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

Hello, everyone, and welcome today as Fevertree announces a strategic partnership with Molson Coors in the U.S. My name is Becky, and I'll be your operator today. [Operator Instructions] I will now hand over to your host, Tim Warrillow, Co-Founder and CEO, to begin. Please go ahead.

Thank you, Becky, and hello, everyone. My name is Tim Warrillow, Co-Founder and CEO of Fevertree, and I am joined on the call by Andy Branchflower, CFO. We are excited to be talking to you today about a transformational step for the Fevertree brand in the U.S., a new long-term strategic partnership with Molson Coors, that will provide a platform for significant revenue and profit growth. Since first entering the market in 2008, Fevertree has been on a highly successful journey in the U.S. And as a result, it has not only become our largest revenue-generating market but still has enormous runway of growth ahead. We have revolutionized the mixer category, driving a premium brand to a market-leading position with a 24% CAGR growth since 2018. We have built and positioned the brand for significant future growth, and this is why we are now so excited to be announcing our plans to unlock the next phase of growth with Molson Coors. Molson Coors are quite simply the best possible partner in the U.S. to jointly drive the brand to the next level. And as such, I'll take you through the first few slides detailing the strategic rationale before Andy takes you through the transaction details and outlook. So over the page. The U.S. is the largest and most developed premium drinks market in the world, boasting a total beverage alcohol market that is 4x the size of the U.K. But within this very large beverage alcohol market, the segmentation is even more attractive to Fevertree. As the premium spirit category, Fevertree's natural adjacency is 12x the size of the U.K. And within that category, the long-term trends are ideally suited to the Fevertree brands, namely consumers' desire to drink less but better. Preference is for longer, lighter drinks as well as more mindful drinking where consumers want to socialize with lower or nonalcoholic drinks. So we believe that when it comes to every one of the consumer trends outlined, we are uniquely well placed to satisfy these new and evolving expectations with our unmatched range of mixers and ability to extend into new occasions, such as adult soft drinks and RTDs. Alongside this, we also see significant runway ahead when it comes to additional channels the brand can access and be applicable to. So all of these areas are ideally suited to the On- and Off-Trade breadth and scale of the Molson Coors platform. Over the page. Fevertree has consistently delivered very strong year-on-year growth in the U.S., thanks to the fantastic work of our U.S. team, the brand has dramatically increased its footprint and awareness over doubling its On- and Off-Trade presence. In doing so, we have achieved many notable milestones, including becoming the largest tonic and ginger beer brand in the U.S. by value. Crucially, we've also been very focused on growing our flavors and formats, enabling us to move into a broader range of drinking occasions. The result of all of this is that the brand has never been healthier, has consistently outpaced the total mixer category and now sits even further ahead of the competition than ever before. Slide 5. As this slide demonstrates, Molson Coors, with its multichannel approach across both the breadth of the On- and Off-Trade channel, make them the perfect partner for the Fevertree brand. In numbers, their network covers over 500,000 accounts and around 30,000 deliveries every single day. They are supported by their dedicated national sales force, best-in-class category management, long-established customer relations and deep sales insights. And crucially, our strategies are clearly aligned, as Fevertree will play a central role in Molson Coors' total beverage strategy and ambitions. So what this means is we will be a priority brand, ensuring we get their full focus and commitment, which will unlock a step change in scale and execution providing the Fevertree brand with the ability to extend its presence within existing accounts as well as enter new accounts, new channels and new categories. So bringing all of this together and in summary, there are 4 key elements to this transformational partnership. As I've just spoken about, firstly, strategic alignment. Fevertree and Molson Coors have a shared vision, belief and commitment to driving the brand's expanding opportunity across alc and non-alc categories. Secondly, scale and platform. Molson Coors' powerful network of U.S. distributors across both On- and Off-Trade, combined with their dedicated national sales force and deep customer relationships, create the ideal platform to maximize Fevertree's momentum, brand strength and ability to grow its total addressable market in mixers and beyond. Thirdly, a step change in investment. A substantial incremental marketing fund will be deployed, providing the firepower to further drive brand and category awareness. And finally, local U.S. production. This will enable Fevertree to capitalize on Molson Coors' supply chain and procurement strength and expertise to drive operational efficiencies as well as manage the onshoring of U.S. production. So in short, all of these actions together will expand the total addressable market for Fevertree and with it, create a mutually beneficial and powerful partnership that will set us even further apart from the U.S. competition. I'll now hand over to Andy.

