Value Investors Club Lecture Notes

Fever Tree Drinks (Submitted by Supernova, October 11, 2022)

Introduction

• Host: Timon van Knowledge
• Disclaimer: Information provided, not a recommendation
• Ticker: FEVR (LON), FVVTF (OTC)
• Company: Fever Tree Drinks

Elevator Pitch

• Fever Tree: a consumer brand in premium cocktail mixers
• Dominant in markets entered (e.g., UK – 45% market share)
• Strong financials (5 & 10 yr organic sales CAGR: 34% & 32%)
• Asset-light model, high return on tangible capital (over 100%)
• Free cash flow growth every year since IPO
• Strong balance sheet (no debt, net cash, pays dividends)
• Stock down 70% YTD due to supply chain & cost inflation issues

Business Description

• Founded: 2004 by Charles Rolls and Tim Warrillow
• Products: Premium cocktail mixers (e.g., tonic water, ginger beer)
• Sales Split: 70% off-premise (grocery stores), 30% on-premise (restaurants, bars)
• Launch Strategy: First on-premise for brand awareness, then off-premise
• Innovation: Regularly introduces new flavors
• Marketing: Co-markets with spirit brands, PR events, airport bars

Market Overview

• Previous Dominant Player: Schweppes (close to 100% share)
• Fever Tree rapidly gained market share due to Schweppes' stagnation
• Fever Tree’s entry expands the mixer category (e.g., UK market tripled in 8 years)
• Key Markets: UK, Europe, US, Rest of the World

Regional Sales Overview

UK

• Largest market (35% of sales)
• Growth primarily driven by gin market expansion
• Dominates with 41% off-premise, 50% on-premise market share

Europe

• Second largest market (29% of sales)
• 5 & 10 yr sales CAGR: 27% & 26%
• Stated goal: 2.5x growth from 2020 levels (by ~2025)

US

• Third largest market (27% of sales)
• High growth potential (US spirits market 10x UK’s)
• Plans to grow US business 5x from 2020 levels

Rest of the World

• Fourth largest market (9% of sales)
• Key markets: Australia, Canada (leading in tonic brand)

Financial Characteristics

• Sales Growth: Significant annual sales growth across years
• High Sales CAGR: 34% (5-year), 31% (10-year)
• Planned expansion into non-carbonated mixers next year

Margin Headwinds & Solutions

• Main Issues: Supply chain issues, cost inflation, lack of scale, pricing strategy
• US Supply Chain: Production ramp issues, high logistics costs
• Cost Inflation: High transportation and product costs (especially glass bottles)
• Scale: Diversified production across plants; inefficiency until higher volumes
• Pricing Power: Typically premium-priced, challenges in high-growth markets
• Recovery Plan:
  • Improve US local production (reduce shipping costs)
  • Address cost inflation with market adjustments
  • Enhance scale to lower unit costs
  • Gradually increase prices in select markets

Strategic Advantages & Risks

Competitive Advantages

• First Mover Advantage: Established brand loyalty, limited shelf space for competitors
• Distribution: Strong US distribution network
• Brand Equity: High loyalty, strong market presence

Risks

• Consumer Spending: Economic downturn might cause consumers to trade down
• Competition: Schweppes, Q (in US), and private labels
• Brand vs. Fad: Possible market shift away from premium mixers
• Alternatives: Growth in legalized marijuana might impact alcohol consumption

Strategic Moves & Future Prospects

• Non-Carbonated Mixers: Entry planned, existing brand equity may help
• Adult Sodas Testing: Expanding into soda aisle could increase market size

Valuation

• Current Stock Price: £8.76, down due to margin headwinds
• Forward P/E: 9.9x normalized 2024 EPS
• Market Comps: Comparable niche beverage companies have higher EV/Sales multiples

Conclusion

• Fever Tree leverages first-mover advantage, branding, and strategic partnerships
• Addressable market expanding with new products and regions
• Current margin issues expected to improve as supply chains normalize