Half-year Report

RNS Number : 2780Y

Fevertree Drinks PLC

08 September 2020

 

Fevertree Drinks plc

FY20 Interim Results to 30 June 2020

Resilient outcome for the half-year, further strengthening our position as the clear global leading premium mixer brand

FY20 Interim Highlights

· Strong Off-Trade performance and diversified revenues across regions and channels has enabled the Group to mitigate the impact of On-Trade closures caused by COVID-19

· Off-Trade sales exceeded expectations across our regions

o  Maintained position as number one brand in the UK mixer category at retail

o  Very strong US performance notably ahead of expectations as the brand continues to gain traction

o  Resilient underlying performance in Europe, with reported revenue impacted by temporary importer de-stocking during lockdown

o  Very encouraging Off-Trade growth in key RoW markets of Canada and Australia

· Rapidly identified and reacted to evolving purchasing and consumption habits

o  Upweighted marketing spend to focus on at-home consumption with the Group's first ever national television advertisement in the UK, driving significant growth in consumer awareness

o  Successful roll out of larger pack format in UK delivering good rate of sale growth

o  Investment in online retail platforms drove significant growth in this channel globally

· A strong and secure financial position has enabled the Group to remain focused on the long-term opportunity, continue to invest, and to make strategic progress

o  Successful launches of the Premium Soda range in the UK and Sparkling Pink Grapefruit in the US

o  Acquisition of GDP Global Drinks Partnership, the Group's sales agent in Germany, just after period end, underlying the Group's ambition in Germany and the wider European opportunity

Financial highlights

£m	H1 FY20	H1 FY19	Change
Revenue
UK	48.3	60.7	(20)%
US	27.4	19.8	39%
Europe	20.5	29.0	(29)%
ROW	8.0	7.8	2%
Total	104.2	117.3	(11)%
Gross profit	48.7	60.8	(20)%
Gross margin	46.8%	51.9%	(510)bps
Adjusted EBITDA1	23.8	36.7	(35)%
Adjusted EBITDA margin	22.8%	31.3%	(850)bps
Diluted EPS (pence per share)	14.99	24.30	(38)%
Dividend (pence per share)	5.41	5.20	4%
Net cash	136.9	104.1	32%

¹ Adjusted EBITDA is earnings before interest, tax, depreciation, amortisation, share based payment charges and finance costs

· Resilient revenue performance of £104.2 million in the first half, a decrease of 11% year-on-year

· Gross profit margin was impacted by COVID-related shift in channel and regional sales mix, and the US price optimisation. Excluding COVID-19 impacts, gross margin for the first half would have been c.49.0%

· Despite the short-term disruption of COVID-19, we continue to upweight investment in marketing and our team to support the long-term opportunity across all regions, maintaining previously budgeted underlying operating costs of c.£60 million for the full year

· This increased investment and the impacts of COVID-19 on revenue and gross margin impacted our Adjusted EBITDA margin in the first half but we remain confident that continuing to invest in our people and our brand will position us strongly as we emerge from the current period of uncertainty 

· Asset light business model continues to support the Group's secure financial position with net cash improving to £136.9 million at period end

· Paying an interim dividend of 5.41 pence per share, an increase of 4% year-on-year, reflecting the financial strength, confidence in the business, as well as our strong cash generation

Tim Warrillow, CEO of Fever-Tree, commented

"I am very proud of how the Fever-Tree team has responded over the last six months and the results that we have delivered. Our priority throughout the COVID-19 pandemic has been our close-knit team, who are integral to the success of the business. We did not furlough any team members and instead focused on redeploying talent around the business. We have also continued to invest in building the team across the globe, adding 20 new employees in the first half of the year.

Our performance in the Off-Trade over the first half of the year has been very encouraging with sales across our regions exceeding our expectations. People's interest and excitement about mixing drinks at home has really taken hold over the lockdown period, attracting more households to the Fever-Tree brand than ever before. Consequently, we have increased our penetration in the UK, consolidated our number one position, and driven value share gains in the US, Europe, and as far afield as Canada and Australia. Despite the On-Trade closure for a large proportion of the first half of the year, we have continued to support our On-Trade partners across our regions and are well-placed to benefit from the return of this important channel.

We have had an encouraging start to the second half of the year and, while we certainly aren't immune to the ongoing challenges of COVID-19, our performance and our investments so far this year, coupled with the growing interest in long mixed drinks, gives me confidence that we will exit the crisis in an even stronger position than we entered it."

There will be live audio webcast on Tuesday 8^th September 2020 at 10:00am BST. The webcast can be accessed via:   https://www.investis-live.com/fever-tree/5f4f4f7948ce9210001da533/temp

For more information please contact:

Investor queries

Ann Hyams, Director of Investor Relations I   [e-mail]   I [phone]

Media queries

Oliver Winters, Director of Communications I   [e-mail]   I [phone]

Nominated Advisor and Joint Broker - Numis Securities

Garry Levin I Matt Lewis I Hugo Rubinstein I [phone]

Joint Broker - Investec Bank plc

David Flin I Alex Wright I [phone]

Financial PR advisers - Finsbury

Faeth Birch [phone]; Chris Ryall [phone]; Amanda Healy [phone]

COVID-19 update I Well-positioned to navigate uncertainties

The Group is in a strong financial position. We are debt-free, with strong underlying cash flow conversion and an improved net cash position at period end of £136.9m. Alongside our strong balance sheet, we benefit from well diversified revenue streams, generated across multiple regions, in both On-Trade and Off-Trade channels, and across multiple end customers. 

