Value Investors Club - Fever Tree Drinks

welcome back to the value investors club I'm your host Timon van knowledge let's get right into it with Vic readings this is not a recommendation only for information and we have fever drinks Fever Tree drinks f e v r l o n and fvvtf OTC uh filed in on October 11 2022 by Supernova description elevator pitch FIFA tree fever is a consumer brand that essentially created its own category premium cocktail mixers fever has been met with a strong demand in almost every Market it has entered driving explosive sales growth and market share gains in tonic and ginger beer fever has already achieved a dominant of 45 market share in its Home Country UK and is now seating the globe with its deliciousness it is compelling Financial characteristics led by strong organic growth 5 and 10 year organic sales kegger of 34 and 32 percent with a long runaway Runway ahead it has an acid light business model with a return on tangible capital of over 100 they have grown free cash flow every year since IPO with no down use they have a strong balance sheet of Fort Knox baby with no debt and net cash Equity equal to 10 of their market cap despite their small size size and high growth they pay a dividend of 1.9 yield and even paid a sizable special Divi a few months ago while top-line growth continues unabated earnings have recently been hit by a sub supply chain and cost inflation issues that have driven ebitda margins from 30 to 10 percent despite sales and other kpis that point to a healthy brand the margin weakness has driven the stock down whooping 70 percent year-to-date extraordinary for Consumer stapled stock the type the supply chain and cost inflation issues should probably approve mostly a transitionary providing a window of opportunity to buy this little gym at only 10x EPS 2024 normalized earnings X cash description learn on based Fever Tree drinks is the world's largest purveyor purveyor of Premium cocktail mixers approximately 80 of sales are tonic water different flavors of tonics such as elderflower cucumber lemon and Mediterranean with a remainder composed of ginger beer club soda and other assorted non-tonic flavors Sicilian lemonade sparkling grapefruit it is it Etc roughly 70 percent of sales are off-premise grocery stores with 30 on-premise restaurants bars Etc they typically sell in four packs of and four packs of cute little 6.8 ounce bottles for 5.99 Fever Tree was founded in 2004 by charts roll and Tim Rory Willow Rory low Charles was a professional gin distiller Tim was a beverage industry consultant and they wanted to create a product to ride the spirit premiumization Trend they were originally going to launch a premium gin a premium gin but saw a better opportunity for a premium mixer they thought hey if you're spending all this money on a premium Spirit then should you mix it with a premium mixer besides when three-fourths of your drink is the mixer don't you want to mix with something better than Schweppes out of a too little bottle two liter bottle or a soda gun that's just cringe and thus Fever Tree was born they were essentially the first mover and premium mixers 10 years after founding they came public 's DNA is Spirits not soda they were built by partnering with Spirits companies to make the perfect gin and tonic they co-market in TV ads with the likes of Gray Goose they are distributed by Spirits distribute Distributors they are consumed with alcohol the co-founders came from the spirits industry the current year as a fever tree CEO is the former CEO of Belvedere Vodka they are placed in the mixer aisle not the soda ale they are all about the craft cocktail their slogan is when three quarters of your drink is a mixer mix with the best not do the do or whatever in other words it's a very different type of non-alcoholic beverage company that identifies more with Spirits than soda fever's strategy has been clear from the beginning sorry write the coattails of Industry tense liquor premiumization and Spirits taking share from beer and wine via the cocktail structure at culture second it use only the best ingredients a clean all natural nothing artificial for example they use cane sugar or fruit sugar as a sweetener rather than corn syrup or artificial sweeteners they they score the world for the highest quality ingredients canine from the Congo lemons from Sicily raspberries from Scotland Etc how much of this how much of this is La qua style and marketing puffery I don't know however they come across as sincere and the stories they tell they tell sound authentic third when the on-premise market first to establish consumer brand awareness then move to the off-premise if you're first to Market you can win the on-premise market you naturally win the consumer off-premise due to the brand equity and brand recognition this is a difficult strategy but the right one to build a strong durable consumer brand fourth innovate fever 3 gets high marks for Innovation a steady flow of new mixers keep the conversation fresh and between reps and bartenders in on in the on-premise market and it keeps consumers coming back into the mixer aisle to see what's new off-premise occasionally something catches for example they launched sparkling grapefruit in 2020 and is now over 10 percent of sales in the US it's primarily used to make a Palomas tequila and grapefruit and this is a hit their elderflower tonic has also been a huge success they have even had limited edition mixes such as blood orange they create mixers around spirit and cocktail Trends and also reduce and also to reduce their Reliance on gin and tonic it is a push to capture share of a growing premium mixer market and a widening assortment of flavors across different spirits marketing spend runs around 10 of sales fewer Co markets are a lot with Spirit brands for example in the US they co-branded with Bombay for gin and tonic um tonics they rent tv ads with Gray Goose for spritz options and ran a Ramen Cola reimagined campaign with Bacardi co-marketing with premium brand Spirits helps expert Brands um helps fever build its own brand other forms of marketing are mainly focused on PR events such as the Kentucky Derby Queen's tennis and pop-up bars such as the one they had in Bryant Park this allows consumers to experience a variety of Fever Tree flavors and Cocktails and ask questions of Fever Tree botanists they opened their first airport bar in May of this year in London which has already served 60 000 cocktails far exceeding their expectations they are looking at opening additional airport bars industry background prior to Fever Tree Schweppes dominate the market for tonic water with close to 100 share Unfortunately they rested a little too comfortably as you would expect a hundred year old company with 100 market share to do decade decade after decade of no innovation and stale packaging um also they suffered from fractured uh ownership making management and decision making difficult all this helps explain some of fever's rapid market share gains out of the gate Schweppes was the perfect company to disrupt fever is gaining extraordinary amounts of share across the globe due to an ill-prepared Schwabs after fever took off it literally took Schweppes 10 years to get a premium tonic to Market there's still a lot of share for them to see it outside of the years where fever has already won the market Fever Tree has clearly struck a NERF with a consumer desperate for something better all the kpis say fever tree has created something special They crush the competition on Cell through raid they take a market share at a rapid Pace wherever they go and they exhibit tremendous pricing power typically priced 100 to 200 percent over Schweppes every time they enter a market they expand the mixer category for example the UK mixer Market has tripled in size over the last eight years they are a classic disruptor and have redefined the category the key ingredients to winning this Market are taste image distribution and price fever appears to be winning on all counts except price what is the address about Market Tam for mixers it's hard to say I've seen a wide variety wide range of estimates and they vary widely also the mixer category is growing fast as Fever Tree essentially created the category for premium mixes and its driving category growth here's what Fever Tree had in their 2021 presentation UK return makes a market at 330 million uh FIFA value share 45 in the US a thousand five hundred thirty million uh fever Market uh fever value share five percent Europe 677 million a fever market share 14 Australia 84 40 Canada 161 6 total 207 2782. keep in mind this is only the off-premise market using Nielsen and Ira iri retail data assuming off-premise is 70 of the total The Tam including on premise would be close to 4 billion pounds and then add in robust 2020 2020 uh to category growth the mixer category grew 11 globally last year as fever drives trends category growth and redefining the category the penetration rate of Premium Spirits far exceeds that of Premium mixes lastly I don't believe the numbers above include non-carbonated mixes such as a margarita mix and a Bloody Mary mix expanding the category even further further side note they plan on entering non-carbonated mixers next year monk Stanley says the total mixer Market at 10 billion in their initial initiation piece from 2018. Regional sales overview fever manages the company in four regions and reports sales at such region UK 35.2 percent Europe 29 percent uh us 26.8 and row nine percent rest of the world UK the UK is FIFA's largest market at 35 of sales over the last 5 and 10 years sales have grown at kager of a 40 per at a keger of 40 and 34 respectfully in 2021 sales grew 15 and are up six percent in uh the first half year of 2022 as they continue to recover from covet bar restaurant lockdowns UK sales grew 2012 fold from 2014 to 2018 as the brand called on during a time when Jin doubled its share of UK's birds from 10 to 20 it now dominates the UK mixer Market with 41 market share off-premise and 50 on-premise fever is now larger than Schweppes and 20x the size of the next largest premium mixer fentiments with only two percent share retail sale is a sell through is 7x of that of other premium mixers operating out of only one bottling planned in the UK provides fever tremendous scale and efficiency given its already dominant market share in the UK further signifies significant against our unlikely while they continue to gain share and extend their dominant position on premise overall growth will likely resemble that of the overall gin Market the market has shown signs of slowing this year as the economy weakens disposable income is under intense pressure due to the due to high energy prices and overall inflation while Fever Tree consumers