Latest / The Dutch Investors / #37 | Fever-Tree Deep Dive | Built to be bought w/ Secret Sauce Investing

Transcript

#37 | Fever-Tree Deep Dive | Built to be bought w/ Secret Sauce Investing · The Dutch Investors

• 0:00
  SPEAKER_03: I think that Fever Tree has been built as a product to almost or a business to be sold.
• 0:05
  SPEAKER_03: I I can't see Fever Tree succeeding as an independent business for 10 more years.
• 0:10
  SPEAKER_03: I think there will be some form of acquisition.
• 0:12
  SPEAKER_03: Um perhaps the the the fox isn't the hen house with Moleson Cours coming in.
• 0:17
  SPEAKER_03: Um there has already been a suggestion that Moles and Cours perhaps could be a longer-term buyer.
• 0:22
  SPEAKER_03: As soon as something like that has occurred, I think other buyers will be on the lookout.
• 0:26
  SPEAKER_03: If you look at historic share price, they're still relatively cheap for somebody to come along and buy them.
• 0:32
  SPEAKER_02: The worst day on Wall Street since the crash of nineteen eighty.
• 1:41
  SPEAKER_00: But before we start, perhaps it would be best to introduce yourself real quick, uh, why Fever Tree, and um yeah, just some thoughts.
• 1:52
  SPEAKER_03: Yeah, so thanks very much for having me back on again.
• 1:54
  SPEAKER_03: Um, so with Fever Tree, it's a tonic producer based here in the UK.
• 2:00
  SPEAKER_03: It's a company I've watched quite closely for almost a decade now.
• 2:04
  SPEAKER_03: The reason being that outside of investing and outside of secret sauce, I work in the drinks industry.
• 2:10
  SPEAKER_03: So because of that, I've written two articles on Fever Tree, and it's a company that I'm invested in.
• 2:15
  SPEAKER_03: And what do you like to do uh from day to day?
• 2:17
  SPEAKER_00: Some of your hobbies maybe?
• 2:19
  SPEAKER_03: Uh so as we talked about there, I I just cycled back to uh the house.
• 2:23
  SPEAKER_03: So it's it's the sun is shining in Scotland.
• 2:25
  SPEAKER_03: This is very rare.
• 2:27
  SPEAKER_03: Um outside of that, I am I am very fit, or I I tried and be very fit where possible, and I I like to keep up with my reading as well.
• 2:36
  SPEAKER_03: Uh I'm just reading Sam Walton's book, Made in America.
• 2:40
  SPEAKER_00: Yeah, it's it's a good book.
• 2:41
  SPEAKER_00: I've read part of it.
• 2:42
  SPEAKER_00: I didn't finish it yet, but uh it's a it's a good story, right?
• 2:46
  SPEAKER_03: Yeah, it's good.
• 2:46
  SPEAKER_03: So I've set myself the target of reading 50 books for the year, but when you're writing and doing everything else, this is not always easy.
• 2:53
  SPEAKER_03: So some some fiction in there as well.
• 2:55
  SPEAKER_03: I just finished Ender's game as well, which was good.
• 2:58
  SPEAKER_03: What what uh what number are you on?
• 3:00
  SPEAKER_03: Uh I'll need to check my Goodreads.
• 3:02
  SPEAKER_03: I think I'm on about 16 or 17 now for the year, though.
• 3:05
  SPEAKER_00: Wow, well done.
• 3:07
  SPEAKER_00: Five months, that's uh pretty impressive.
• 3:09
  SPEAKER_03: Probably just not learning anything, just just uh not taking anything in though.
• 3:15
  SPEAKER_00: You've been investing for some time already, writing about companies since 2021.
• 3:20
  SPEAKER_00: Can you describe what kind of investor you are?
• 3:23
  SPEAKER_00: What characteristics do you look for in companies?
• 3:26
  SPEAKER_03: Uh so typically I maybe quite generically look for what what you might call the Charlie Munger approach to companies or stock picking.
• 3:33
  SPEAKER_03: Um so these are companies that typically have high ROIC, they have good growth rates, they typically have high gross margins, they have quite an obvious moat.
• 3:44
  SPEAKER_03: Um, and beyond that, I do like when these companies don't tend to have debt.
• 3:48
  SPEAKER_03: They're probably relatively easy to understand as well, and in a segment or sector that I'm familiar with.
• 3:54
  SPEAKER_00: Yeah, that makes sense.
