press, influencers and top bars and restaurants with the aim of encouraging trial and juicing serves like the Paloma. Following specific campaigns across Italy and France, the Netherlands and Switzerland, we saw a marked increase in Fever-Tree's brand awareness, especially in Switzerland, where our TV ad alone led to a 13% increase. Our targeted marketing investment focused on innovation and high-quality premium ingredients are really resonating with the European consumer, and we continue to look ahead with confidence of the future potential of this region. Slide 29. Our final region is the rest of the world, where Fever-Tree delivered GBP 27.2 million worth of revenue, which despite a positive second half performance meant we finished the year with a revenue decline of 10% at constant currency. As we mentioned in our interim results, the transition to a new subsidiary set up in Australia, which included a one-off inventory buyback in the first half of the year impacted revenue delivery for the region. However, our revenue across the Rest of the World region, excluding Australia, was in good growth. Our underlying trading across our key markets in our Rest of the World region was positive with good progress made in Canada, where we became the #1 Ginger Beer brand by value and remain the dominant premium mix of brand in the market. We also continue to make good progress in Japan with our partner, Asahi where we believe there's a very significant future opportunity. The [momentum] we are driving the premium mix market across the world alongside the significant steps we've taken this year to set the brand up for future growth in the Australian market makes us confident of a much stronger '24 across this region, and we are more optimistic than ever about the future prospects of the Fever-Tree brand globally. So Slide 30. I'd like to finish by once again reminding you that the strategic progress we've made during '23 and why we remain confident in the outlook for the business. There's no doubt that a significant global opportunity remains. The spirit category is large, growing and gaining share from beer and wine globally and consumers are increasingly looking for high-quality ingredients as they aim to drink less, but better. The Fever-Tree brand continues to grow in popularity and gain share well ahead of the competition around the world with especially strong growth in the biggest global premium share market of the U.S. In addition, our [unrivaled] brand credentials are enabling us to broaden our addressable market as we expand into new categories beyond our core mixes. So along with top line growth, the business is very focused on driving margin improvements and turned an important corner in the second half of the year as we doubled EBITDA following significant progress in driving operational efficiencies as well as offsetting some of the inflationary cost pressures we've been exposed to over the last few years. Our new glass contract lower freight rates and consistent approach to price increases, along with further operational efficiencies, we can implement means we are confident that driving material margin improvement over the medium term, including a double of the EBITDA in 2024. So thank you for listening this morning. Andy and I, along with Charles in the U.S. are now happy to answer your questions.

[Operator Instructions] Our first question comes from Rashad Kawan from Morgan Stanley.

Congrats on the results. A couple for me, please. First, on the U.S., clearly a compelling growth story. I loved [indiscernible] and how clear it is and framing where you are today and the opportunity at hand. Can you talk about what you see as kind of the risks to the upside and downside when it comes to getting to those medium-term goals over time? That's the first question. And then on the second one, if I can drill into the U.K., consensus is modeling about 1% growth going forward. It's clear that the growth from the non-tonic business is impressive, but that implies the core tonics business was down high single digits, I think, last year. How should we think about the overall trajectory of the U.K. business in the medium term? Do you think that the growth in the non-tonic business can be enough to offset the decline in Tonic over time? And how important is innovation in all of this?

Okay. Thank you. Charles, do you want to tackle the first 1 about the U.S.?

Yes. Very happy. Look, I think the -- the opportunity for us and sort of within that, I think you're asking really about sort of the risks going forward. For me the biggest things are as follows. Firstly, we need to continue to innovate. Innovation is key. We are tackling more and more drinking occasions today. We believe strongly that there are still a number of drinking occasions for us to go after. And even within those drinking occasions, the way that the U.S. consumer operates, and the way the U.S. trade operates is, they're always looking for the next twist or the next evolution of that. I think probably the best example to give you from recent years has been the launch of our Blood Orange Ginger Beer. We took a Ginger Beer, which we developed specifically with Maker's Mark and then targeted that against bourbon opportunity. Now the Mule is considered classically a vodka drink, but here we are actually extending it and working with a spirit partner to keep innovating and extending that Mule drinks. So the Mule today is now not only a vodka drink but also a tequila drink or bourbon drink, an Irish Mule whiskey drink. So we just had some at Patrick's Day. So there's [Mule's full] lot of those flowing around the place. So 1 is our ability to innovate and continue to innovate and be relevant in our innovation with the U.S. consumer. I think that's absolutely critical for us. Secondly is really the ability to leverage the brand's strength and the acceptance and the -- if you like, the quality of our brand ingredients, our brand story to ensure that we actually can tackle sort of multiple consumer needs and occasions. And particularly evolve the brand into sort of more and more soft consumption. We do see and we know already that our Ginger Beer, our sparkling lemonade, our Grapefruit, et cetera, are all consumed neat as well as, obviously, as the mix up and whilst we'll always be a mixer in our core, and there are huge opportunities for us if we can extend into that incremental space. Obviously, most notably with Ginger Ale, where we know that the quality of the ingredients. We know that our Ginger Ale is significantly better tasting than anything else on the market. Significantly, I would say, better for you in the fact that we're not using high fructose concept. We've got a delicious real ginger taste in that. So expanding and extending that -- and I think finally, then, it's about then our ability to -- our continued ability to execute and invest behind the opportunity, which we continue to do, whether that's in just distribution networks, people and most importantly, now I think media and marketing is going to play a larger and larger role for us in the future. Over to you, Tim.