are often hard core loyalists they could begin to trade down consensus expectations are for two percent sales growth from 2020 to 2025. uh from 22 to 25 I'm sorry Europe is fever is the second largest market at 29 of sales over the last five and ten years sales have grown at a keger of 27 and 26 respectfully in 2021 constant currency say sales grew 35 and are up 31 in the first half year of 2022. according to Nielsen uh fever is the number one mixer brand in Europe management started Management's stated goal is to grow their European business a 2.5 x from 2020 levels over the medium term I typed as take that as a five years so 2025 implying sales of 163 million versus 2020 to 2020 to e sales of 116 million U.S the U.S fever tree's third largest region at 27 of sales the US is fever 3's third largest Sweden region at 27 of sales I'm sorry over the last five and ten years sales have grown at a keger of 39 and a 34 respectfully in 2021 constant currencies currency sales grew 41 sales are only up uh 11 in the first half year of 2022 due to the due to supply chain issues which have limited Supply according to management underlying demand is stronger than current sales indicate and should approve in the second half year as they build inventory in the UK and ship to the US to fulfill strong demand more on this later the U.S market is fever's biggest opportunity the US consumes 10x more in spirits than the UK the UK premium mixes have grown to 45 of the mixer Market versus only 10 in the US and 80 in Europe although Brits drink more gin than us Americans so our comparable level of penetration may not be realistic further we drink a lot more dark liquids Liquors which pair with Coke still according to Nielsen the fever has already captured number one market share at retail in tonic and ginger beer in the US they're at a sale at retail is very high and far ahead of other brands in the U.S encouraging retailers to give them more shelf space covert accelerated momentum with retail sales almost doubling from 2019 to 2021. all kpis point to a healthy thriving brand in the US just through the first half of 2022 they have increased total points of distribution by 33 via winning high quality accounts such as a such as MGM Myriad and four seasons management stated management stated Management's stated goal is to grow the US business 5x from 2020 levels of the medium term implying sales of 20 295 million versus 2022e sales of 94 5 million consensus is for 20 organic sales growth from 20 to 20 yeah from 10 22 to 25 which seems about legit rest of the world rest of the world is fever's fourth a largest market at nine percent of sales over the last five and ten years sales have grown at a keger of 39 and 42 respectfully in 2021 constant currency sales grow grew 20 that are up seven percent in the first half year of 2022. uh Australia and Canada on key markets where they are driving category growth according to Nielsen they are already the number one tonic brand in Canada Stellar Financial characteristics here are some numbers to salivate over sales growth um sales growth uh 43 and 13 48 in 49 and 14 17 15 72 and 16 66 and 17 38 and 18 9 and 19 minus 3 and 20 and 23 and twenty one 28 in 13 28 and 14 30 and 15 34 and 16 33 and 17 32 and 1828 in 19 and 21 and 2020 and 19 and 2021. tangible Ric Ric adjusts a capital base for excess cash and accumulated intangible amortization uh 78 uh 13 264 and 14 63 and 15 110 and 16 228 and 1712 and 18 102 in 1994 in 2020 and 62 and 22 new one as good as sales growth has been 2020 and 2021 were heard by on-premise covered lockdowns and FX headwinds in the UK the on-premise market was shut down for half the year due to covert restrictions in the usfx headwinds um weighed on reported sales which were reported up 33 but we're up 41 in constant currency the 5 and 10 years sales keger are eye-opening UK one year seven percent five year 40 10-year 33 percent Europe 18 one year um 27 in five years and 26 in 10 years us one year 23 5-year 38 10-year 34 the rest of the world 20 in one year 39 in five years and 41 in 10 years total one year 15 5 years 34 10 years 31 percent they see a lot of growth ahead and outline some of the existing opportunities below such as their intention to enter non-carbonated mixes in the US next year uh agency's significant opportunities Beyond carbonated mixers extending into non-carbonated cocktail mixes in the US with other markets to follow exploring premium adult soft drinks starting with the UK white space Asian Latin America earlier stage focused on establishing on trade in key City cities long-term opportunity as Western drinking habits establish next wave including U.S Germany Italy Spain France Austria and Canada U.S premium Spirits category um to 10x the size of the uh over 10x the size of the UK strong momentum in key European markets driving category growth and premiumization in Australia and Canada stronghold including UK and Belgium transformed mixer category clear leadership position with significant price premium to mainstream mainstream Brands higher UK household penetration than one number the number one UK beer brand um foreign I liked it uh we'll have to take a deeper look though further on we go as shown above fever generates Returns on tangible capital of over 100 due to its acid light business model cap X is only 5 million it owns North manufacturing plants or DCS raw materials ingredients labels bottles everything are shipped directly to the bottle the finished product is then shipped to the distribution distribute distributor who is responsible for getting it to bars restaurants and grocery stores Wireless acid light model leads to lower cost and higher returns it also leads to lower visibility and makes it more susceptible to cause pressures such as the ones they are currently experiencing working capital is the primary use of capital which ran around 50 of sales pre-covered and has run around 70 of sales during and post covet assessing the margin headwinds the Crux of the debate today is fevers depressed margins fever trees Mantra is 50 gross margins and 30 percent ebitda margins they lived up to that Mantra prior to 2020 but then margins began to decline and haven't yet stopped gross margin um and 2013 at 48 in 2017 at 53 in 2022 at 33 percent ebitda margin 2013 at 28 the 2017 33 and um 2022 in at 10 as you can see we had eight years of pretty consistent margin performance before the wheels started to come off in 2020. the decline in Gross margins accounts for essentially 100 of the decline in operating margins from 2019 to 2022e uh forever fever's gross margin fell approximately 17 percentage points from 50.5 to 34 um whilst ebitda margin fell about by about the same so we can narrow our focus on just the gross margin on as the source of the problem the issues impacting gross margins are U.S supply chain issues cost inflation lack of scale in growth markets pricing strategy holding prices and growth markets despite High inflation using management commentary and Company filings the accumulative margin impact from these is um fiscal year 1950 to 1533 across margin work uh delayed Ram but limited glass availability in U.S equals higher sea fried sea fried inflation glass but also General product Logistics cost inflation Mong Stanley has done good work here provides a similar margin walk they estimate the U.S supply chain logistic issues account for 50 of the 1700 basis points margins um compression from 2090 to 2022 with 600 basis points coming from uh transatlantic Freight and other another 250 presumably coming from inflation in this economics of scale management does not explicitly break out explicitly break out the margin impact from this economics of scale but they do discuss it on their codes it is presumably mixed in with logistic issues and cost inflation lack of scale equals higher unit cost let's dig into each of these to assess how much margin can be recovered U.S supply chain issues fever supply chain issues are confined to the US fever currently makes only 40 of the U.S of their us finished product locally in the US the remaining is 60 is very expensive to Source because it has been shipped from the UK the plan was to have 80 percent of U.S production done locally by the end of this year unfortunately they hit a production snacks they use to bottle they use two bottle implants in the U.S one on each Coast the west coast production line was commissioned in 2021 at the East Coast was commissioned in 2022. on the west coast they have had a difficult time sourcing glass bottles due to Port congestion delays securing glass supply on the west coast has led to both higher Glass cost costs and higher freight costs as well as incuring higher internal freight costs as they try to balance inventory between costs coasts they are working hard to secure glass supply in 2023 for both the East Coast and West Coast yes there is a glass bottle shortage and prices are up a lot on the last call they said West Coast poured a congestion has eased in production there is running better the bigger problem has been on the East Coast where a labor shortage has slowed their production ramp as a result fever is relying on their UK plan and shipping to the US this has resulted in an extraordinarily High Transportation cost and has left fever vulnerable to skyrocketing transatlantic shipping rates which are up another 50 another 50 percent this year on top of the huge rise last year according to the company U.S Logistics costs were up 56 per case in 2021 they are up more this year they have more this year the East Coast ramp is by far the biggest headwind to margins fortunately these are visibly temporary costs that could that should resolve themselves over the next 6 to 12 months we should see close to a full year of local bottling in the US in 2023 which will dramatically reduce exposure to high sea fright and overall logistic costs not only have the issues heard margins they have also led to inventory shortages and had a meaningful impact on Sales Management has noted U.S demands demand is far stronger than what current sales imply there have recently been increasing uh production in the UK plan to relieve their U.S inventory shortage given the high fried High Transportation cost they will probably lose money on these sales however it is all it allows them to sustain momentum with West Coast Production now running more smoothly in the east coast inventory levels normalizing due to increased shipments from the UK fever is anticipating a strong fourth quarter for modeling purposes I assume they recover 80 of the US Logistics cost increases in 2023 sus production ramps and UK to U.S shipping declines this leads to a 700 basis points gross margin Improvement in 2023. I assume they ramp from 80 to 100 in 2024 and Logistics costs