We have maintained the cross-departmental team that was established at the start of the crisis as we continue to monitor the changing situation and co-ordinate our response. Our asset light, outsourced business model, with few capital commitments and a low fixed cost base provides both resilience to withstand the ongoing impacts of COVID-19 and the flexibility to react to changing channel dynamics and consumer demand.

Reflecting the financial strength and long-term prospects of the business, we will be paying an interim dividend of 5.41 pence per share, an increase of 4% year-on-year.

COVID-19 update I Supporting our people and communities

Fever-Tree has always been a close-knit team, with every employee valued and integral to the business. The way the Global team has adapted to working remotely and the commitment they have demonstrated through a challenging period is a testament to the talent and dedication of all our employees. As we grow as a business, we continue to strengthen our team, adding 20 new employees during the first half of the year.

Through the crisis we have strived to provide security and certainty to our team and therefore decided very early into the COVID-19 pandemic not to use the UK government's furlough scheme or receive government grants. Instead, during lockdown periods our On-Trade teams globally have focused on new projects and initiatives as we look to 2021 and beyond, whilst some individuals were deployed to different departments across the business to broaden their knowledge and skill set.

We remain determined to emerge on the other side of COVID-19 not only as an even stronger business but also one that has made a difference during the crisis. As well as a focus on our employees, we have offered support to communities and groups across our regions, including financial support to local charities, encouraging staff with capacity to volunteer their time, and through donations to initiatives supporting key workers. In the UK we supported "Salute the NHS" in their mission to provide one million meals to NHS frontline staff, donating 100,000 soft drinks to be included in their meal packs. In addition, we have continued to support our charitable partner, Malaria No More in keeping the fight against Malaria in the public eye by continuing our £1 million commitment over three years.

Strategic update I Resilient performance as focus remains on the long-term opportunity

Against the backdrop of disruption caused by COVID-19, Fever-Tree has delivered a resilient performance, with revenue of £104.2m representing a decline of 11% year-on-year. The On-Trade, which typically represents approximately 45% of Group revenue, has been severely impacted as lockdowns have led to closures in most of our territories since March, with only limited re-openings prior to the end of the period. 

As consumption has shifted away from the On-Trade we have worked proactively to drive growth in the Off-Trade and have delivered a consistently strong performance in this channel globally. Alongside this we have seen increasing evidence that the lockdown period has provided a further catalyst to the movement towards long mixed drinks. Spirits companies are increasingly looking to capitalise on this trend, and as the clear pioneer and global leader of the premium mixer category we remain very well placed to continue to partner with them to drive this significant long-term opportunity. 

Therefore, whilst the On-Trade closures have impacted our revenue in the short-term, we have remained focused on the long-term opportunity, continuing to build our team and invest in the brand across all our regions. This approach has been enabled by our financial strength and operational agility, and whilst there will be some inevitable impacts on our operational margins this year, we are confident that we will emerge from this crisis in a stronger position than we entered it, and are increasingly well placed to deliver our plans for long term growth.

UK I Positive momentum in the Off-Trade

Fever-Tree delivered a robust performance given the challenges posed by COVID-19, with revenue of £48.3m, a decline of 20% year-on-year. The On-Trade, which typically represents half of UK revenue, was closed from mid-March, and consequently revenue was down 61% in this channel in the first half of the year.

In the Off-Trade, following a modest start to the year as we continued to lap tough comparators from early 2019, we saw a strong ramp up in sales in the weeks leading up to mid-March as consumers increased frequency of shops and basket size in anticipation of imminent lockdowns. During the lockdown period, the Off-Trade performed consistently ahead of expectations, as consumers increased their at-home consumption, seeking out long mixed drinks as an everyday affordable treat. As a result, sales in the Off-Trade channel increased by 24% in the first half of the year, a strong performance which has consolidated Fever-Tree's market leading position.

Our agile business model meant we were quick to adapt to changing consumer purchasing habits that emerged during the period, such as the preference for larger pack formats, encouraging us to accelerate the roll out of our 15 x 150ml can pack which has delivered a very strong rate of sale in the retailers where it has been listed so far. We also increased our focus and resource in the convenience channel, which saw strong growth as consumers shopped closer to home, resulting in new distribution secured in Co-Op stores during the period. In addition, we have continued to invest for the long-term by taking advantage of cost effective marketing opportunities in the Off-Trade, redeploying marketing funds away from On-Trade and events into new on-shelf initiatives in retail, as well as launching our first ever national television advertising campaign which has driven an increase in consumer awareness.

As a result, Fever-Tree has increased volume share year-on-year, continued to strongly outperform other premium mixer competitors and remained the number one mixer by value at UK Off-Trade, with 37.6%² value share. 

Alongside mixers, we have seen the spirits category perform strongly at retail during the lockdown period, notably gin, as consumers have sought to treat themselves with a long mixed drink at the end of the day during lockdown. Spirits companies are increasingly looking to capitalise on this trend, be it gin and tonic, whisky and ginger, or vodka and soda, and are engaging on potential co-promotion opportunities. We are, therefore, very optimistic that the lockdown period has been a further catalyst to the long-term trend towards long mixed drinks which Fever-Tree, with our category leadership position, range and relationships, remains uniquely placed to continue to drive.

The On-Trade channel remained closed from mid-March, significantly impacting our overall performance. During this period, our team was proactive in offering support to our On-Trade customers through credit extensions and payment plans, as well as working closely with our end accounts to ensure they were offered the support required to adapt to the new ways of trading on reopening. These were gratefully received and have strengthened our relationships with many of our key long-term customers. 