• 3:55
  SPEAKER_00: Many of us uh it sounds pretty familiar and pretty um in line with what we're looking for as well, among a few other things, of course.
• 4:04
  SPEAKER_00: So, how did you come across FeverTree?
• 4:06
  SPEAKER_00: It's a brand I never heard of before, uh, before talking to you.
• 4:10
  SPEAKER_00: And I believe you own the company, so perhaps you could also expand a bit on why why you own the company.
• 4:16
  SPEAKER_03: So, as I explained earlier, uh I work in the drinks trade in the UK, and FeverTree was one of these companies that almost just overnight exploded throughout the UK.
• 4:26
  SPEAKER_03: Um, I'm not sure if it was the same in in the Netherlands, but we had the the gin boom in the UK, where it felt like there was several new distilleries popping up every week.
• 4:37
  SPEAKER_03: Um, and FeverTree was really the company that benefited off the back of this.
• 4:41
  SPEAKER_03: So from about 2010 right up until COVID time, there just seemed to be this abundance of gin distilleries, especially, um, and fever tree's growth came off the back of that.
• 4:52
  SPEAKER_03: So FeverTree was a company that I have been aware of, I've bought from in the past, bought stock from.
• 4:58
  SPEAKER_03: They were very much uh a FTSE darling.
• 5:01
  SPEAKER_03: So if you look back on the share price of FeverTree, at one point they were close to about£40 a share, and it just seemed if you look at FinTwit, they were very much they were talked about, especially in the UK.
• 5:13
  SPEAKER_03: From my from my perspective, I was very aware that they were a good company, they had solid a solid growth rate, high margins, strong brand.
• 5:21
  SPEAKER_03: However, the share price never aligned with with where I wanted to invest.
• 5:25
  SPEAKER_03: Uh that wasn't until about 2022 where I got my first opportunity to buy in, and then again I've I've purchased some more shares in 2024 when there was a bit more of a pullback.
• 5:36
  SPEAKER_00: Okay, and perhaps that is a good um segment to go over what FeverTree is and does.
• 5:44
  SPEAKER_00: Is FeverTree the brand itself also?
• 5:48
  SPEAKER_00: Um, or is it like the company name that sells different kinds of brands just to start it off?
• 5:55
  SPEAKER_03: Yeah, that's that's a good a great question because we're probably so familiar with people like Coca-Cola or Pepsi who are the brand but then also have different product segments.
• 6:04
  SPEAKER_03: But FeverTree is the the company name and the brand name.
• 6:07
  SPEAKER_03: There are not any sub-brands underneath FeverTree.
• 6:10
  SPEAKER_00: And can you expand a bit and give us some background on how FeverTree got started and how it evolved into what it is today?
• 6:18
  SPEAKER_03: Uh yeah, so FeverTree was founded, I think just at its 20-year anniversary, so 2005, um, by Charles Rawls and Tim Warlow.
• 6:28
  SPEAKER_03: Um, and it's what I would describe as a quintessentially British brand.
• 6:33
  SPEAKER_03: So it tends to sell well around the world because it has that association with quality.
• 6:38
  SPEAKER_03: Um they as I mentioned already, they did very well with the gin boom from sort of 2010 onwards.
• 6:45
  SPEAKER_03: Um, but since then they've expanded outside of Tonic, so they've diversified their product base, so they now have Tonic's other sort of adult soft drinks, which includes the likes of lemonade, ginger beer, cola.
• 6:57
  SPEAKER_03: Um they've introduced premium sodas and cocktail mixers, which include the likes of margaritas, um, mojitos, espresso martini, and then they've also got RTDs as well.
• 7:09
  SPEAKER_03: So that's uh variations on cocktails and cans.
• 7:13
  SPEAKER_03: And beyond that, they're really expanding quite heavily into the US, which I'm sure we'll come on to.
• 7:18
  SPEAKER_00: Yeah, before we uh dug into this analysis, I looked at uh the investor relations side.
• 7:24
  SPEAKER_00: I uh I read some different reports on the company, and it feels like the business is pretty simple to understand.
• 7:32
  SPEAKER_00: Perhaps you could explain to our listeners and to me what do they do in simple terms and how do they make money?
• 7:41
  SPEAKER_03: So they they essentially just sell tonics and soft drinks.
• 7:45
  SPEAKER_03: The majority of the products are non-alcoholic, and they started here in the UK, and they're now expanding that to the rest of the world.