Thanks, Tim, and good morning, everyone. So I'm going to talk through some of the key aspects of the partnership and transaction as announced this morning. Sitting at the heart of the strategic partnership is a license agreement between Fevertree and Molson Coors. Under the agreement, Molson Coors will be responsible for the sales, distribution, marketing execution and production of Fevertree in the U.S. Alongside this, the key elements of the partnership, including annual and strategic planning, decisions on level of marketing investment and product range strategy will be managed together in partnership via a joint governance committee composed of an equal number of senior management from Fevertree and Molson Coors. And crucially, of course, Fevertree retained full control of brand identity, vision and the development of new products for the U.S. market. Under the license agreement, the partnership P&L will now sit within Molson Coors' financials rather than Fevertree's. Molson Coors bring operational capability and economies of scale that will unlock significant incremental profitability over time. And alongside this, they will fund the working capital required to drive the U.S. opportunity. Going forward, Fevertree will recognize their share of the partnership's profits via a royalty fee invoiced to Molson Coors. And crucially, Molson Coors have agreed to guarantee an absolute level of these annual royalty fees over the period from 2026 to 2030 underlining their confidence in the opportunity. The recognition of U.S. profit via a royalty fee will change the shape of our group's statutory P&L. And so going forward, we'll provide reconciliations that will allow us to continue to report on revenue and EBITDA margins on a basis consistent with historic reporting. We'll leave a teach-in on this topic in person with analysts at our offices tomorrow and will share the materials on our website in due course. The transaction also includes the sale of Fevertree USA Inc. to Molson Coors for consideration of $23.9 million. Fevertree USA Inc. is our local U.S. trading entity, which previously held the license for U.S.A. sales and distribution within our group. And the sale of the business is an important aspect of the transition to the partnership agreement, allowing for the transfer of working capital, employees and operations to Molson Coors. In terms of the U.S. team, in the near term, nothing is changing, they will continue to work on the Fevertree brand. The focus is, of course, on transition into the partnership arrangement and maintaining brand expertise and continuity of relationships. And finally, Molson Coors will acquire an 8.5% shareholding in Fevertree Drinks plc issued for cash consideration of GBP 71 million. This investment demonstrates Molson Coors' commitment to the partnership and their belief in the opportunity ahead and will underpin the long-term relationship between parties. We will return the proceeds from the issue to shareholders via buyback program commencing in February. Alongside the proceeds from the sale of Fevertree USA, Inc., the prospect of improved U.S. cash generation going forward will further strengthen our balance sheet. As such, we will continue to remain mindful of our capital allocation framework and the opportunity for further return to shareholders beyond the initial buyback program announced today. So turning the page. As we announced this morning, this is a transformational partnership for the group, not only in terms of our ability to drive the U.S. opportunity, but financially, it will drive a step change in Fevertree's quality of earnings as we look forward. As Tim set out, the U.S. remains the single most significant opportunity for the group. This partnership, with a strong strategic alignment between parties and commitment to invest behind the brand, underpins our ability to execute against the U.S. opportunity ahead. And as we drive that opportunity, the ability to leverage Molson Coors' operational expertise and economies of scale will allow for increased profitability and reduced volatility, all underscored by guaranteed levels of royalty fee, which together materially derisks the delivery of U.S. profits over the medium term. And then further building on this, Molson Coors will fund the working capital required to drive U.S. growth, allowing Fevertree to convert U.S. profits to cash highly efficiently. This reduces the cost of U.S. growth and will, in turn, further strengthen our balance sheet, creating incremental firepower to drive the global opportunity for the brand alongside the potential for further shareholder distributions. In order to realize these sustained long-term benefits, we will need to invest for growth in the U.S. As we announced the partnership today, we're mindful that both parties need to execute the transition of our existing U.S. business and it is prudent to assume this will impact our group 2025 results. In 2026, we expect to see a significant uplift in U.S. marketing investment. But notwithstanding this, we expect to deliver a strong acceleration in both top and bottom line for the group. And over the medium term, we're confident that the benefits of the partnership with Molson Coors will drive a sustained uplift in the group's revenue and EBITDA growth, positioning Fevertree to continue to deliver a high quality of earnings for the long term.