improve further adding another 180 basis points to gross margin in 2024. okay we're back I had to take a little break it costs inflation cost inflation has two components first Logistics and transportation and second product product costs I assume some inflation will remain permanently permanently while some will prove transitory some will be offset with higher prices my model assumes 50 recovery of cost inflation by 2025 via a combination of lower commodity costs and higher pricing a lot of rides on European gas prices because they drive Logistics and transportation costs as well as gas prices the 50 increase in Sea Freight rates has been the primary driver of Transportation cost inflation it has been a huge headwind into margins however these costs were less lessened dramatically as U.S production rents product cost inflation has been driven primarily by glass bottles which are 30 of total product costs a cost glass prices are primarily a function of gas prices so they've had glass prices sub surcharges tied to gas prices while improved Port congestion has eased glass availability on the west coast the globally glass availability across the industry has been restricted in order to secure glass for the rest of the year they had to agree to a double-digit price increase they are currently negotiation negotiating for 2023 glass supply it is unlikely a glass cost will decline next year and will probably increase they also seen ingredient inflation sugar and such for modeling purposes I have built in an additional 150 basis points headwind to gross margins in 2023 for inflation partially offset by improving pricing adding 50 basis points in 2024 I assume they recapture 50 of the 2019 to 2022 cumulative inflation impact via a decline in commodity prices improved pricing adding 380 basis points gross margin this is a big assumption that has some risk to it lack of scale in the US the device the diversification of volumes as we establish this network has temporarily reduced our economies of scale as we increase volumes through this network especially in the US we will recapture economies of scale fiscal year um 21 presentation Earnest presentation UK operations are extremely efficient due to scale they have 45 market share and run everything from one bottling plant which accounts for 38 of total sales so margins are high and profits are maximized contrast this to the 62 percent of sales outside the UK which is spread across the globe and supported by six bottling sites and three canning sites so 38 of sales in the UK one bottling plant 62 of sales in the rest of the world nine plants establishing This Global Network to serve on the diversity of volumes has reduced economies of scale over their media term intermediate term as volumes continues to continue to grow specifically in the U.S scale will improve and with other with it margins onshoring local production in the US Australia and elsewhere and the biggest challenge is the biggest challenge to margins bottle of fees are volume based as are a lot of other purchase contracts as the business scales unit costs will come down and margins will lift pricing power Viva tree typically sales sells for 100 to 200 percent premium to the mass Market brand Schweppes indicating huge pricing power and brand strength however in some cases the gap between Schweppes and fever has gotten too wide those who remember Marlboro Monday understand the risk of pushing pricing too far in 2020 fever reduced pricing by 15 in the US to help close the price gap between them and Schweppes that was the first indicator that they may have pushed price too far the second is this year While most of fever's peers are on their second round of price increases fever has been holding prices flat leading some to believe their considerable pricing power is simply Tapped Out well I think there's some truth to this I also believe management is trying to prioritize growth and is hesitant to do anything that could disrupt disrupt its momentum it is winning over customers and taking share at a rapid clip and management doesn't want to disrupt that makes sense to me holding prices flat during a period of high inflation is a heavy cost in the near term longer term either costs come down they raise prices or they get squeezed this is a good place to know that management thinks very long term decades so they are playing the long-term game and don't mind suffering through a period of flat pricing if it means winning the U.S market long term fever's goal is to optimize price while maintaining an affordable premium product price strategy varies by market depending on growth in mature markets the UK fever is priced at 140 percent premium to Schweppes and is taking a percent pricing in 2022. in Europe it's closer to 100 in high growth less mature markets such as the US uh the premium to Schweppes is closer to 250 percent it is in this market that fever has kept pricing flat as they try to drive adoption and narrow the price Gap they just completed an in-depth Market by market analysis and plan to take pricing next year in certain markets I've built in only 50 basis points for margin improvements from pricing next year a fairly conservative conservative assumption in this environment summary on margin recovery adding up all the sources of margin recovery recovery gets up to gets us to 45.4 gross margin by 2024. 2022 it was 33.8 can fever return to 50 gross margin margins at 30 percent ebitda margins I think it is very it is unlikely in the near midterm near medium term although 25 ebitda margins seem reasonable by 2025 and they should move higher from there as as the business continues to scale my preference would be it would actually be for them to drop their margin Target and focus on winning the market Bears argued that the margin degradation is structural we don't see a case for this but rather see most of the issues as transitory for over the next one to two years cost headwinds glass bottles ocean fried should moderate as the economy slows and renormalize from the covert dislocation and diseconomies of scale fade as they push more volume through the network as we outline outlined above we see a gross margins improving from 34 percent this year to 45 percent by 2024-25 resulting in ebitda margins of 25 versus historical 30 percent assuming 10 annual sales growth and 25 Abida margins EPS will equal 72 pounds by 2024 at the current price of 8 pounds 76 cents less 1.65 in net cash at one pound seven 65 cents in net cash fever is trading at a um PE X cache of 9.9 x normalized 24 eps brand strength despite the margin headwinds there are many signs fever's brand remains strong number one number one market share in the UK with 45 value share and growing and with 51 share on premise they are bigger than Schweppes despite being 2.5 x the price they are 20x the size of the next largest premium mixer sell through sell through a 7x higher than other premium mixers second grew 41 in constant currency in the US last year with total points of distribution increasing 33 already number one mock chair and tonic and ginger beer third European sales are growing more than 30 percent and fever is 6X the next largest premium brand fever has maintained huge pricing power globally the importance distribution and winning on premise distribution to the on-premise market is an incredibly incredibly important ingredient to success in this business while the off-premise Tam is far bigger the on-premise how are could heavily influences off-premise sales because it builds consumer awareness the thought goes that if fever can win the bartender on premise they win the customer of premise building a brand this way is difficult and slow but it is the right approach once fever wins an account it's pretty it's a pretty sticky business the bartender has to have a good reason to switch how do you get your product in tens of thousands of bars restaurants grocery stores across the globe this takes an even this takes on even more importance in the US due to the size of the market and its complexities liquor laws yes I know Fever Tree is in the liquor just stay with me uh in 2018 fever signed a National Distribution agreement with the largest Spirits distributor in the U.S Southern glazes Southern Southern has a 35 share in wine and spirits distribution in the U.S with a great portfolio of the largest and best spur brands in the world giving them a connection to almost every on-premise account in their territory in on-premise you're not selling to the customer you're selling to the bartender the bartender is the gatekeeper and Southern's Reps don't just distribute they sail Southern doesn't represent any other mixer Distributors Southern isn't going to distribute a competitor product because they are committed to Fever Tree and the largest and the second largest distributor in the U.S rndc 15 share isn't going to distribute an additional mixer because they already have an agreement with Q fevers primary rival in the U.S if this sounds like a great deal for the beverage company keep in mind the distributor is getting a 30 margin common is industry knowledge Spirits distribution is incredibly profitable according to Wiki Selma glazes is the 11th largest private company in the US and while fever is a lower ticket for southern they make up for it in inventory turn how does fever win in on-premise Martinez are always looking for better products to please their clientele clientele they just want Happy customers and a bigger check upselling the bartender from Schweppes out of a soda gun to Fever Tree out of a cute little single serve bottle is a big part of the sale the pitch is exactly fever trees motto if three quarters of your drink is the mixer mixed with the best for example vodka is a flavorless so the customer tastes only the tonic therefore go with something better than Schweppes while bartenders will serve you a gin and tonic with Schweppes out of the gun no bartender feels good about that good about that due to the lack of fair this sense and the lack of theater Europe generally does not have soda guns so drinks have always been served by the bottle in the U.S however guns are pervasive when a customer is served their cocktail appeared a tableside from the sassy little Fever Tree bottle it creates theater and is a superior experience to shopping on GNT served from a gun with no presentation and having the bottle displayed on the table is obviously a huge marketing tool that helps fever grow brand awareness this is what southern does they try to win the bartender over if they can do that fever 3 becomes a growing recurring Revenue stream while in on the premise Market the distributor is the same sales person in retail there's no one to market the product there's no one to market the product the packaging does the