• 7:52
  SPEAKER_03: So I've recognized you you've said that you haven't seen any in the Netherlands, so you maybe need to keep an eye out, but it's quite popular, it's the the most popular tonic brand, essentially, uh especially here in the UK, and they seem to be the number one tonic brand um and ginger beer brand in the US by value.
• 8:10
  SPEAKER_03: So they're certainly capturing market share.
• 8:13
  SPEAKER_03: Uh, I can see it's sold in most supermarkets here in the UK, whether that be Tesco or Asda, and then I'm also aware it's sold now in the US in Walmart.
• 8:22
  SPEAKER_00: Is it a global brand or is it still expanding or is it available everywhere?
• 8:28
  SPEAKER_03: It is available everywhere, but obviously the fact that you have never heard of it before demonstrates that perhaps they're not as big as a shareholder as I would like them to be.
• 8:37
  SPEAKER_03: Um, yes, they're very much based in the US outside of the UK, and they're expanding into Europe and uh Australasia as well.
• 8:47
  SPEAKER_03: But the company has obviously been UK-centric for a long time.
• 8:51
  SPEAKER_03: However, the US has just recently overtaken the UK as their largest market.
• 8:56
  SPEAKER_00: Yeah, perhaps I'm not the biggest um benchmark in the Netherlands.
• 9:00
  SPEAKER_00: Uh, I don't really like tonics anyway, so I I'm not really looking out for uh for the brand anyway.
• 9:06
  SPEAKER_00: So perhaps my girlfriend heard of it before, but uh I haven't, so I mean that's the thing.
• 9:13
  SPEAKER_00: Do you drink uh fever tree or is it more of a I don't know, female drink, or does anyone drink Fever Tree?
• 9:19
  SPEAKER_03: Yeah, as I said, it's very popular here in the UK.
• 9:21
  SPEAKER_03: Um, it's tends to be a more of a premium tonic, so people may pay a little bit more for it for fever tree versus the likes of Schwepps or Britvik.
• 9:31
  SPEAKER_03: Um, you'll find that most fever tree, apart from the cans, all tend to come in glass bottles, which again lends itself to the premium side of the product.
• 9:41
  SPEAKER_03: Um for me, fever tree falls into a bit of a category where we now have the likes of Heinz Tomato uh sauce or the baked beans, where you have this flavour that you associate with um with a product.
• 9:56
  SPEAKER_03: And if I was to drink a gin and tonic, uh perhaps partly because I'm a shareholder, but also because of the fact that I like a quality gin and tonic, I would have to have it drunk with fever tree.
• 10:06
  SPEAKER_03: Um, I think there's there's anecdotal examples where I've I've been served uh chintz and tonics without fever tree and and quite honestly not able to drink it.
• 10:14
  SPEAKER_00: Fair enough.
• 10:15
  SPEAKER_00: Yeah, it's a bit anecdotal, but uh that works.
• 10:18
  SPEAKER_00: I'd like to ask another question on the business model uh side of FeverTree.
• 10:23
  SPEAKER_00: Fever Tree has positioned itself as a premium brand with an asset-like business model.
• 10:29
  SPEAKER_00: After nearly two decades, the business still remains relatively small, operating in a category that some might argue is structurally limited, I guess.
• 10:39
  SPEAKER_00: You've said that you like the brand itself, but I'm curious, when you step back and look at the full picture, what do you see as FeverTree's biggest um enduring strength in its business model?
• 10:53
  SPEAKER_00: And perhaps on the flip side, what's the what's the weakness in their uh business model, rather?
• 10:58
  SPEAKER_03: Um yeah, so if we if we break that down into a few parts, um what's its maybe its most underappreciated strength?
• 11:05
  SPEAKER_03: Is first and foremost, in my view anyway, fever tree has largely driven or almost created a new category of mixer that didn't exist prior to FeverTree launching.
• 11:16
  SPEAKER_03: Um they obviously evidence this in a lot of their investor reports, but they estimate that since 2014 through to 2023 um the the mixer market has grown by about 82%.
• 11:29
  SPEAKER_03: So we've also seen a lot of growth in the spirits uh segment, and that's uh see we've now seen spirits surpass beer um as a as a product.
• 11:40
  SPEAKER_03: So typically in the alcohol market, spirits make up about 42.2%, um whilst beer holds about 41.9.