Since period end, the On-Trade has seen a gradual and cautious reopening. There have been differences in reopening rates and footfall between pubs, bars and restaurants, as well as regional differences, and we expect to continue to see a very gradual recovery as we proceed through the remainder of the year.

The Group has continued to innovate and pioneer the category through the first half of the year. We launched our Premium Soda range in March and have seen a very positive response in the Off-Trade, with new listings secured and very encouraging rate of sale performance across retailers. Our intention is to roll-out the range across the On-Trade as it gradually reopens. 

At the end of the period we were delighted to work alongside Sainsbury's and spirits partners to bring to life our first ever Fever-Tree Gin & Tonic Bay. This was the first mixer-led spirits co-promotion of its kind at UK retail, encouraging shoppers to find their perfect pairing in store across the Fever-Tree range with recommended gin partners, underlining the brand's strength and position as the enabler for consumers to explore and experiment across the gin category.

In summary, notwithstanding the disruption of COVID-19 and the short-term impact on our On-Trade sales, the Group has made good progress in the UK in the first half of the year. We have responded proactively to the rapid shift to at-home consumption, launched new formats, new flavours, pioneered a new co-promotional approach, and produced a national television advertising campaign. The performance of the brand in the Off-Trade, along with the support we have provided to our On-Trade partners during lockdown puts us in a strong position as normality gradually returns to both channels.

² IRI 13 weeks to 28 June 2020

US I Successful pricing optimisation contributing to a strong Off-Trade performance

The Group performed very strongly in the US over the first half of the year as we continue to build momentum in the region. Despite the impact of COVID-19 on On-Trade sales, total US revenue for the first half of the year increased by 39% to £27.4m (35% on a constant currency basis).

Our priorities since we took direct control of US operations in June 2018 have remained unchanged. Initially our focus was on building the team, strengthening our route to market and building strong relationships with our distributors, customers and the trade, then using these foundations to expand our distribution across both channels and activate our marketing agenda. 

The next step was addressing the opportunity to optimise our pricing and format architecture. Rigorous quantitative and qualitative analysis undertaken in the second half of 2019 reaffirmed our belief that there was a significant opportunity to unlock an affordable premium positioning similar to that achieved by the Group in other markets, catering to a wider audience of consumers and occasions to encourage both trial and consumption. We engaged with our distributors and customers in the early stages of this year and worked alongside them to successfully implement the price optimisation over the period from March to June. These discussions also demonstrated the potential for incremental distribution and a broadening of our format mix, however, implementation of these has currently been delayed by COVID-19.

Sales in the Off-Trade started the year strongly with continued momentum and the benefit of new distribution gained in 2019. Since lockdowns began across the US, we have seen sales accelerate further in the Off-Trade channel, both at grocery and across liquor stores. Fever-Tree has delivered +72% value growth³ over the first half of 2020 at US retail, exceeding our expectations and ensuring we remain the clear market leader in grocery in the premium mixer category, which itself is the fastest growing segment in the category.

This performance is partly attributable to the switch to at-home consumption following On-Trade closures, although just as seen in the UK, this has been further amplified by the increased propensity towards making long mixed drinks at home, with spirits taking share from beer and wine during the lockdown. In addition, we have started to see the benefit of the price optimisation which was gradually introduced on shelf during the period, although it is too early to isolate the exact impact of this on rate of sale given the other factors influencing Off-Trade growth. Our strong performance in the Off-Trade demonstrates we are significantly growing our consumer base which will greatly enhance our On-Trade efforts when the On-Trade channel fully opens for business.

On-Trade sales in the US have been materially affected in the first half by closures related to lockdowns, which have varied by state in length and extent, but overall have led to very challenging conditions since March. Despite this, we continue to enjoy a strong relationship with Southern Glazer's Wines and Spirits (SGWS), with whom we have performed well, especially in the liquor store channel. We have also continued to win new mandates and distribution with national hotel and restaurant groups in the first half, positioning the Group well as the On-Trade gradually reopens.

Within the portfolio we have seen strong growth across our full range of mixers, targeting multiple drinks occasions, from the Mule (Ginger Beer), to tonics (Tonic Water) and spritzes (Club Soda). Tequila continues to show very strong growth, and in the first half of the year we launched a new Sparkling Pink Grapefruit to pair with Tequila to create the perfect Paloma cocktail. This launch has been a great success, already gaining significant attention from retailers and consumers, and we are optimistic about the Pink Grapefruit opportunity as we look forward to 2021.

Marketing and investment remain important focus areas as we grow brand awareness with consumers and the trade. We have increased our level of investment during the COVID-19 crisis, redeploying spend to where it will be most impactful. Throughout lockdown this redeployed spend was focused on digital execution to gain maximum exposure, broadening our work with the Google Accelerator program, working closely with partners such as TimeOut (renamed TimeIn) and engaging with bar-tenders to create online content delivered via social media takeovers, video and emails focused on creating simple long mixed drinks at home. In addition, we started to build strong relationships with a number of online retailers, including Drizly and Minibar, with performance across Amazon especially notable as volumes increased by 130% year-on-year over the period.

³ Nielsen 26 weeks to 29 June 2020

Europe I Optimising the business to access the opportunity

Revenue for the first half of the year declined by 29% to £20.5m (30% on a constant currency basis), impacted by importer destocking and therefore not fully reflective of underlying trading, especially in the Off-Trade, which performed well in many key markets.