Great. Thanks, Charles. And your question on the U.K., look, I mean, our Tonic did decline a bit only low to medium single-digit last year. And that is just in reflection, as you know, about the stabilizing of this Gin category and our Tonic is obviously reflecting that. And in truth, if it wasn't for the kind of soggy summer, I think we would have been pretty optimistic that our Tonic business would have been stable itself or actually in a moderate growth. But I think the really important point is that Gin is stabilizing, and it's a big significant category in the U.K. It accounts for a quarter of the whole spirit category and is a very premium 1 with a very loyal customer base. And so we're very optimistic with that, that will continue to be a very important part of our portfolio mix going forward. But excitingly for us is as we talk about, is the growth of the range of our products. I mean, we saw 25% growth for our other nontonic products in the U.K. And as we talked about and I talked about in the presentation, I'll move into these other cocktail areas with our cocktail mixes, which early days, but was really well received, very positive early signs. We're going to be putting a lot of focus, both in terms of marketing and distribution behind those in the summer and beyond. And then, of course, as we talk about the opportunity in the world of adult soft drinks in the U.K. So the point is we remain very confident of the opportunity going forward here in the U.K. And I hope that came across in the presentation.

Our next question comes from Matthew Ford from BNP Paribas.

Two questions for me, please. So -- the first 1 is on the margin. You've clearly kind of gone through the margin outlook and the expansion you're expecting for 2024. But could you just comment a little bit maybe on 2025, if we're not too early, what your kind of high-level expectation is of the shape of 2025, how many of these tailwinds we're seeing next year in '24 rather, are going to come through and benefit '25 as well. Just any thoughts you have around that? That's the first question. And then the second 1 is just on the U.S. You mentioned you've terminated the contract with your West Coast bottling supplier and move to the East Coast. Just wanted to get an update on what's your current level of U.S. domestic production now? And how do you see the kind of balance between local production in the U.S. versus shipping across from Europe this year and going forward now that freight rates have come down?

Andy, do you want to take those?

Yes. I think in terms of the first question, obviously, on Slide 15, kind of laid out the 3 areas that we think about driving sort of medium-term margin recovery. And as I said, I think we're comfortable with an expectation currently, if you look at consensus, the ['25 was] about 200 bps of gross margin improvement. And when we think about the sort of 3 areas I spoke about, about the fact that some of those inflation we have wins like Trans-Atlantic Freight, like energy costs into glass, we do expect to see a further benefit in 2025, just as we annualize the full unwind of balance sheet positions and we're laying down hedges currently for 2025 with our glass supplier at improved rates relative to our 2024 hedge rate. So I think that gives us confidence in the visibility of further margin improvement next year. The other sort of bucket I spoke about is the fact that we intend to remain consistent with our pricing policy, take those steady regular price increases, while we have this broad suite of programs have really focused on offsetting inflationary cost impacts through optimizing production footprint, procurement efficiency, technical optimizations and really leveraging the work we've done over the last couple of years to upweight our sort of end-to-end operation processes, and embed technology across those as well. So we feel very positive about the ability to drive further margin improvement, but we think a sort of steady gradual recovery in that gross margin is a sensible way to think about it. The third bucket talks to kind of our U.S. production footprint, which really comes on to your second question. And we said in the release today, we chose not to renew our West Coast U.S. bottling contract. That decision was purely down to price. The pricing being offered for the contract renewal was in line with our requirements. I think 1 of the advantages of having the global production footprint is that we can leverage that. We can leverage in that instance, the fantastic economies of scale we are able to capture here in the U.K. We're also able to leverage the fact that those Trans-Atlantic freight rates have come back in line with more historic levels, which means it's more economical in the midterm to fulfill West Coast demand from the U.K. And for that reason, when we stand back and look at our overall production mix, U.K. to U.S., it's skewed back towards the U.K. for 2024. But look, in the longer term, we remain committed to our strategy of increasing our local U.S. production footprint. And I think the fact that we signed an additional East Coast U.S bottle the last year, which we'll be bringing online this year is testament to that, that we see them as a good long-term strategic partner in terms of their positioning. They're closer to the source of U.S. glass, they're also positioned so that we can fulfill demand into Canada in due course as well. So we remain committed in the long term to building that U.S. footprint, but in the near term, we're also trying to balance that with that margin recovery, and it's an important component that the 600 basis points we intend to deliver in 2024.

Great. Thanks, Andy, very comprehensive. And I think we've got time for 1 more.

The next question comes from Anubhav Malhotra from Liberum.

A couple from me, please. Firstly, you have highlighted Japan as 1 of the pre-growth markets that you are targeting for long term. Just wanted to understand how that relationship with Asahi has been building. Have you been gaining distribution with them? And what sort of progress you have seen there? Just some highlights on that. And then secondly, on the marketing -- media and marketing has been highlighted a number of in your presentation as being -- going to play a larger and larger role in the business in the future. So how do you see that marketing spend developing over the years? Do you think in order to grow in those in the newer markets in the growth markets, you'll have to invest a bit more and you see the marketing spend going up?

Yes. It's Tim. I'll take those. So Japan, I was out there last year with the Asahi team, and they're very infused by the opportunity and the size of the future opportunity, which was great to see. I'm actually out there again in a couple of weeks' time with all their senior team to talk about the updates because they're ahead of their plan, as it currently is set out. But I think we've got a joint growing ambition. So that's why we call it out because there's no question that, that market -- that is perfect for the Fever-Tree product with the manner with which they drink, the premium nature of the drink and the occasion that they enjoy there. So we are optimistic about the medium- and long-term future of that market. And just with regards to marketing, Look, we've been very consistent historically about the amount of money we have spent on our marketing relative to our revenue. As the revenue grows, we were able to spend more and more, but what we've always said is that if the occasion is right, we would not be shy in increasing our marketing [monies] to take advantage of opportunities, and that remains the case. We're not planning on that, but we will keep that option very much up front of mind because we can see some growing opportunities in the future. I think -- I think we're going to have to call it the day there. So thank you very much, everyone, for calling in and listening.