marketing if the consumer doesn't know any of the brands they say they size you up by your price and your packaging but if they can win you over on premise it makes for much for a much easier sell in the grocery store built a brand on premise sell volume off-premise this is the brand building strategy of a Spirits company Fever Tree is building a brand like like a Spirits company another Point worth making here is one of the big guys like Coke or Pepsi decided they wanted to enter the premium mixer Market they would have no natural Distribution on premise yeah they can actually distribute a pyramid mixer but they don't have relationships with the bartenders and wouldn't know how to sell a mixer Fever Tree on the other hand is partnering with the spirits companies co-marketing with them it has Southern representing them in an on in the on-premise Coke and Pepsi have none of them they don't have reps pitching new craft cocktails similarly Schweppes is a cheap easy solution for the on-premise but the Reps aren't out talking to bartenders trying out new craft cocktails with new flavors the national Distributors have the scale to drive adoption at hundreds of thousands of on-premise accounts bars and restaurants are crucial to build the fun build on the foundation of Eva trees brand Equity the I'm sorry this relationship in combination with fever's co-marketing agreements with companies like Diageo Diageo highlights how a fever tree behaves more like experts company than a typical consumer beverage business this consolidation and Regulatory protection of the whole side wholesale tier protects the mode of scaled suppliers in practice September 20 2021 expanding into adjacent an agent senses I'm sorry I don't know how to pronounce it fever recently bought announced they intended to move into non-carbonated mixes in 2023. these would mainly be Margarita and Bloody Mary mix but also bar Essentials such as grenadians and Bitters the non-carbonated mixer Market is larger than either tonic or ginger beer and there's no clear leader with fever's brand Equity they have an excellent opportunity to grow into this Edge Edge sensei they also recently announced they were testing expansion into adult soda by placing some existing products that are sometimes consumed without alcohol in the adult soda ale of the grocery store they will maintain the price premium and stay in the mixer ale but expand the bottle size in keeping with traditional soda bottles and add them to the solar ale this strategy makes me a bit nervous thinking it could weaken their brand and image but of course the size of that Tam is multiples of the mixer market so maybe it's worth testing they are currently testing it in UK grocery stores by adding scuss to the soda ale they have already secured shelf space equal to five percent increase valuation with earnings temporarily um depressed any valuation metric on current or even 2023 numbers is meaningless let's start by looking at EV to sales and then move to valuation on anticipated normalized earnings as you can see ev to sales NTM is super depressed at 2.25 X its lowest level by far since going public before that I would say it was at an average of seven to eight in my opinion there's a ton of strategic value here for someone with global distribution like the iGo consider that coke took a stake in Monster somewhat similar to fever and returns growth and it's niche Nishi beverage profile at 5x sales here are a few other private company Market comps of Niche beverages that are worth considering body armor monster Rockstar Bay Gatorade and vitamin water all acquired by either Coke Pepsi or Dr Pepper um ev2 sales from 3.5 x to 7.4 X so purely on so purely on Mark private Market comps using ev2 sales has more than 2x upside and fever's High margins are you feeling above average EVS multiple a large acquirer with a global supply chain a global distribution could solve many if not all of fever's current issues most sell side analysts actually comp fever to spurts companies rather than solid companies the private Market values and Spirits are even higher at sex approximately 6X EVS it's worth spending a minute uh digressing here on Monster at the time Coke bought a Sega monster 2024 uh in 2014 um they were a distant second to Red Bull and in a beverage Niche some thought fetish today monster is the number one stock and total shareholder return over the past 20 years with a total return of 170 percent it is up over 4X since partnering with Coke the day they reported the coke distribution and Equity ownership deal the stock was up 38 and never look back this speaks to the opportunity fever has in partnering with a global Beverage Company to accelerate distribution the big difference in distribution is fever needs someone that can sell into on-premise a connection with the barterness that would be a liquor company and it would have to be a company that has a brand and almost every Spirit category because fever would be abandoning co-marketing relationships with all other liquor companies the agio has 48 share in Gin and has a portfolio of Brands across prototypes seems like a good fit now let's look at a normalized earnings and go get and get to a value on PE I start by modeling out sales by region for 2022 2024 to 2024 they are roughly in line with consensus as you can see estimates below which uh result in a 10 sales kegger to 2024. using the marginal analysis from earlier are model gross margins returning to 45 uh 0.4 by 2024 and Avatar margins of 25 of of 24.7 while these margins are far higher than today's level they are conservative relative to the eight years prior to covet it somewhat splits the difference these assumptions get us to 72 pounds uh in 2024 EPS as shown below sense X cash fever is trading at a PE of 9.9 X these normalized eps these normalizes Public Market comps are tricky because but considering the their natural beverage trades at 50 higher on EVs and doesn't have near the margin profile of fever fever is more comparable to monster which has a similar history of high growth and returns it trades at 39x 2022 e earnings and 8.3 EVS I assume a fair multiple is in the low 20s 23x 24 normalized earnings plus one pound 65 in net cash gets me to an estimated value of 18 pounds 21 or upside of 108 108 to 2024. competitive advantages first mover in the off-premise in the off-premise fever 3 being first to Market was an undeniable Advantage many customers are now a loyal Fever Tree customers and they have to have a reason to switch if you are a fever tree customer it's hard to find a reason to switch other than to downgrade for budgetary reasons and shelf space is limited fever provides the retailer with fast inventory turn and strong margins hard for newcomer to compete with distribution U.S distribution is highly concentrated with Southern glazers and rndc having a combined 50 market share glazers carries fever and r d c carries fever's largest competitor Q and neither is interested in bringing in a second premium mixer brand all the kpis outlined in this report sales growth price premium Seth Rover 8 versus competitors Etc point to a significant brand Equity the hard work fever has put into establishing an on-premise presence has certainly helped build the brand risks consumer spending the economy is obviously weakened a weakening which poses trade down risk longer term maybe we are at the end of an era of conspicuous consumption and entering an era of repression this is a macro risk brand versus fat I fully acknowledge Fever Tree it could be some decade long fat and the investment guards are playing a sick joke on me I remind I am reminded of all the flavored Celsius that came to Market at Price premiums and now now in the same low price point bin if things turn out South I believe the stock price is supported by strong strategic value competition competitors are Schweppes the largest mass Market brand Q the second largest premium makes a brand to fever and tons of small competitors every major grocery chain now has their own private label tonic so I don't want to understand the competition well there's tons of competition in the space We Believe fevers first mover Advantage distribution and brand Equity create a sizable barriers to and add to entry bartenders need a reason to switch and it's hard to find one especially if they are already using Southern for their Spirit needs Q is fever's primary competitor in the US they are in the number one they're in the same number of stores today however fevers sales per store is more than double queues at 250k versus 100k fever has said they took considerable share from Q during covid and that they sell through is 60 to 90 greater in stores where they have the same number of sqs skus also Q is 50 club soda and 25 ginger beer there's room for both Brands witness Red Bull and Monster pricing relative to other food categories a fever sells for a huge premium to the mass Market brand it would be it would be hard to find a category in the grocery store that exhibits such a widespread between premium and mass fever's pricing power may be tapped out Alternatives the explosive growth and legalized marijuana could take share from alcohol while they certainly are mutually exclusive a pot provides consumers on alternative to get up my favorite fever-treed cocktails Fever Tree Mediterranean tonic and Hendrix gin fresh squeezed lime wedge Fever Tree elderflower Tonic and oppressed 9 1908 gin lime wedge garnish Fever Tree sparkling grapefruit and Don Julio Blanco tequila awesome um this is not recommendation like I said earlier two he does describe this as well I do not hold the position with the issues such as deployment directorship or consultancy I and or others I advise all the material investment in the issue is security I do not advise us uh catalyst it's not that I don't advise it it's just not recommendation that's what I do Catalyst uh margin recovery as U.S production ramps inflation cools it's currently at a price of 13.71 cents and market cap 166 billion um one billion 1 billion 66 66 uh Enterprise Value 1 billion fifty and PE at 32 P be at five five nine Guru Focus says it's undervalued significantly as well but let's not trust on that algorithm uh cash to debt 37 percent debt to equity is 0.01 I don't have a lot of that that's awesome um EV to free cash flow 34 percent interesting company thank you very much for tuning in um I will actually take a little look at this further because I actually find it quite interesting um I like this company so far uh tune in next time thank you very much