Thanks, Andy. And we will now hand over for any questions.

[Operator Instructions] Our first question is from Edward Mundy from Jefferies.

Congratulations on the deal. Three questions for me, please. First one, on the growth piece. Could you provide a bit more detail around the types of things that you will be able to do on distribution or sales or execution compared to the trends that whether you've got at the moment, perhaps talk about breadth channel or just the benefit of being part of a bigger portfolio. So first of all, on growth. Second of all, on the strategic alignment piece, which is obviously very important for this deal and ensuring the brand receives enough attention and is a key priority for Molson Coors. Can you talk about how the transaction fits into Molson Coors' total beverage strategy and ambition and what they're excited about this partnership? And then finally, Andy, on the royalty stream and sort of how this works? And to what extent this underpins sort of the medium-term growth outlook, perhaps you could provide a bit more color around that as well.

Ed, I'm sorry, there was a little bit of distortion on your online. Andy, did you get?

Do you want me to go again?

Well, let's say, you might help us out if we're not answering them. But look, first and foremost, and I think you understand this very well. But Molson Coors bring with them a power and scale that we don't currently have. They touch every corner of the country and every channel. And this will allow us, as I said in my script, to enter new accounts, new channels and new categories. And also because of the power and scale of Molson Coors, they have these fantastic deep relationships with their customers, which we will benefit from. They've got a big, strong sales force. They've got fantastic merchandising power of their own, which will allow us to get more new shelf space, off-shelf space and so all in all, they will bring a scale that we currently don't have in our system. I'm sorry, the second question?

The second question was around strategic alignment, and just making sure that the brand receives enough attention. Could you perhaps talk about how -- what's Molson Coors excited about this? And how does this fit into their total beverage strategy and ambition?

Yes. Well, look, I mean this is why they originally approached us because they have been very public about their ambitions to drive their business beyond beer into total beverage as they describe it. And they realized that Fevertree brands fitted perfectly into this strategy and also fitted perfectly with their distribution capability because we are a rare breed in the world of soft drinks that we work across both the On- and Off-Trade, which is where the Molson network is so strong. And so that is why they see us as central to their beyond beer nonalcoholic plans and ambitions, which is why we will be a priority brand for us -- for them, I should say, which will clearly benefit us enormously.

Yes. And Ed, on your final question, look, as I set out sort of presentationally, the movement to a license agreement and recognition now of royalties going forward will change the shape of our statutory P&L, but we'll be reconciling back to U.S. brand revenue in the way we report to the city to allow consistency with historical reporting, consistency in the context of the U.S. with how we recognize revenue in the rest of the group. And in terms of the profit that we recognized in relation to the U.S., as we mentioned this morning, there are guaranteed elements of the profit flow from '26 to 2030, which gives us great confidence in our ability to provide guidance for how we see that outlook developing over the coming years. If we stand back from that and actually think about the profitability of the Fevertree partnership in the U.S., obviously, we're very excited about the prospect of working with a partner like Molson, who bring fantastic operational capability, supply chain expertise, economies of scale, all of which will drive incremental profitability for the partnership P&L over the coming period.

Our next question is from Anubhav Malhotra from Panmure Liberum.

Congratulations on a great deal this morning. I just wanted to understand if you could quantify for us what -- how much working capital investment and CapEx investment had been going into the U.S. business on an annual basis roughly to drive the growth that is now freed up for you? My second question is around other markets beyond the U.S., I mean for a market like Australia, market like Canada, there would be other local companies, which could potentially be interested in doing similar sort of deals with you. Does this deal with Molson Coors limit your ability to do such deals at least for some time period? Or does it not? And then thirdly, my question would be on the guaranteed element of profit for 2026 to 2030, maybe if you could compare that with your internal budget or discussions that you have had with Molson Coors, how much of what is actually budgeted for the next 5 years, would those guaranteed profits implied would be like 25% of what you have in your mind at the potential profit opportunity in the U.S. or maybe that's close to 75%, I don't know if you could give some color on that.