Due to the uncertainties related to COVID-19 many of our European importers placed significantly reduced orders from March to May as they chose to manage their inventory and credit risk by depleting their existing stockholdings. This meant our reported sales in the first half of the year are significantly behind sales made in-market by our importers, where Fever-Tree had a good performance in the Off-Trade. We have subsequently seen a strong increase in orders placed in the period from June to August, correcting the majority of the discrepancy between our sell-in and our importers sell-out seen at June.

On the basis of underlying sales made by our importers in Europe, volumes in the Off-Trade have been up approximately 30% year-on year across the region. However, as with elsewhere, On-Trade sales have been materially impacted by closures, especially in Southern Europe which tends to rely more on the On-Trade, as well as the tourism industry. 

As outlined in our Full Year 2019 results in April, our strategy and approach in European markets is segmented into three groups. Core Markets, including Belgium, Denmark and Ireland, are markets where premium tonic has achieved a strong or market-leading share and provide a blueprint for what can be achieved elsewhere in the region. Our focus is on maintaining the position we have established in the tonic category whilst driving growth in new flavours and formats. 

Next Wave Markets, including Germany, Spain and Italy, are countries where Fever-Tree currently has relatively low penetration in sizable mixer markets and where significant growth opportunities exist. Spain and Italy are both On-Trade led markets and as such, sales in these countries have been more severely impacted in the first half of the year. The relationship with our local importers remains strong and our focus is on identifying opportunities as the On-Trade reopens. Germany represents an exciting long-term opportunity in a market that has performed well through COVID-19. The acquisition of our sales agent, GDP Global Drinks Partnership GmbH ("GDP") post period end, another example of the Group's proactive approach during the period, will provide us with a strong operational footprint with which to continue to drive our growth in Germany.

Finally, in Earlier Stage markets, such as France and Netherlands, we are focused on establishing the conditions to allow for growth within currently immature mixer categories. This includes building the optimum distribution and route to market, as well as increasing headcount where appropriate.

We have continued to invest across the region despite the disruption caused by COVID-19, however, there has been a redeployment of spend away from the On-Trade and events activities towards the Off-Trade. This has included investment in retail display visibility across our Core Markets, co-promotional activity with Lillet on a Spritz serve in Belgium, co-promotional activity on gin and tonic with Bombay Sapphire in Germany, and in our Earlier Stage markets, including Netherlands and France, we have increased our distribution footprint within convenience stores.

Whilst the impact of COVID-19 will continue to be felt across the region as the On-Trade gradually recovers, we remain confident and optimistic about the medium and long-term opportunity in Europe. There are a number of markets that offer real potential and we continue to invest and focus on the opportunity that they present, as evidenced by the post period end acquisition of GDP.

RoW I Building momentum in Australasia and Canada

Our RoW markets have all been impacted by closures to the On-Trade. However, our two largest markets with sizeable mixer categories, Australasia and Canada, both delivered a very encouraging Off-Trade performance during the first half of the year, contributing to an overall revenue increase for the region of 2% to £8.0m.

In Australia, Fever-Tree continues to be the clear premium mixer category leader and is responsible for driving growth within this segment. Long mixed drinks continue to gain popularity, led by the gin and tonic. Gin was the fastest growing spirit category in 2019, with +21% value growth, and Fever-Tree is driving growth in the tonic category. Fever-Tree's increasing brand awareness, along with significant distribution gains, have enabled the brand to grow in major retailers such as Coles, where our tonic sales were up just over 100% year-on-year at the end of the half and now contribute over a quarter of tonic sales for this major retailer. As well as maximising the momentum in the gin and tonic serve, we also see opportunities to premiumise other mixer categories such as gingers going forward.

In June, Fever-Tree hosted a Gin & Tonic Festival in Australia, an event that was brought to life online through tastings and masterclasses, having originally been planned to take place in Sydney. The virtual event was used to educate consumers on the premiumisation of the gin and tonic, drive trial and awareness, and build trade advocacy during a time when the On-Trade was closed.

In Canada, Fever-Tree has used its strong presence in the premium mixer category to increase trial and awareness, and secure new distribution with a number of key accounts. We grew our tonic sales by more than 100% year-on-year over the last 12 months to become the largest tonic brand by value in Canada, with over a third of the market share at retail. Based on our strong rate of sale in major retailers, we are confident of continuing to gain new distribution, both in terms of number of accounts and facings in-store. This is underpinned by the premiumisation of the mixer category, led by Fever-Tree, with premium mixers far outpacing the growth of standard serves.

In Asia we continue to focus on key cities across the region. The appointment of our first Regional Director for Asia last year demonstrates our long-term ambition for the region, where we are starting to establish ourselves by enhancing our distribution network and building our relationships with spirits companies to promote premium long mixed drinks.

FY20 outlook

The first half of 2020 has been a challenging period for most companies navigating through the uncertainties created by COVID-19. However, our diverse set of revenues, across multiple geographies and channels, has led to a resilient first half performance.

We have now established a market leading position in a number of key markets, with long-term relationships across the On-Trade and Off-Trade, with our production and distribution partners, and with various spirit partners. It is the success in our established markets that provides us with the case studies and platform to turn to the global opportunity with real confidence. We are in the early stage of execution in a number of markets with significant potential, where our focus is on investing in great people, building the right route to market, creating an optimal portfolio and creating a bespoke marketing strategy to ensure we are ideally positioned to realise these opportunities.

Whilst the long-term aspirations of the Group remain unchanged, this year's performance will be impacted by the challenges and uncertainties COVID-19 has created, most notably the closure of the On-Trade across our regions for a significant proportion of the year followed by what we expect to be a gradual reopening. We are well positioned to benefit from the reopening but remain mindful of the impact of continued social distancing implications alongside the risk of further local or national lockdowns as the year progresses. 