welcome back to the value investors club I&#39;m your host Timon van knowledge let&#39;s get right into it with Vic readings this is not a recommendation only for information and we have fever drinks Fever Tree drinks f e v r l o n and fvvtf OTC uh filed in on October 11 2022 by Supernova description elevator pitch FIFA tree fever is a consumer brand that essentially created its own category premium cocktail mixers fever has been met with a strong demand in almost every Market it has entered driving explosive sales growth and market share gains in tonic and ginger beer fever has already achieved a dominant of 45 market share in its Home Country UK and is now seating the globe with its deliciousness it is compelling Financial characteristics led by strong organic growth 5 and 10 year organic sales kegger of 34 and 32 percent with a long runaway Runway ahead it has an acid light business model with a return on tangible capital of over 100 they have grown free cash flow every year since IPO with no down use they have a strong balance sheet of Fort Knox baby with no debt and net cash Equity equal to 10 of their market cap despite their small size size and high growth they pay a dividend of 1.9 yield and even paid a sizable special Divi a few months ago while top-line growth continues unabated earnings have recently been hit by a sub supply chain and cost inflation issues that have driven ebitda margins from 30 to 10 percent despite sales and other kpis that point to a healthy brand the margin weakness has driven the stock down whooping 70 percent year-to-date extraordinary for Consumer stapled stock the type the supply chain and cost inflation issues should probably approve mostly a transitionary providing a window of opportunity to buy this little gym at only 10x EPS 2024 normalized earnings X cash description learn on based Fever Tree drinks is the world&#39;s largest purveyor purveyor of Premium cocktail mixers approximately 80 of sales are tonic water different flavors of tonics such as elderflower cucumber lemon and Mediterranean with a remainder composed of ginger beer club soda and other assorted non-tonic flavors Sicilian lemonade sparkling grapefruit it is it Etc roughly 70 percent of sales are off-premise grocery stores with 30 on-premise restaurants bars Etc they typically sell in four packs of and four packs of cute little 6.8 ounce bottles for 5.99 Fever Tree was founded in 2004 by charts roll and Tim Rory Willow Rory low Charles was a professional gin distiller Tim was a beverage industry consultant and they wanted to create a product to ride the spirit premiumization Trend they were originally going to launch a premium gin a premium gin but saw a better opportunity for a premium mixer they thought hey if you&#39;re spending all this money on a premium Spirit then should you mix it with a premium mixer besides when three-fourths of your drink is the mixer don&#39;t you want to mix with something better than Schweppes out of a too little bottle two liter bottle or a soda gun that&#39;s just cringe and thus Fever Tree was born they were essentially the first mover and premium mixers 10 years after founding they came public &#39;s DNA is Spirits not soda they were built by partnering with Spirits companies to make the perfect gin and tonic they co-market in TV ads with the likes of Gray Goose they are distributed by Spirits distribute Distributors they are consumed with alcohol the co-founders came from the spirits industry the current year as a fever tree CEO is the former CEO of Belvedere Vodka they are placed in the mixer aisle not the soda ale they are all about the craft cocktail their slogan is when three quarters of your drink is a mixer mix with the best not do the do or whatever in other words it&#39;s a very different type of non-alcoholic beverage company that identifies more with Spirits than soda fever&#39;s strategy has been clear from the beginning sorry write the coattails of Industry tense liquor premiumization and Spirits taking share from beer and wine via the cocktail structure at culture second it use only the best ingredients a clean all natural nothing artificial for example they use cane sugar or fruit sugar as a sweetener rather than corn syrup or artificial sweeteners they they score the world for the highest quality ingredients canine from the Congo lemons from Sicily raspberries from Scotland Etc how much of this how much of this is La qua style and marketing puffery I don&#39;t know however they come across as sincere and the stories they tell they tell sound authentic third when the on-premise market first to establish consumer brand awareness then move to the off-premise if you&#39;re first to Market you can win the on-premise market you naturally win the consumer off-premise due to the brand equity and brand recognition this is a difficult strategy but the right one to build a strong durable consumer brand fourth innovate fever 3 gets high marks for Innovation a steady flow of new mixers keep the conversation fresh and between reps and bartenders in on in the on-premise market and it keeps consumers coming back into the mixer aisle to see what&#39;s new off-premise occasionally something catches for example they launched sparkling grapefruit in 2020 and is now over 10 percent of sales in the US it&#39;s primarily used to make a Palomas tequila and grapefruit and this is a hit their elderflower tonic has also been a huge success they have even had limited edition mixes such as blood orange they create mixers around spirit and cocktail Trends and also reduce and also to reduce their Reliance on gin and tonic it is a push to capture share of a growing premium mixer market and a widening assortment of flavors across different spirits marketing spend runs around 10 of sales fewer Co markets are a lot with Spirit brands for example in the US they co-branded with Bombay for gin and tonic um tonics they rent tv ads with Gray Goose for spritz options and ran a Ramen Cola reimagined campaign with Bacardi co-marketing with premium brand Spirits helps expert Brands um helps fever build its own brand other forms of marketing are mainly focused on PR events such as the Kentucky Derby Queen&#39;s tennis and pop-up bars such as the one they had in Bryant Park this allows consumers to experience a variety of Fever Tree flavors and Cocktails and ask questions of Fever Tree botanists they opened their first airport bar in May of this year in London which has already served 60 000 cocktails far exceeding their expectations they are looking at opening additional airport bars industry background prior to Fever Tree Schweppes dominate the market for tonic water with close to 100 share Unfortunately they rested a little too comfortably as you would expect a hundred year old company with 100 market share to do decade decade after decade of no innovation and stale packaging um also they suffered from fractured uh ownership making management and decision making difficult all this helps explain some of fever&#39;s rapid market share gains out of the gate Schweppes was the perfect company to disrupt fever is gaining extraordinary amounts of share across the globe due to an ill-prepared Schwabs after fever took off it literally took Schweppes 10 years to get a premium tonic to Market there&#39;s still a lot of share for them to see it outside of the years where fever has already won the market Fever Tree has clearly struck a NERF with a consumer desperate for something better all the kpis say fever tree has created something special They crush the competition on Cell through raid they take a market share at a rapid Pace wherever they go and they exhibit tremendous pricing power typically priced 100 to 200 percent over Schweppes every time they enter a market they expand the mixer category for example the UK mixer Market has tripled in size over the last eight years they are a classic disruptor and have redefined the category the key ingredients to winning this Market are taste image distribution and price fever appears to be winning on all counts except price what is the address about Market Tam for mixers it&#39;s hard to say I&#39;ve seen a wide variety wide range of estimates and they vary widely also the mixer category is growing fast as Fever Tree essentially created the category for premium mixes and its driving category growth here&#39;s what Fever Tree had in their 2021 presentation UK return makes a market at 330 million uh FIFA value share 45 in the US a thousand five hundred thirty million uh fever Market uh fever value share five percent Europe 677 million a fever market share 14 Australia 84 40 Canada 161 6 total 207 2782. keep in mind this is only the off-premise market using Nielsen and Ira iri retail data assuming off-premise is 70 of the total The Tam including on premise would be close to 4 billion pounds and then add in robust 2020 2020 uh to category growth the mixer category grew 11 globally last year as fever drives trends category growth and redefining the category the penetration rate of Premium Spirits far exceeds that of Premium mixes lastly I don&#39;t believe the numbers above include non-carbonated mixes such as a margarita mix and a Bloody Mary mix expanding the category even further further side note they plan on entering non-carbonated mixers next year monk Stanley says the total mixer Market at 10 billion in their initial initiation piece from 2018. Regional sales overview fever manages the company in four regions and reports sales at such region UK 35.2 percent Europe 29 percent uh us 26.8 and row nine percent rest of the world UK the UK is FIFA&#39;s largest market at 35 of sales over the last 5 and 10 years sales have grown at kager of a 40 per at a keger of 40 and 34 respectfully in 2021 sales grew 15 and are up six percent in uh the first half year of 2022 as they continue to recover from covet bar restaurant lockdowns UK sales grew 2012 fold from 2014 to 2018 as the brand called on during a time when Jin doubled its share of UK&#39;s birds from 10 to 20 it now dominates the UK mixer Market with 41 market share off-premise and 50 on-premise fever is now larger than Schweppes and 20x the size of the next largest premium mixer fentiments with only two percent share retail sale is a sell through is 7x of that of other premium mixers operating out of only one bottling planned in the UK provides fever tremendous scale and efficiency given its already dominant market share in the UK further signifies significant against our unlikely while they continue to gain share and extend their dominant position on premise overall growth will likely resemble that of the overall gin Market the market has shown signs of slowing this year as the economy weakens disposable income is under intense pressure due to the due to high energy prices and overall inflation while Fever Tree consumers are often hard core loyalists they could begin to trade down consensus expectations are for two percent sales growth from 2020 to 2025. uh from 22 to 25 I&#39;m sorry Europe is fever