Yes. Look, I'll take the first question about working capital. In terms of, if you look at the working capital profile for the group over the last 5 years, typically, it's between 20% and 25% of revenue on an annual basis, our level of working capital if we -- and we haven't broken that out between how that differs between regions. But if we stand back and think about our previous model, disproportionately, we're producing products in the U.K. We're putting it on the boat that takes 6 to 8 weeks to reach the U.S. We're then holding anything between 3, 4, 5 months of inventory in the U.S. and we're invoicing our customers before collecting the cash. So as we've said before, U.S. has always had an elongated working capital cycle. So in the context of that 20% to 25% average, it's fair to say that the U.S. working capital as a proportion of U.S. revenue is far higher than that. And so on the basis of the movement into the license agreement and the movement of the financials into Molson Coors, they'll be managing the working capital going forward. And so you'll see the U.S. specific working capital dramatically reduce over the coming years, particularly as we onshore U.S. production. And therefore, with that, that group working capital level will reduce from 20% to 25% down over the next 3 or 4 years. We won't quantify at this point, but it does allow for certainly an improved profile from where we go forward. And if you think about what would have been required to drive U.S. growth, the cash requirements for the group would have been disproportionately absorbed by the U.S. as it became a bigger and bigger part of the overall sales mix, which is why it's a really important component of this -- of the way forward, the fact that we will become more cash generative. And as I said, that gives us fun power to drive the brand -- firepower to drive the brand globally. And as we've always said in terms of our capital allocation framework, cash above and beyond that requirement, we will return cash to shareholders as well.

And just a quick answer to your second question is about does this have impact elsewhere? I mean the very short answer is no. This really is something that is totally focused on the U.S., and we haven't had conversations beyond that.

And then your final question about the specifics of the guaranteed level of profit. You'll understand I can't go into that. All I can say is it gives us great confidence in the earnings outlook that we're guiding to in the context of the U.S.

Our next question is from Rashad Kawan from Morgan Stanley.

Congrats on the deal. Just 2 for me. So first one, I mean, if you just take a step back, can you help us understand your expectations around the size of the U.S. opportunity with Molson as a partner, call it on a 5-year view or so relative to what it would have been if you had continued on your own? And then second question, kind of related to the first. Obviously, the partnership from a distribution sales marketing perspective is clear. But is there a benefit from a product innovation perspective, anything around co-creation you guys have talked about, does it impact your existing corporate partnerships, so thinking about some of the partnerships you have with some of the spirit companies today as an example.

So I'll answer to your first question, I mean, we're not quantifying it in terms of numbers. But as I hope we've illustrated in the presentation, the size and opportunity of the U.S. market is significant. We see an opportunity that's a number, if not multiple times the size of our business currently. And as I explained, there's no question that Molson Coors have the capability to really drive this business to the next level in terms of size, but also crucially into new channels and new opportunities. So as I mentioned in the presentation, things like adult soft drinks, ready-to-drink, they have these fantastic routes to market for those categories. The Fevertree brand is perfectly positioned to enter. So there's no question in our mind that this is multiple times the size opportunity than we're currently enjoying in the U.S. Sorry, you wouldn't mind repeating the second question?

Yes. The second question is more about innovation and whether there's an opportunity to co-create anything or just kind of benefit from just the product suite that Molson has and the intellectual capital that's there. And also, does it impact your existing kind of corporate partnerships with some of the U.S. spirits companies in that market?

I see. Yes. Look, I mean, as I said with innovation, these are conversations that we're starting with Molson Coors that will continue. So there are no announcements there currently. But clearly, we are excited about the innovation opportunities that are available to us in the U.S. And does it affect our current relationships with other spirit partners? No. It certainly shouldn't. We've got fantastic relationships. We're doing really brilliant co-promotional activations across the U.S., with a whole suite of spirit companies, which have been very effective for them, very effective for us. And clearly, as we are, by far, the #1 premier mixer brand in the U.S. I'm quite sure that they want to continue to work with us. As indeed, we will continue -- want to work with that. So this shouldn't have any impact on that.

Our next question is from Matthew Ford from BNP Paribas.