• 11:48
  SPEAKER_03: So over the last decade we've seen this quite significant shift away from beer consumption to spirits, um, and fever tree has rode that wave.
• 11:58
  SPEAKER_03: In regards to the brand itself as well.
• 12:01
  SPEAKER_03: I think to your point earlier, obviously they've still got some work to do, but there's a real strength of brand and brand association that if you're in a in a beer garden or or wherever it may be, especially in the UK, fever tree tends to be advertised.
• 12:15
  SPEAKER_03: You know, it's it's one of these companies that it's associated with associated with quality.
• 12:20
  SPEAKER_03: Um so for me, I think Fever Tree, if they can continue to scale, and they are still scaling, I think if we look if we look at the US and we look at the numbers, um they are they're absolutely slowing down here in in the UK and Europe.
• 12:34
  SPEAKER_03: I think that there was a slight decrease actually in the most recent financial year.
• 12:38
  SPEAKER_03: Um, but for the US and for the rest of the world, the sales are still growing.
• 12:43
  SPEAKER_00: What you mentioned about the beer is also very interesting, and I do think that the younger generation is moving away from alcohol, whether people like it or not.
• 12:52
  SPEAKER_00: I think it's probably better for society uh long term, uh especially when you look at uh health-related issues.
• 12:59
  SPEAKER_00: So perhaps you can expand a bit more on what the market actually looks like right now.
• 13:05
  SPEAKER_00: Is it still growing?
• 13:06
  SPEAKER_00: Who are their main competitors maybe, and um what are some of the KPIs maybe in this in this industry?
• 13:14
  SPEAKER_03: Yeah, so if we look at the market and maybe even to an earth one of your earlier points, um fever tree sort of financial year 2024, they generated uh about 360 million or just over that, um, which which obviously they've still been they've been going for 20 years, which which may not, you know, they perhaps to your point earlier, there should be a larger company.
• 13:34
  SPEAKER_03: Um, but they are still growing as a business.
• 13:37
  SPEAKER_03: Sales have slowed down, um, but they're seeing growth in the US where there was about a 9% growth, and the rest of the world they grew about 19%.
• 13:47
  SPEAKER_03: So they're grown in categories outside of tonic as well.
• 13:50
  SPEAKER_03: They are now typically, um, especially by value, the largest tonic um brand in the US.
• 13:57
  SPEAKER_03: However, what we're seeing is they're diversifying their product range.
• 14:01
  SPEAKER_03: Um, and even to your point there about the younger generation not consuming alcohol, perhaps it's not as much of a disadvantage to fever tree that has been very much a mixer with spirits, that in fact does it open in a door and it's still on a known to become an alternative to the the sp you know spirits and to younger consumption so that people can still drink with their friends, but they're drinking fever tree, which is non-alcoholic.
• 14:27
  SPEAKER_03: So if we consider uh the market in general, um again, I'll go hit back on the point that fever tree have essentially redefined this category and grown the category.
• 14:38
  SPEAKER_03: Um, tonic, um give me some input here, but tonic seems to very much have been a June in Tonic, it was very uh quintessentially British.
• 14:46
  SPEAKER_03: So I think if we look at their main competitors from my side of things, it was very much Britvik and Schweppes.
• 14:52
  SPEAKER_03: So Schwepps of what was historically Cabary Schweppes um has a lot of history here in the UK, but perhaps it just fallen away from being a premium brand or any association.
• 15:04
  SPEAKER_03: So the the real uh interesting elements of the competitors is the fact that neither of these is owned by Coca-Cola or Pepsi.
• 15:12
  SPEAKER_03: I I just assumed that one or two of them would be um based on on their product portfolio.
• 15:17
  SPEAKER_03: But if you consider um the likes of Schweppes, I'll just uh break it down here, but um Schwepps, in terms of ownership, uh is not just a single company, it's a company that's quite fragmented.
• 15:32
  SPEAKER_03: So it's one of these companies that again it's owned by part of it's owned by Dr.
• 15:38
  SPEAKER_03: Pepper um in the US.
• 15:40
  SPEAKER_03: We've then got it trademarked um with Coca-Cola owning Schweppes in I think it's 21 European countries, and then in a further 22 European countries, it's uh owned by Beam Sentauri.
• 15:56
  SPEAKER_03: So as a market and a product, it's very, very fractured.
• 16:00
  SPEAKER_03: And this was the main competitor in the in the marketplace.