is the second largest market at 29 of sales over the last five and ten years sales have grown at a keger of 27 and 26 respectfully in 2021 constant currency say sales grew 35 and are up 31 in the first half year of 2022. according to Nielsen uh fever is the number one mixer brand in Europe management started Management&#39;s stated goal is to grow their European business a 2.5 x from 2020 levels over the medium term I typed as take that as a five years so 2025 implying sales of 163 million versus 2020 to 2020 to e sales of 116 million U.S the U.S fever tree&#39;s third largest region at 27 of sales the US is fever 3&#39;s third largest Sweden region at 27 of sales I&#39;m sorry over the last five and ten years sales have grown at a keger of 39 and a 34 respectfully in 2021 constant currencies currency sales grew 41 sales are only up uh 11 in the first half year of 2022 due to the due to supply chain issues which have limited Supply according to management underlying demand is stronger than current sales indicate and should approve in the second half year as they build inventory in the UK and ship to the US to fulfill strong demand more on this later the U.S market is fever&#39;s biggest opportunity the US consumes 10x more in spirits than the UK the UK premium mixes have grown to 45 of the mixer Market versus only 10 in the US and 80 in Europe although Brits drink more gin than us Americans so our comparable level of penetration may not be realistic further we drink a lot more dark liquids Liquors which pair with Coke still according to Nielsen the fever has already captured number one market share at retail in tonic and ginger beer in the US they&#39;re at a sale at retail is very high and far ahead of other brands in the U.S encouraging retailers to give them more shelf space covert accelerated momentum with retail sales almost doubling from 2019 to 2021. all kpis point to a healthy thriving brand in the US just through the first half of 2022 they have increased total points of distribution by 33 via winning high quality accounts such as a such as MGM Myriad and four seasons management stated management stated Management&#39;s stated goal is to grow the US business 5x from 2020 levels of the medium term implying sales of 20 295 million versus 2022e sales of 94 5 million consensus is for 20 organic sales growth from 20 to 20 yeah from 10 22 to 25 which seems about legit rest of the world rest of the world is fever&#39;s fourth a largest market at nine percent of sales over the last five and ten years sales have grown at a keger of 39 and 42 respectfully in 2021 constant currency sales grow grew 20 that are up seven percent in the first half year of 2022. uh Australia and Canada on key markets where they are driving category growth according to Nielsen they are already the number one tonic brand in Canada Stellar Financial characteristics here are some numbers to salivate over sales growth um sales growth uh 43 and 13 48 in 49 and 14 17 15 72 and 16 66 and 17 38 and 18 9 and 19 minus 3 and 20 and 23 and twenty one 28 in 13 28 and 14 30 and 15 34 and 16 33 and 17 32 and 1828 in 19 and 21 and 2020 and 19 and 2021. tangible Ric Ric adjusts a capital base for excess cash and accumulated intangible amortization uh 78 uh 13 264 and 14 63 and 15 110 and 16 228 and 1712 and 18 102 in 1994 in 2020 and 62 and 22 new one as good as sales growth has been 2020 and 2021 were heard by on-premise covered lockdowns and FX headwinds in the UK the on-premise market was shut down for half the year due to covert restrictions in the usfx headwinds um weighed on reported sales which were reported up 33 but we&#39;re up 41 in constant currency the 5 and 10 years sales keger are eye-opening UK one year seven percent five year 40 10-year 33 percent Europe 18 one year um 27 in five years and 26 in 10 years us one year 23 5-year 38 10-year 34 the rest of the world 20 in one year 39 in five years and 41 in 10 years total one year 15 5 years 34 10 years 31 percent they see a lot of growth ahead and outline some of the existing opportunities below such as their intention to enter non-carbonated mixes in the US next year uh agency&#39;s significant opportunities Beyond carbonated mixers extending into non-carbonated cocktail mixes in the US with other markets to follow exploring premium adult soft drinks starting with the UK white space Asian Latin America earlier stage focused on establishing on trade in key City cities long-term opportunity as Western drinking habits establish next wave including U.S Germany Italy Spain France Austria and Canada U.S premium Spirits category um to 10x the size of the uh over 10x the size of the UK strong momentum in key European markets driving category growth and premiumization in Australia and Canada stronghold including UK and Belgium transformed mixer category clear leadership position with significant price premium to mainstream mainstream Brands higher UK household penetration than one number the number one UK beer brand um foreign I liked it uh we&#39;ll have to take a deeper look though further on we go as shown above fever generates Returns on tangible capital of over 100 due to its acid light business model cap X is only 5 million it owns North manufacturing plants or DCS raw materials ingredients labels bottles everything are shipped directly to the bottle the finished product is then shipped to the distribution distribute distributor who is responsible for getting it to bars restaurants and grocery stores Wireless acid light model leads to lower cost and higher returns it also leads to lower visibility and makes it more susceptible to cause pressures such as the ones they are currently experiencing working capital is the primary use of capital which ran around 50 of sales pre-covered and has run around 70 of sales during and post covet assessing the margin headwinds the Crux of the debate today is fevers depressed margins fever trees Mantra is 50 gross margins and 30 percent ebitda margins they lived up to that Mantra prior to 2020 but then margins began to decline and haven&#39;t yet stopped gross margin um and 2013 at 48 in 2017 at 53 in 2022 at 33 percent ebitda margin 2013 at 28 the 2017 33 and um 2022 in at 10 as you can see we had eight years of pretty consistent margin performance before the wheels started to come off in 2020. the decline in Gross margins accounts for essentially 100 of the decline in operating margins from 2019 to 2022e uh forever fever&#39;s gross margin fell approximately 17 percentage points from 50.5 to 34 um whilst ebitda margin fell about by about the same so we can narrow our focus on just the gross margin on as the source of the problem the issues impacting gross margins are U.S supply chain issues cost inflation lack of scale in growth markets pricing strategy holding prices and growth markets despite High inflation using management commentary and Company filings the accumulative margin impact from these is um fiscal year 1950 to 1533 across margin work uh delayed Ram but limited glass availability in U.S equals higher sea fried sea fried inflation glass but also General product Logistics cost inflation Mong Stanley has done good work here provides a similar margin walk they estimate the U.S supply chain logistic issues account for 50 of the 1700 basis points margins um compression from 2090 to 2022 with 600 basis points coming from uh transatlantic Freight and other another 250 presumably coming from inflation in this economics of scale management does not explicitly break out explicitly break out the margin impact from this economics of scale but they do discuss it on their codes it is presumably mixed in with logistic issues and cost inflation lack of scale equals higher unit cost let&#39;s dig into each of these to assess how much margin can be recovered U.S supply chain issues fever supply chain issues are confined to the US fever currently makes only 40 of the U.S of their us finished product locally in the US the remaining is 60 is very expensive to Source because it has been shipped from the UK the plan was to have 80 percent of U.S production done locally by the end of this year unfortunately they hit a production snacks they use to bottle they use two bottle implants in the U.S one on each Coast the west coast production line was commissioned in 2021 at the East Coast was commissioned in 2022. on the west coast they have had a difficult time sourcing glass bottles due to Port congestion delays securing glass supply on the west coast has led to both higher Glass cost costs and higher freight costs as well as incuring higher internal freight costs as they try to balance inventory between costs coasts they are working hard to secure glass supply in 2023 for both the East Coast and West Coast yes there is a glass bottle shortage and prices are up a lot on the last call they said West Coast poured a congestion has eased in production there is running better the bigger problem has been on the East Coast where a labor shortage has slowed their production ramp as a result fever is relying on their UK plan and shipping to the US this has resulted in an extraordinarily High Transportation cost and has left fever vulnerable to skyrocketing transatlantic shipping rates which are up another 50 another 50 percent this year on top of the huge rise last year according to the company U.S Logistics costs were up 56 per case in 2021 they are up more this year they have more this year the East Coast ramp is by far the biggest headwind to margins fortunately these are visibly temporary costs that could that should resolve themselves over the next 6 to 12 months we should see close to a full year of local bottling in the US in 2023 which will dramatically reduce exposure to high sea fright and overall logistic costs not only have the issues heard margins they have also led to inventory shortages and had a meaningful impact on Sales Management has noted U.S demands demand is far stronger than what current sales imply there have recently been increasing uh production in the UK plan to relieve their U.S inventory shortage given the high fried High Transportation cost they will probably lose money on these sales however it is all it allows them to sustain momentum with West Coast Production now running more smoothly in the east coast inventory levels normalizing due to increased shipments from the UK fever is anticipating a strong fourth quarter for modeling purposes I assume they recover 80 of the US Logistics cost increases in 2023 sus production ramps and UK to U.S shipping declines this leads to a 700 basis points gross margin Improvement in 2023. I assume they ramp from 80 to 100 in 2024 and Logistics costs improve further adding another 180 basis points to gross margin in 2024. okay we&#39;re back I had to take a little break it