Given the level of uncertainty and the dynamic nature of the situation, the impact of COVID-19 on the remainder of the financial year is still hard to predict. However, on the assumption of no further significant lockdowns in our regions as seen in the second quarter this year, and a continued gradual recovery of the On-Trade, and incorporating the acquisition post-period end of GDP, we expect FY20 revenues of between £235m and £243m. The channel and regional mix impacts on gross margin seen in the first half of the year will continue throughout the second half, and we remain committed to spending c.£60m of underlying operating expenditure.

While we are not immune to the current situation, the Group is financially well placed and its unique asset light outsourced business model provides it with the agility to adapt to and mitigate the challenges arising from the current circumstances. The wider long-term trend towards premium spirits and premium long mixed drinks continues and we are confident the Group will be well placed once the current period of disruption and uncertainty ends.

Financial review

The Group entered 2020 in a very strong financial position; debt-free, with £128.3m cash on the balance sheet and strong underlying cash flow conversion. Alongside this strong financial position, the Group operates an asset light, outsourced business model, which underpins a low fixed cost base, requires low levels of capital expenditure and most importantly enables operational agility and flexibility. 

This combination of operational agility and financial strength has informed our approach to navigating the disruption caused by COVID-19. 

Operationally we have worked very closely with our network of five bottlers and two canners across the UK and Europe to ensure continuity of production through the period despite multiple and varied on-going challenges, further underlining the strength and value of our outsourced model. Alongside this, post period end we have completed the acquisition of our German sales agent, GDP, giving the Group an operational footprint in a key European market.

Our financial stability has allowed us to remain focused on delivering against the long-term opportunity despite the impact in the short-term that COVID-related closures have had on our On-Trade revenues globally. We took the decision very early on not to furlough any of our staff, and indeed have continued to build our team. During COVID-19, we have necessarily re-deployed and re-focused elements of our marketing spend, continued to invest and have significant marketing activities planned for the second half of this year. As a result of these decisions our operating margins will temporarily be impacted in 2020 but we remain confident that the continued investment in our people and our brand will position us strongly as we emerge from the current period of uncertainty.

Since the period of lockdowns began in March, we have managed both our credit risk and working capital profile carefully. Alongside this, we committed to pay a 2019 final dividend during the period. Subsequently we have seen strong operating cash flow conversion and our cash position has improved to £136.9m at period end. As a reflection of the Board's confidence in the financial strength of the business, we will pay an interim dividend of 5.41 pence per share, an increase of 4% year-on-year.

£m	H1 FY20	H1 FY19	Change	Constant currency
Revenue	104.2	117.3	(11.2)%	(11. 9)%
Gross profit	48.7	60.8	(19.9)%	48.1
Gross margin	46.8%	51.9%	(510)bps	46.5%
Adjusted EBITDA	23.8	36.7	(35.2)%	23.4
Adjusted EBITDA margin	22.8%	31.3%	(850)bps	22.6%
Operating profit	21.4	34.8	(38.3)%
Profit before tax	21.7	35.0	(37.9)%
Cash	136.9	104.1	31.5%

Gross margin and operating expenses

Gross margin of 46.8% represents a retraction from the 51.9% gross margin reported in the first half of 2019. Certain known factors, including the US price optimisation implemented in the first half of this year, would have resulted in a gross margin for the Group in line with our expectations of c.49% for the period.

Whilst there was some marginal upside from foreign currency movements, the most significant impacts on gross margin beyond the expected level of c.49% relate to the effect of COVID-19 on channel and territory mix. In the UK, the On-Trade reduced to 26% of UK sales in the first half of 2020 (H1 2019: 52%), whilst the US contribution to regional sales mix for the Group increased to 26% of Group revenue (H1 2019: 17%). We would expect the impact on gross margin of these sudden shifts in channel and regional mix to unwind gradually as the On-Trade recovers globally. However, in the longer term we do expect the US to increase in the regional sales mix given the scale of opportunity in that market. The US currently operates at a lower gross margin than the rest of the Group.  Whilst we continue to command a strong price point in the US the lower percentage gross margin is a function of the elevated logistics costs related to transporting product from the UK to the US, storing high levels of stock due to the lead time into the US, and then transporting the product across continental US. Whilst servicing the US from UK production has been the appropriate approach to date as we have established the brand in the US, we believe there will be an opportunity over time to drive efficiencies in our US logistics costs as we move production from the UK to the US and then scale with local production partners.

Underlying operating expenses increased by 3.4% in the first half of the year to £24.9m (H1 2019: £24.1m) as we continued to invest despite the impact on revenue of COVID-related closures of the On-Trade. As a result, underlying operating expenses increased to 24.0% of revenue (H1 2019: 20.6%). 

Within this, marketing spend in the first half of the year reduced to 8.0% of revenue (H1 2019: 10.4%), reflecting the paring back of planned On-Trade and events-related spend from March onwards, including most notably the cancellation of the Fever-Tree Championships at The Queen's Club. Whilst there was a redeployment of an element of this spend during the period, for instance with regards our UK television advertising campaign and increased digital spend in the US, a significant upweight in marketing spend is planned for the second half of the year. 

Staff costs and other overheads represented 16.0% of revenue in the first half of the year (H1 2019: 10.2%). This reflected a continued investment in building our team in in the first half of 2020, including the appointment of a Chief Marketing Officer, combined with the annualisation of new hires made in 2019. Within other overheads we increased our bad debt provision as a reflection of the elevated level of credit risk associated with COVID-19's ongoing impact on our customers and partners. 