• 16:03
  SPEAKER_03: If we then consider Britvik, um Britvic were publicly traded for for quite a long time, but they've actually just been recently been acquired by Carlsburg, and that might offer them more distribution, but again, their products, in my opinion, are not on par with with FeverTree.
• 16:20
  SPEAKER_00: Would you say FeverTree is more focused on health-conscious consumers?
• 16:26
  SPEAKER_03: I wouldn't say they're they're perhaps focusing on health, but I think it just naturally offers itself to that marketplace because as if you take sort of data based on the health of society, those who are more affluent tend to have better health, and I think Fever Tree is targeting those consumers.
• 16:44
  SPEAKER_03: Uh, we see that with even the partnership where they had um, I think it was with Queens, the tennis club, um, and it's it's sponsoring sports events, um, and with that, you know, there's there's a certain individual or or target consumer they're going after.
• 17:02
  SPEAKER_03: So I'm not necessarily saying it's as a health product or a health or a you know even an alternative to spirits, but certainly is the case that I think it targets a more affluent and naturally healthy consumer.
• 17:14
  SPEAKER_03: That makes sense.
• 17:15
  SPEAKER_00: And this market has clearly benefited from the rise of premium spirits and the broader shift towards uh at-home consumption, especially post-COVID.
• 17:26
  SPEAKER_00: But some would argue that the category itself is still relatively niche with pretty limited uh ATAM, total addressable market, once you strip out um tonic um and gin, maybe it feels like uh I don't know, maybe a mature market, some would say.
• 17:46
  SPEAKER_00: So, do you do you know when we talk about this growth in this market?
• 17:51
  SPEAKER_00: Do you think how much of is it organic?
• 17:54
  SPEAKER_00: Is it category-wide expansion versus FIVATree just simply gaining market share in a very stagnant or slow-growing space, or is the market just growing as a whole and is FeverTree benefiting from that?
• 18:09
  SPEAKER_03: So if we reflect on the last decade, um and with FeverTree's metrics, as I've already quoted, they they grew the market um or the mixer market in the UK by about 82%, um, or or the market grew by 82%, sorry, um, with FeverTree capturing about almost 50% of that marketplace.
• 18:30
  SPEAKER_03: However, um yeah, however, with with FeverTree, I it's I I would be skeptical, I would be skeptical that they could achieve the same growth for the rest of the world, including the US, at that level.
• 18:45
  SPEAKER_03: That's in the UK, I I was part of it and witnessed it firsthand, we saw there was this huge resurgence in in gin and craft distilleries.
• 18:56
  SPEAKER_03: Now that's not to say that that can't continue, but I think that momentum has fallen off after COVID.
• 19:02
  SPEAKER_03: And I think if we if we consider the US as the next big opportunity for FeverTree, there's two things to consider here.
• 19:11
  SPEAKER_03: First of all, FeverTree considers the US to be or US alcohol consumption market to be about four times the size of the UK.
• 19:19
  SPEAKER_03: So if you consider that, there's still probably anywhere from you know they can probably do about four times in sales what they're already doing in the US over the next decade or so.
• 19:32
  SPEAKER_03: And second of all, um they've obviously just announced the uh partnership with Molson Cours, and that in itself offers them quite considerable distribution opportunities.
• 19:43
  SPEAKER_03: Um obviously there's a element here where the brand could potentially be diluted as they grow because they're obviously pushing towards a premium element, um, but they're diversifying the product base, which should support places like the UK and Europe where they're where they're perhaps losing sales, and then with the US, that will only support the growth as they as they break into that market.
• 20:03
  SPEAKER_03: But it's not to say that the US will have the same demand and pull through for gen and tonics that we've had here in the UK for the last decade.
• 20:12
  SPEAKER_00: I was about to ask you um on Molson Cores.
• 20:16
  SPEAKER_00: Um, I think Molson Cores, is that how I pronounce it?
• 20:19
  SPEAKER_00: Yeah, I think that's right.
• 20:21
  SPEAKER_00: I think they're mostly known for their beers, right?
• 20:24
  SPEAKER_03: Yeah, that's correct.
• 20:25
  SPEAKER_03: Yeah, that's absolutely spawn.
• 20:27
  SPEAKER_03: So they are, but they're very much a distribution company.
• 20:30
  SPEAKER_03: So if you look at the the most recent or one of the most recent investor relations from FeverTree, they do take into account the fact that um Moles and Cures are very you know, they're they're making 400 independent or they've got 400 independent distributors, they're sell servicing about half a million accounts, and on a daily basis, they're making 30,000 deliveries.