costs inflation cost inflation has two components first Logistics and transportation and second product product costs I assume some inflation will remain permanently permanently while some will prove transitory some will be offset with higher prices my model assumes 50 recovery of cost inflation by 2025 via a combination of lower commodity costs and higher pricing a lot of rides on European gas prices because they drive Logistics and transportation costs as well as gas prices the 50 increase in Sea Freight rates has been the primary driver of Transportation cost inflation it has been a huge headwind into margins however these costs were less lessened dramatically as U.S production rents product cost inflation has been driven primarily by glass bottles which are 30 of total product costs a cost glass prices are primarily a function of gas prices so they&#39;ve had glass prices sub surcharges tied to gas prices while improved Port congestion has eased glass availability on the west coast the globally glass availability across the industry has been restricted in order to secure glass for the rest of the year they had to agree to a double-digit price increase they are currently negotiation negotiating for 2023 glass supply it is unlikely a glass cost will decline next year and will probably increase they also seen ingredient inflation sugar and such for modeling purposes I have built in an additional 150 basis points headwind to gross margins in 2023 for inflation partially offset by improving pricing adding 50 basis points in 2024 I assume they recapture 50 of the 2019 to 2022 cumulative inflation impact via a decline in commodity prices improved pricing adding 380 basis points gross margin this is a big assumption that has some risk to it lack of scale in the US the device the diversification of volumes as we establish this network has temporarily reduced our economies of scale as we increase volumes through this network especially in the US we will recapture economies of scale fiscal year um 21 presentation Earnest presentation UK operations are extremely efficient due to scale they have 45 market share and run everything from one bottling plant which accounts for 38 of total sales so margins are high and profits are maximized contrast this to the 62 percent of sales outside the UK which is spread across the globe and supported by six bottling sites and three canning sites so 38 of sales in the UK one bottling plant 62 of sales in the rest of the world nine plants establishing This Global Network to serve on the diversity of volumes has reduced economies of scale over their media term intermediate term as volumes continues to continue to grow specifically in the U.S scale will improve and with other with it margins onshoring local production in the US Australia and elsewhere and the biggest challenge is the biggest challenge to margins bottle of fees are volume based as are a lot of other purchase contracts as the business scales unit costs will come down and margins will lift pricing power Viva tree typically sales sells for 100 to 200 percent premium to the mass Market brand Schweppes indicating huge pricing power and brand strength however in some cases the gap between Schweppes and fever has gotten too wide those who remember Marlboro Monday understand the risk of pushing pricing too far in 2020 fever reduced pricing by 15 in the US to help close the price gap between them and Schweppes that was the first indicator that they may have pushed price too far the second is this year While most of fever&#39;s peers are on their second round of price increases fever has been holding prices flat leading some to believe their considerable pricing power is simply Tapped Out well I think there&#39;s some truth to this I also believe management is trying to prioritize growth and is hesitant to do anything that could disrupt disrupt its momentum it is winning over customers and taking share at a rapid clip and management doesn&#39;t want to disrupt that makes sense to me holding prices flat during a period of high inflation is a heavy cost in the near term longer term either costs come down they raise prices or they get squeezed this is a good place to know that management thinks very long term decades so they are playing the long-term game and don&#39;t mind suffering through a period of flat pricing if it means winning the U.S market long term fever&#39;s goal is to optimize price while maintaining an affordable premium product price strategy varies by market depending on growth in mature markets the UK fever is priced at 140 percent premium to Schweppes and is taking a percent pricing in 2022. in Europe it&#39;s closer to 100 in high growth less mature markets such as the US uh the premium to Schweppes is closer to 250 percent it is in this market that fever has kept pricing flat as they try to drive adoption and narrow the price Gap they just completed an in-depth Market by market analysis and plan to take pricing next year in certain markets I&#39;ve built in only 50 basis points for margin improvements from pricing next year a fairly conservative conservative assumption in this environment summary on margin recovery adding up all the sources of margin recovery recovery gets up to gets us to 45.4 gross margin by 2024. 2022 it was 33.8 can fever return to 50 gross margin margins at 30 percent ebitda margins I think it is very it is unlikely in the near midterm near medium term although 25 ebitda margins seem reasonable by 2025 and they should move higher from there as as the business continues to scale my preference would be it would actually be for them to drop their margin Target and focus on winning the market Bears argued that the margin degradation is structural we don&#39;t see a case for this but rather see most of the issues as transitory for over the next one to two years cost headwinds glass bottles ocean fried should moderate as the economy slows and renormalize from the covert dislocation and diseconomies of scale fade as they push more volume through the network as we outline outlined above we see a gross margins improving from 34 percent this year to 45 percent by 2024-25 resulting in ebitda margins of 25 versus historical 30 percent assuming 10 annual sales growth and 25 Abida margins EPS will equal 72 pounds by 2024 at the current price of 8 pounds 76 cents less 1.65 in net cash at one pound seven 65 cents in net cash fever is trading at a um PE X cache of 9.9 x normalized 24 eps brand strength despite the margin headwinds there are many signs fever&#39;s brand remains strong number one number one market share in the UK with 45 value share and growing and with 51 share on premise they are bigger than Schweppes despite being 2.5 x the price they are 20x the size of the next largest premium mixer sell through sell through a 7x higher than other premium mixers second grew 41 in constant currency in the US last year with total points of distribution increasing 33 already number one mock chair and tonic and ginger beer third European sales are growing more than 30 percent and fever is 6X the next largest premium brand fever has maintained huge pricing power globally the importance distribution and winning on premise distribution to the on-premise market is an incredibly incredibly important ingredient to success in this business while the off-premise Tam is far bigger the on-premise how are could heavily influences off-premise sales because it builds consumer awareness the thought goes that if fever can win the bartender on premise they win the customer of premise building a brand this way is difficult and slow but it is the right approach once fever wins an account it&#39;s pretty it&#39;s a pretty sticky business the bartender has to have a good reason to switch how do you get your product in tens of thousands of bars restaurants grocery stores across the globe this takes an even this takes on even more importance in the US due to the size of the market and its complexities liquor laws yes I know Fever Tree is in the liquor just stay with me uh in 2018 fever signed a National Distribution agreement with the largest Spirits distributor in the U.S Southern glazes Southern Southern has a 35 share in wine and spirits distribution in the U.S with a great portfolio of the largest and best spur brands in the world giving them a connection to almost every on-premise account in their territory in on-premise you&#39;re not selling to the customer you&#39;re selling to the bartender the bartender is the gatekeeper and Southern&#39;s Reps don&#39;t just distribute they sail Southern doesn&#39;t represent any other mixer Distributors Southern isn&#39;t going to distribute a competitor product because they are committed to Fever Tree and the largest and the second largest distributor in the U.S rndc 15 share isn&#39;t going to distribute an additional mixer because they already have an agreement with Q fevers primary rival in the U.S if this sounds like a great deal for the beverage company keep in mind the distributor is getting a 30 margin common is industry knowledge Spirits distribution is incredibly profitable according to Wiki Selma glazes is the 11th largest private company in the US and while fever is a lower ticket for southern they make up for it in inventory turn how does fever win in on-premise Martinez are always looking for better products to please their clientele clientele they just want Happy customers and a bigger check upselling the bartender from Schweppes out of a soda gun to Fever Tree out of a cute little single serve bottle is a big part of the sale the pitch is exactly fever trees motto if three quarters of your drink is the mixer mixed with the best for example vodka is a flavorless so the customer tastes only the tonic therefore go with something better than Schweppes while bartenders will serve you a gin and tonic with Schweppes out of the gun no bartender feels good about that good about that due to the lack of fair this sense and the lack of theater Europe generally does not have soda guns so drinks have always been served by the bottle in the U.S however guns are pervasive when a customer is served their cocktail appeared a tableside from the sassy little Fever Tree bottle it creates theater and is a superior experience to shopping on GNT served from a gun with no presentation and having the bottle displayed on the table is obviously a huge marketing tool that helps fever grow brand awareness this is what southern does they try to win the bartender over if they can do that fever 3 becomes a growing recurring Revenue stream while in on the premise Market the distributor is the same sales person in retail there&#39;s no one to market the product there&#39;s no one to market the product the packaging does the marketing if the consumer doesn&#39;t