As previously disclosed, we remain committed to continue spending against our originally budgeted levels of underlying operating expenses of c.£60m for 2020. Within this, whilst there is significant marketing activity planned for the second half, we expect our full year spend to be weighted towards staff costs and other overheads.

The combination of the impact on revenue of On-Trade closures alongside the effect on gross margin of shifts in channel and territory mix, whilst maintaining underlying operating expenditure, has resulted temporarily in a significant retraction in Adjusted EBITDA margin. As a result, the Group generated Adjusted EBITDA of £23.8m, a 35.2% decline from the first half of 2019, at a margin of 22.8% (H1 2019: 31.3%).

Amortisation costs were flat year-on-year at £0.4m, and share based payments remained flat year-on-year whilst depreciation increased to £1.2m (H1 2019: £0.7m). As a result of these movements, the 35.2% decline in Adjusted EBITDA translates to a 38.3% decrease in operating profit to £21.4m (H1 2019: £34.8m). 

Tax

The effective tax rate in the first half of 2020 was 19.4% (H1 2019: 19.0%). A change in the phasing of quarterly tax instalments required by HMRC has resulted in a net Corporation Tax debtor of £4.4m at period end, which will unwind in the second half of 2020.

Earnings per share

The basic earnings per share for the period is 15.06 pence (H1 2019: 24.39 pence) and the diluted earnings per share for the period is 14.99 pence (H1 2019: 24.30 pence), a decrease of 38.3%. 

In order to compare earnings per share period on period, earnings have been adjusted to exclude amortisation and the UK statutory tax rates have been applied (disregarding other tax adjusting items). On this basis, normalised earnings per share for the first half of 2020 is 15.38 pence per share and for the first half of 2019 was 24.63 pence per share, a decrease of 37.6%. 

Balance sheet and working capital  

There has been significant focus on credit control in the first half of the year. As lockdowns were enacted the Group sought to strike the appropriate balance between managing credit risk and supporting our customers and distribution partners globally. Initially we proactively extended terms with our UK On-Trade customers and our network of international importers, which was widely welcomed and further improved our already strong relationships. We have since established payment plans with all customers and are monitoring adherence very closely. The level of outstanding debtors from March 2020 and earlier has reduced from £37.2m to a current level of £1.1m, with payments expected against this remaining balance over the coming months. As a reflection of the increased credit risk related to on-going COVID-19 uncertainty we have increased our bad debt provision to 4.3% of trade debtors (H1 2019: 2.6%). 

Working capital⁴ decreased to £41.9m (H1 2019: £55.8m), with lower inventory and debtor levels largely a reflection of the reduced level of trading whilst creditors have remained consistent with the prior period. This reduction in working capital has resulted in cash generated from operations improving to 146% of Adjusted EBITDA (H1 2019: 106%).

⁴ Working capital is inventory and trade receivables less trade payables and derivative financial instruments

Cash

The Group continues to retain a strong cash position. Cash at period end has increased to £136.9m (H1 2019: £104.1m), an increase of 31.5% from June 2019 and 6.7% from December 2019.

Capital Allocation Framework and Dividend

The Group's Capital Allocation Framework remains unchanged. Our financial strength and cash position has allowed us to maintain our long-term focus despite the uncertainty relating to the impacts of COVID-19. As such, we will continue to retain sufficient cash to allow for investment against the Global opportunity, will remain vigilant with regards to M&A opportunities and beyond that will consider additional distributions to shareholders where the Board considers there to be surplus cash held on the Balance Sheet.

As a reflection of our confidence in the financial strength of the Group the Directors are pleased to declare an interim dividend of 5.41 pence per share, 4% ahead of the 2019 interim dividend. The dividend will be paid on 16 October 2020, to shareholders on the register on 25 September 2020.

Operational review

Since March, there have been, and continue to be, multiple challenges impacting our outsourced production model. These have ranged from dramatic variations in demand from month to month across regions and formats, up to threefold increases in lead times on certain ingredients and packaging, and delays in the commissioning of our new US bottling partner, which has now been rescheduled to the latter stages of this year assuming conditions allow. 

We have worked very closely with our network of five bottlers and two canners to mitigate the impacts of this disruption and have retained continuity of production throughout the period. This has required steps such as the early securing of significant contingency stocks of key ingredients, establishment of secondary warehousing in the UK to mitigate potential disruption and granular, real-time demand forecasting and highly fluid production planning. Whilst continuity of production has been retained through the period, it is important to state that network capacity, efficiency and lead times for supply into markets have all been impacted to differing extents by the disruption caused by COVID-19. 

First and foremost, the management of bottling capacity and changing production plans alongside our key partners has been vital, and this period has further underlined the value of the network of production partners we have built over recent years, the importance and the quality of these partners and the strength of our working relationship with them.

Post period events

In July, the Group was pleased to announce the acquisition of GDP Global Drinks Partnership GmbH "GDP", the Group's sales agent in Germany for a total consideration comprising €2.6m cash, plus a c.€5m consolidation of historic balances owed to Fever-Tree by GDP at completion.

GDP is a well-established sales agent and importer, with a strong portfolio of premium drinks and a good track record of growing premium brands. This portfolio approach is highly suited to the size and outlet fragmentation of the German market and, alongside Fever-Tree, GDP distributes complementary premium beer and spirits brands, which generated c.€10m of sales in 2019.