Congratulations for today's announcement. My question is for Andy, just in terms of the transition over the next couple of years. Obviously, you've called out this up-weighted A&P investment in the U.S. and a bit of transition in '25 and in '26. But can you just give us a feel for how this might translate into the margin profile? I mean for example, as I look at EBITDA margin in consensus for next year or for 2025, we're at just shy of 16% EBITDA margin. Could you just kind of walk through perhaps how this increased A&P and how this transition might feed through to a margin impact in '25, '26 and then how you're thinking about the recovery from there on?

Yes. Sure, of course. Look, I mean, I think first and foremost, as we set out in the presentation, this partnership significantly upgrades Fevertree's long-term quality of earnings and opportunity to drive the top line, profitability and cash conversion. In order to make that transition though over the next -- this year, 2025 and 2026, there will be effectively an investment required. And that's going to be reflected by EBITDA margins over that period, we would say between 11% and 13%. And why? Because in the first instance, we're transitioning from our existing setup in the U.S. to the new setup with Molson. Alongside this, we're going to be investing behind the brand. Like we've always said at the right time, we will up-weight investment particularly in the U.S. when we have the right level of distribution. This is the right time. And so subsequently, that will, in the short term, have an impact, if you like, on EBITDA margins. And the other aspect is part of this partnership is the economies of scale and increased profitability that Molson will bring to the table. But that will take time to come through. Onshoring production will happen over initial period. So the really interesting thing is where we exit this. By the time you get to 2027, we're anticipating a significantly uplifted U.S. revenue compared to current expectations that will carry through to 2028. From a margin perspective, even though we still expect to be -- to have up-weighted U.S. marketing spend in 2027, you're going to see margins come back to at least mid-teens from an EBITDA perspective. And by 2028, we're going to have a higher top line margins coming back to high teens because we're going to have all of the benefits of the economies of scale and the new platform for growth in the U.S. So as we say, there's significantly upgrades the medium- and long-term outlook for this business. And to do so proactively, we've taken the decision to invest to achieve and unlock that long-term growth, but that will be in numbers terms the impact in the short term on EBITDA margin at group level.

Our next question is from Charlie Higgs from Redburn Atlantic.

I've got 2. But first one, Tim, just on kind of the U.S. market in general, I think your performance accelerated in the half when most of the big spirits companies are talking about a softer U.S. spirits market. Can you just talk a bit more about what drove that enhanced performance and what you're seeing on the ground in terms of cocktail developments in the U.S.? Is there anything that's resonating particularly well? And then the second one, is just for Andy, on capital allocation and moving towards this new kind of more capital-light model, is there any reason long term to think that the company shouldn't be doing more share buybacks going forwards? Or would you have a preference for other options of use of excess cash?

Yes, Charlie. So look, as you say, the U.S. spirits has been a bit softer in terms of growth than it has for the last few years because they've had the fantastic growth in the last few years. But make no mistake, the U.S. spirits world is still growing at certainly at the premium end. But as you say, we have been growing faster than that, and that's because we have been winning market share, but also we've been broadening our range and deepening our penetration, and a reflection of the amount of white space that is still out there and available to us. And when you ask about spirit trends, I mean, the great thing about the U.S. market, it's diverse in terms of the cocktails that are in trends and what we've made sure is that we've got the right mixer for those cocktails as they develop. We're still seeing a fantastic growth as an example with the Paloma, where our pink great fruit soda mixer is working so well. But ginger beer business continues to grow and grow, and we are now by far the market leader. And one of the things continuing to fuel that is the mule drink, whether that's a Moscow mule with vodka, Jalisco mule with tequila or even with rum. So this is what is exciting about the Fevertree portfolio is we're so well positioned depending on which cocktail is growing and developing at the time. So yes, that is why it is such an exciting market and category, and that's why there is so much opportunity and potential ahead.

And Charlie, in terms of the capital allocation question, look, as we've spoken about, absolutely this move to a more asset-light model will drive increased cash conversion and cash generation for the business and in terms of how we think about the opportunity for returning cash to shareholders. We'll -- clearly, we'll continue to evaluate the most efficient form of any return to shareholders over time, but buyback certainly could be part of that mix going forward.

Thank you, Charlie. This concludes our Q&A session and consequently today's call. Thank you for joining us today. You may now disconnect your lines.