Appropriately for a company that specialises in mixers for cocktails and long drinks, Fever-Tree has had a mixed time of it over the past couple of years as cost headwinds have crunched its margins. In similar vein, its recent trading update saw the company slightly miss topline forecasts but beat earnings expectations.
The particular problems for Fever-Tree were glass prices and shipping costs, though both situations have now gone a long way to being resolved. Glass for its bottles, which are a big energy user in the manufacturing process, has now been locked in for a year at a lower price. The other big outlay was transatlantic freight, where costs jumped fourfold to $10,000 per container but have now dipped back down to about $3,000 per container.
Fever-Tree was established in 2004 by Charles Rolls, 66, and Tim Warrillow, 49, to make high quality tonic for the premium gin market and it has since diversified into a range of mixers, sodas and adult soft drinks. Its shares rose sharply after its flotation at 134p in November 2014, peaking at £37.23 in August 2018, equating to a market value not far short £4.5 billion. Its founders — chief executive Warrillow and his now retired partner Rolls — collected hundreds of millions from selling shares.
After five years of beating City forecasts it all went a bit pear-shaped as the lockdown closure of pubs, bars and restaurants at a stroke killed off half its business. Although its off-trade sales — via supermarkets and off-licences — went up as stay-at-home drinkers broadened their G&T repertoire and became more adept at mixing cocktails, it didn’t come close to filling the hole left in on-trade sales.
Since the end of the pandemic trading has gradually recovered, although there have been plenty of headwinds to keep Warrillow and his team occupied, not least the impact of cost inflation on the price of products. Fever-Tree was never a cheap mixer, and the cost of living crisis made the brand look even more expensive, but retention of the number one position in the UK by market share, both in the on and off trade, is a remarkable statistic.
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Christmas trading, always a key selling period, was “especially strong in the on-trade”, where it experienced double-digit growth compared with 2022. Earnings are predicted to double this year to £60 million.
Its non-tonic products now account for about 25 per cent of sales reflecting the growth of sodas and gingers. Five years ago the split was more like 90 per cent tonic.
US Nielsen data covering roughly half Fever-Tree’s trade sales has just been published showing its US growth hit 25 per cent in January. The US is now the country’s largest market and it ended the year extending its number one position in both the tonic and ginger beer categories, where a Vodka Mule (no longer Moscow Mule) — vodka, ginger beer and lime — is one of the most popular long spirits drinks in America.
One spirit that has grown extremely rapidly in the past couple of years, with a knock-on benefit to Fever-Tree’s mixers, is tequila, increasingly popular in a Paloma cocktail with a pink grapefruit soda or in a Margarita with a Mexican lime soda or a dedicated Margarita mixer. Despite market jitters over falling tequila sales at Diageo, the tequila category now has 17 per cent of the US spirits market.
While there has been some trading down, it is apparently down to drinkers switching from $50-a-bottle ultra or super-premium tequila to premium level bottles priced at about $30. While this may not be great for some of the spirits companies, it is actually broadening the category’s appeal, moving it from a “sipping” drink over ice to being drunk as a long mixed drink such as the Paloma with a Fever-Tree mixer or soda.
Advice Buy
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Spire benefits from pressure on NHS
The admission this week from Rishi Sunak that the government has failed on a pledge to cut NHS waiting lists in England further underlined the opportunity for private healthcare providers (Alex Ralph writes).
Among the market leaders capitalising on the pressure on the public health service is Spire Healthcare, the FTSE 250 mid-cap company.
Spire has been a beneficiary of the increasing demand from self-pay patients and a rebound in private medical insurance (PMI), helping the company to post better-than-expected sales and earnings at its half-year results in September.
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Revenue rose 13.1 per cent to £676.5 million year-on-year, with private revenue up 10.4 per cent. Revenue from the NHS, struggling with long backlogs of patients, including for orthopaedic procedures, jumped 17.1 per cent.
It will have been five months since Spire last updated the market on trading when it posts results for the year to the end of December on February 29.
Investors will be looking for continued operational momentum and an update on the effects of the underlying tailwinds in the UK healthcare system.
Spire, under Justin Ash, its chief executive since 2017, has been expanding in complementary services, such as its private GP business through the £12 million acquisition of the Doctor’s Clinic Group in December 2022 and more recently the £74 million purchase of Vita Health Group, the mental health provider, in October. Spire believes the Vita deal provides synergies in working with corporate and PMI customers, as well as its occupational health businesses.
Spire’s debt position has been among the issues weighing on the investment case in the past, but the company has made progress, cutting its leverage ratio to 2.1 times net debt to earnings at the half-year and it has the firepower for similar bolt-on acquisitions.
Vague guidance has been another reason to keep some investors on the sidelines, with the company forecasting “continued momentum in top-line growth, margin improvement and ROCE [return on capital employed] improvement”.
The shares, up 1p yesterday at 235p, have gained almost 10 per cent since the interim results, but remain below the 250p offer from Ramsay Health Care, an Australian competitor, in 2021 which, unusually, was voted down by shareholders despite Spire’s board recommending the deal.
Advice Hold
Why Underlying UK healthcare market dynamics and M&A opportunities remain encouraging