Germany is currently Fever-Tree's second largest market in Europe⁵ and represents a notable opportunity for the Group. It is one of the largest mixer markets in Europe and is underpinned by emerging premiumisation trends evident in both the mixer and spirits categories. The acquisition of GDP, with established management, distribution relationships and sales channels already in place allows the Group to accelerate the strength and depth of its presence in Germany much faster than could have been achieved by building the same capabilities from scratch.

⁵ Based on depletion volumes over 2019

Consolidated statement of comprehensive income

For the six months ended 30 June 2020

	Notes	(unaudited) 6 months to 30 June 2020 £m	(unaudited) 6 months to 30 June 2019 £m	Audited year to 31 December 2019 £m
Revenue	2	104.2	117.3	260.5
Cost of sales		(55.5)	(56.5)	(129.0)
Gross profit		48.7	60.8	131.5
Administrative expenses		(27.3)	(26.0)	(59.3)
Adjusted EBITDA	1	23.8	36.7	77.0
Depreciation		(1.2)	(0.7)	(2.2)
Amortisation		(0.4)	(0.4)	(0.7)
Share based payment charges		(0.8)	(0.8)	(1.9)
Operating profit		21.4	34.8	72.2
Finance costs
Finance income		0.3	0.2	0.5
Finance expense		-	-	(0.2)
Profit before tax		21.7	35.0	72.5
Tax expense		(4.2)	(6.7)	(14.0)
Profit for the year / period		17.5	28.3	58.5
Items that may be reclassified to profit or loss
Foreign currency translation difference of foreign operations		0.1	-	0.1
Effective portion of cash flow hedges		(1.4)	-	0.2
		(1.3)	-	0.3
Comprehensive income attributable to equity holders of the parent company		16.2	28.3	58.8
Earnings per share for profit attributable to the owners of the parent during the year
Basic (pence)	4	15.06	24.39	50.46
Diluted (pence)	4	14.99	24.30	50.26

Consolidated statement of financial position

30 June 2020

	Notes	(unaudited) 30 June 2020 £m	(unaudited) 30 June 2019 £m	Audited 31 December 2019 £m
Non-current assets
Property, plant & equipment		6.3	4.9	6.9
Intangible assets		40.6	41.3	41.0
Deferred tax asset		0.8	0.3	0.5
Other financial assets		2.3	2.2	2.1
Total non-current assets		50.0	48.7	50.5
Current assets
Inventories		23.6	30.4	20.8
Trade and other receivables		50.1	55.6	60.8
Corporation tax debtor		4.4	-	-
Derivative financial instruments		-	-	0.1
Cash and cash equivalents		136.9	104.1	128.3
Total current assets		215.0	190.1	210.0
Total assets		265.0	238.8	260.5
Current liabilities
Trade and other payables		(30.0)	(29.9)	(27.5)
Corporation tax liability		-	(5.9)	(5.1)
Derivative financial instruments		(1.8)	(0.3)	-
Lease liability		(0.6)	(0.6)	(0.6)
Total current liabilities		(32.4)	(36.7)	(33.2)
Non-current liabilities
Lease liability		(1.0)	(1.5)	(1.2)
Total non-current liabilities		(1.0)	(1.5)	(1.2)
Total liabilities		(33.4)	(38.2)	(34.4)
Net assets		231.6	200.6	226.1
Equity attributable to equity holders of the company
Share capital		0.3	0.3	0.3
Share premium		54.8	54.8	54.8
Capital Redemption Reserve		0.1	0.1	0.1
Cash Flow Hedge Reserve		(1.2)	-	0.2
Translation Reserve		0.1	(0.1)	-
Retained earnings		177.5	145.5	170.7
Total equity		231.6	200.6	226.1

Consolidated statement of cash flows

For the six months ended 30 June 2020

	Notes	(unaudited) 6 months to 30 June 2020 £m	(unaudited) 6 months to 30 June 2019 £m	Audited year to 31 December 2019 £m
Operating activities
Profit before tax		21.7	35.0	72.5
Finance expense		-	-	0.2
Finance income		(0.3)	(0.2)	(0.5)
Depreciation of property, plant & equipment		1.2	0.7	2.2
Amortisation of intangible assets		0.4	0.4	0.7
Share based payments		0.8	0.8	1.9
		23.8	36.7	77.0
(Increase)/ Decrease in trade and other receivables		11.1	7.5	1.3
(Increase)/ Decrease in inventories		(2.7)	(2.0)	5.7
Increase/ (Decrease) in trade and other payables		2.5	(3.1)	(4.0)
		10.9	2.4	3.0
Cash generated from operations		34.7	39.1	80.0
Income tax paid		(14.1)	(3.8)	(12.0)
Net cash flows from operating activities		20.6	35.3	68.0
Investing activities
Purchase of property, plant and equipment		(0.5)	(0.7)	(2.6)
Interest received		0.3	0.2	0.5
Net cash used in investing activities		(0.2)	(0.5)	(2.1)
Financing activities
Interest (paid)		-	-	(0.2)
Issue of shares		-	-	-
Dividends paid		(11.5)	(11.9)	(18.0)
Repayment of loan		-	(6.1)	(6.1)
Issue of other financial assets		-	(2.2)	(2.2)
Other financing activities		(0.3)	(0.1)	(0.5)
Net cash used in financing activities		(11.8)	(20.3)	(27.0)
Net increase in cash and cash equivalents		8.6	14.5	38.9
Cash and cash equivalents at beginning of period		128.3	89.7	89.7
Effect of movement in exchange rates on cash held		-	(0.1)	(0.3)
Cash and cash equivalents at end of period		136.9	104.1	128.3

Notes to the consolidated financial information

For the six months ended 30 June 2020

1.  Basis of preparation and accounting policies

The interim financial information has been prepared in accordance with the recognition and measurement requirements of International Financial Reporting Standards (IFRS) and IFRIC interpretations issued by the International Accounting Standards Board (IASB) adopted by the European Union.