know any of the brands they say they size you up by your price and your packaging but if they can win you over on premise it makes for much for a much easier sell in the grocery store built a brand on premise sell volume off-premise this is the brand building strategy of a Spirits company Fever Tree is building a brand like like a Spirits company another Point worth making here is one of the big guys like Coke or Pepsi decided they wanted to enter the premium mixer Market they would have no natural Distribution on premise yeah they can actually distribute a pyramid mixer but they don&#39;t have relationships with the bartenders and wouldn&#39;t know how to sell a mixer Fever Tree on the other hand is partnering with the spirits companies co-marketing with them it has Southern representing them in an on in the on-premise Coke and Pepsi have none of them they don&#39;t have reps pitching new craft cocktails similarly Schweppes is a cheap easy solution for the on-premise but the Reps aren&#39;t out talking to bartenders trying out new craft cocktails with new flavors the national Distributors have the scale to drive adoption at hundreds of thousands of on-premise accounts bars and restaurants are crucial to build the fun build on the foundation of Eva trees brand Equity the I&#39;m sorry this relationship in combination with fever&#39;s co-marketing agreements with companies like Diageo Diageo highlights how a fever tree behaves more like experts company than a typical consumer beverage business this consolidation and Regulatory protection of the whole side wholesale tier protects the mode of scaled suppliers in practice September 20 2021 expanding into adjacent an agent senses I&#39;m sorry I don&#39;t know how to pronounce it fever recently bought announced they intended to move into non-carbonated mixes in 2023. these would mainly be Margarita and Bloody Mary mix but also bar Essentials such as grenadians and Bitters the non-carbonated mixer Market is larger than either tonic or ginger beer and there&#39;s no clear leader with fever&#39;s brand Equity they have an excellent opportunity to grow into this Edge Edge sensei they also recently announced they were testing expansion into adult soda by placing some existing products that are sometimes consumed without alcohol in the adult soda ale of the grocery store they will maintain the price premium and stay in the mixer ale but expand the bottle size in keeping with traditional soda bottles and add them to the solar ale this strategy makes me a bit nervous thinking it could weaken their brand and image but of course the size of that Tam is multiples of the mixer market so maybe it&#39;s worth testing they are currently testing it in UK grocery stores by adding scuss to the soda ale they have already secured shelf space equal to five percent increase valuation with earnings temporarily um depressed any valuation metric on current or even 2023 numbers is meaningless let&#39;s start by looking at EV to sales and then move to valuation on anticipated normalized earnings as you can see ev to sales NTM is super depressed at 2.25 X its lowest level by far since going public before that I would say it was at an average of seven to eight in my opinion there&#39;s a ton of strategic value here for someone with global distribution like the iGo consider that coke took a stake in Monster somewhat similar to fever and returns growth and it&#39;s niche Nishi beverage profile at 5x sales here are a few other private company Market comps of Niche beverages that are worth considering body armor monster Rockstar Bay Gatorade and vitamin water all acquired by either Coke Pepsi or Dr Pepper um ev2 sales from 3.5 x to 7.4 X so purely on so purely on Mark private Market comps using ev2 sales has more than 2x upside and fever&#39;s High margins are you feeling above average EVS multiple a large acquirer with a global supply chain a global distribution could solve many if not all of fever&#39;s current issues most sell side analysts actually comp fever to spurts companies rather than solid companies the private Market values and Spirits are even higher at sex approximately 6X EVS it&#39;s worth spending a minute uh digressing here on Monster at the time Coke bought a Sega monster 2024 uh in 2014 um they were a distant second to Red Bull and in a beverage Niche some thought fetish today monster is the number one stock and total shareholder return over the past 20 years with a total return of 170 percent it is up over 4X since partnering with Coke the day they reported the coke distribution and Equity ownership deal the stock was up 38 and never look back this speaks to the opportunity fever has in partnering with a global Beverage Company to accelerate distribution the big difference in distribution is fever needs someone that can sell into on-premise a connection with the barterness that would be a liquor company and it would have to be a company that has a brand and almost every Spirit category because fever would be abandoning co-marketing relationships with all other liquor companies the agio has 48 share in Gin and has a portfolio of Brands across prototypes seems like a good fit now let&#39;s look at a normalized earnings and go get and get to a value on PE I start by modeling out sales by region for 2022 2024 to 2024 they are roughly in line with consensus as you can see estimates below which uh result in a 10 sales kegger to 2024. using the marginal analysis from earlier are model gross margins returning to 45 uh 0.4 by 2024 and Avatar margins of 25 of of 24.7 while these margins are far higher than today&#39;s level they are conservative relative to the eight years prior to covet it somewhat splits the difference these assumptions get us to 72 pounds uh in 2024 EPS as shown below sense X cash fever is trading at a PE of 9.9 X these normalized eps these normalizes Public Market comps are tricky because but considering the their natural beverage trades at 50 higher on EVs and doesn&#39;t have near the margin profile of fever fever is more comparable to monster which has a similar history of high growth and returns it trades at 39x 2022 e earnings and 8.3 EVS I assume a fair multiple is in the low 20s 23x 24 normalized earnings plus one pound 65 in net cash gets me to an estimated value of 18 pounds 21 or upside of 108 108 to 2024. competitive advantages first mover in the off-premise in the off-premise fever 3 being first to Market was an undeniable Advantage many customers are now a loyal Fever Tree customers and they have to have a reason to switch if you are a fever tree customer it&#39;s hard to find a reason to switch other than to downgrade for budgetary reasons and shelf space is limited fever provides the retailer with fast inventory turn and strong margins hard for newcomer to compete with distribution U.S distribution is highly concentrated with Southern glazers and rndc having a combined 50 market share glazers carries fever and r d c carries fever&#39;s largest competitor Q and neither is interested in bringing in a second premium mixer brand all the kpis outlined in this report sales growth price premium Seth Rover 8 versus competitors Etc point to a significant brand Equity the hard work fever has put into establishing an on-premise presence has certainly helped build the brand risks consumer spending the economy is obviously weakened a weakening which poses trade down risk longer term maybe we are at the end of an era of conspicuous consumption and entering an era of repression this is a macro risk brand versus fat I fully acknowledge Fever Tree it could be some decade long fat and the investment guards are playing a sick joke on me I remind I am reminded of all the flavored Celsius that came to Market at Price premiums and now now in the same low price point bin if things turn out South I believe the stock price is supported by strong strategic value competition competitors are Schweppes the largest mass Market brand Q the second largest premium makes a brand to fever and tons of small competitors every major grocery chain now has their own private label tonic so I don&#39;t want to understand the competition well there&#39;s tons of competition in the space We Believe fevers first mover Advantage distribution and brand Equity create a sizable barriers to and add to entry bartenders need a reason to switch and it&#39;s hard to find one especially if they are already using Southern for their Spirit needs Q is fever&#39;s primary competitor in the US they are in the number one they&#39;re in the same number of stores today however fevers sales per store is more than double queues at 250k versus 100k fever has said they took considerable share from Q during covid and that they sell through is 60 to 90 greater in stores where they have the same number of sqs skus also Q is 50 club soda and 25 ginger beer there&#39;s room for both Brands witness Red Bull and Monster pricing relative to other food categories a fever sells for a huge premium to the mass Market brand it would be it would be hard to find a category in the grocery store that exhibits such a widespread between premium and mass fever&#39;s pricing power may be tapped out Alternatives the explosive growth and legalized marijuana could take share from alcohol while they certainly are mutually exclusive a pot provides consumers on alternative to get up my favorite fever-treed cocktails Fever Tree Mediterranean tonic and Hendrix gin fresh squeezed lime wedge Fever Tree elderflower Tonic and oppressed 9 1908 gin lime wedge garnish Fever Tree sparkling grapefruit and Don Julio Blanco tequila awesome um this is not recommendation like I said earlier two he does describe this as well I do not hold the position with the issues such as deployment directorship or consultancy I and or others I advise all the material investment in the issue is security I do not advise us uh catalyst it&#39;s not that I don&#39;t advise it it&#39;s just not recommendation that&#39;s what I do Catalyst uh margin recovery as U.S production ramps inflation cools it&#39;s currently at a price of 13.71 cents and market cap 166 billion um one billion 1 billion 66 66 uh Enterprise Value 1 billion fifty and PE at 32 P be at five five nine Guru Focus says it&#39;s undervalued significantly as well but let&#39;s not trust on that algorithm uh cash to debt 37 percent debt to equity is 0.01 I don&#39;t have a lot of that that&#39;s awesome um EV to free cash flow 34 percent interesting company thank you very much for tuning in um I will actually take a little look at this further because I actually find it quite interesting um I like this company so far uh tune in next time thank you very much

Transcript for:Value Investors Club - Fever Tree Drinks

Transcript for:
Value Investors Club - Fever Tree Drinks