The principal accounting policies adopted in the preparation of the interim financial information are unchanged from those applied in the Group's financial statements for the year ended 31 December 2019. The accounting policies applied herein are consistent with those expected to be applied in the financial statements for the year ended 31 December 2020.

This report is not prepared in accordance with IAS 34. The financial information does not constitute statutory accounts within the meaning of section 435 of the Companies Act 2006. Statutory accounts for Fevertree Drinks plc for the year ended 31 December 2019 have been delivered to the Registrar of Companies. The auditor's report on those accounts was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.

Adjusted EBITDA has been calculated consistently with the method applied in the financial statements for the year ended 31 December 2019. Operating profit is adjusted for a number of non-cash items, including amortisation of the Fever-Tree brand intangible acquired in March 2013, depreciation, and the share-based payment charge which recognises the fair value of share options granted. The intention is for Adjusted EBITDA to provide a comparable, year-on-year indicator of underlying trading and operational performance.

The impact of COVID-19 has also been reflected in the Directors' assessment of the going concern basis of preparation for the Group financial statements. This has been considered by modelling the impact on the Group's cashflow for the period to the end of December 2021. 

Whilst the Group is financially strong and has well balanced revenue streams, it is clear that COVID-19 will have a material impact on 2020 trading with the potential for further impacts in 2021. Sales have been strong in the Off-Trade channel across regions, but the On-Trade channel, which makes up 45% of Group sales, has been severely challenged, as government advice led to the temporary closing of all On-Trade outlets across our key regions during the first half of the year. Whilst the On-Trade is now partially reopened in most of our key regions, we expect the recovery to be gradual, and the risk of further local and regional lockdowns remains as we proceed through 2020. In light of this uncertainty and the related heightened credit risk, we have increased our provision for bad debts to £2.1m.  

Due to the high level of uncertainty in relation to the length, breadth and depth of the potential impacts of COVID-19, the Directors have modelled the impact on the Group under three separate scenarios which consider different rates of recovery of the On-Trade globally over the period to December 2021.

Under these differing scenarios, the forecasts for the period to the end of December 2021 indicate that the Group continues to have positive cashflows and significant cash balances and as a result is able to continue operating and to meet its liabilities as they fall due. This strong financial position and ongoing cash generation has underpinned the Directors' decision to pay an interim dividend of   5.41   pence per share.

The Directors have therefore concluded that the Group has adequate resources to continue in operational existence for at least the 12 months following the publication of the interim financial statements, that it is appropriate to continue to adopt the going concern basis of preparation in the financial statements, that there is

Notes to the consolidated financial information

For the six months ended 30 June 2020

not a material uncertainty in relation to going concern and that there is no significant judgement involved in making that assessment.

2.  Revenue by region

		(unaudited) 6 months to 30 June 2020 £m	(unaudited) 6 months to 30 June 2019 £m	Audited year to 31 December 2019 £m
United Kingdom		48.3	60.7	132.7
United States of America		27.4	19.8	47.6
Europe		20.5	29.0	64.4
Rest of the World		8.0	7.8	15.8
Group		104.2	117.3	260.5

3.  Dividend

The interim dividend of 5.41 pence per share will be paid on 16 October 2020 to shareholders on the register on 25 September 2020.

4.  Earnings per share

		(unaudited) 6 months to 30 June 2020 £m	(unaudited) 6 months to 30 June 2019 £m	Audited year to 31 December 2019 £m
Profit
Profit used to calculate basic and diluted EPS		17.5	28.3	58.5
Number of shares
Weighted average number of shares for the purpose of basic earnings per share		116,139,794	116,121,648	116,126,293
Weighted average number of employee share options outstanding		482,873	427,211	448,508
Weighted average number of shares for the purpose of diluted earnings per share		116,622,667	116,548,859	116,574,801
Basic earnings per share (pence)		15.06	24.39	50.46
Diluted earnings per share (pence)		14.99	24.30	50.26

Notes to the consolidated financial information

For the six months ended 30 June 2020

Normalised EPS		(unaudited) 6 months to 30 June 2020 £m	(unaudited) 6 months to 30 June 2019 £m	Audited year to 31 December 2019 £m
Profit
Reported profit before tax		21.7	35.0	72.5
Add back:
Amortisation		0.4	0.4	0.7
Adjusted profit before tax		22.1	35.4	73.2
Tax - assume standard rate (19%)		(4.2)	(6.7)	(13.9)
Normalised earnings		17.9	28.7	59.3
Number of shares		116,139,794	116,121,648	116,126,293
Normalised earnings per share (pence)		15.38	24.63	51.08

Normalised EPS is an Alternative Performance Measure in which earnings have been adjusted to exclude amortisation and the UK statutory tax rates have been applied (disregarding other tax adjusting items).

5.  Events after the reporting period

On 1 July, the Group acquired 100% of the share capital of GDP Global Drinks Partnership GmbH, "GDP", the Group's former sales agent in Germany. The total consideration for the acquisition comprises €2.6m cash, and c.€5m consolidation of historic balances owed to Fever-Tree by GDP at the acquisition date.  GDP also distributes complementary premium beer and spirits brands, which generated c.€10m of sales in 2019.

Initial acquisition accounting under IFRS 3 is on-going and will be disclosed in the Group's financial statements for the year-ended 31 December 2020. 

 

 

END

 

 

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