• 20:52
  SPEAKER_03: So there's an option for FeverTree to tap into that.
• 20:55
  SPEAKER_03: Um, but as I say, and as you rightly pointed out, Molson Cures is still a beer brand or a beer distribution company, but that's perhaps not too dissimilar from somebody like uh a Diasio here in the UK.
• 21:08
  SPEAKER_03: Somebody gets a portfolio of products offered to them, and Tonic is just an add-on to Moles and Cures portfolio.
• 21:15
  SPEAKER_00: Yeah, yeah, I believe they bought a stake of around eight or nine percent, and as part of the deal, they now handle everything for FIVATree in the United States, uh, from making the drinks and selling and marketing them.
• 21:29
  SPEAKER_00: What do you think of this move?
• 21:30
  SPEAKER_00: Is it overall a good move for um FIVATree since you're a shareholder of FeverTree, or do you think what's what's your uh gut feeling on this move?
• 21:41
  SPEAKER_03: Yep, so the Moles and Cours relationship um in January this year, they announced they were purchasing an 8.5% stake in Fever Tree um for 71 million.
• 21:50
  SPEAKER_03: So this made them the second largest shareholder in the company.
• 21:53
  SPEAKER_03: Um, they have guaranteed a certain level of profit for FeverTree for the coming years, which I thought was an interest in one and this will be classed almost as a as a royalty but then sort of baked back into into the revenue and margin but this was just I think for fever tree between 2026 and 2030 it just meant they were guaranteed a certain level of profits regardless of obviously how well they sell um in the US so Malls and Cura's are obviously incentivized to to drive sales off fever tree if they've opted to guarantee a certain level of profits and I think if we can just consider that to break into a new market particularly one as large as US there's a large cost associated with that there's hiring of teams there's perhaps infrastructure and operations you need in place so I have no doubt that Fever Tree probably had a good distributor but they now they have a distributor with an incentive to obviously distribute their product um in Molsoncoes my take on this is that it's largely positive and I did see mixed feedback from from shareholders when this was announced and I think there's there's obviously the risk as well that this move dilutes brand equity.
• 23:08
  SPEAKER_03: Moles and courses is not a typically a premium product however we'll just have to see how it plays out over the next number of years.
• 23:15
  SPEAKER_03: And if you know as a positive that that 71 million was I think it was issued in new shares but it looks like fever tree have have announced they'll they'll commence a share buyback program for um that 71 million so that that shareholders are ultimately not being diluted in the long term.
• 23:30
  SPEAKER_00: Yeah whether that's the best way of allocating capital is to be determined depends on the valuation I suppose but um that's a different story.
• 23:38
  SPEAKER_00: Perhaps it's a good time to look at the competitive advantage of FeverTree if they have any to begin with what do you think is fever tree's biggest advantage or mode?
• 23:48
  SPEAKER_03: So I think first and foremost it has to be the brand that is the the largest element of fever tree that it's it's something that you know first and foremost they're perhaps not there yet obviously in terms of size but if you look at something like Coca-Cola you know what you're going to receive wherever you're around the world you understand exactly what the flavor of that product's going to be as soon as you drink it.
• 24:10
  SPEAKER_03: So in terms of fever tree I think first and foremost is the brand it's the it's the brand that ensures the product remains premium and with that it means consumers are are willing to pay a bit more beyond that I think um there's an operational side of things so they're an asset-like business I you know don't know maybe how much of a mole it offers them but it certainly offers a competitive advantage where the majority of fever tree you would think they'd have as a company um considerable a can high capex but in fact if you look at the capex is relatively low um I can't remember off the top of my head here but I think we're we're sort of single digit percentages of revenue and and beyond that we've we've obviously not touched on on the founders and the shareholders but they are still remain owner operated um as a business so Tim Warrell who's the CEO he was still one of the original founders um 20 years ago so it's still owner operated and he I think he's only around 50 so he does still have quite a lot of runway left for this company.
• 25:10
  SPEAKER_00: So how strong is Fever Tree's brand compared to say Coca-Cola and can any other company replicate it easy easily?
• 25:19
  SPEAKER_03: So I think um it's maybe not totally fair to compare say Fever Tree with Coca-Cola because Coca-Cola is perhaps one of the the most famous brands in history um but if it comes to tonics then I think fever tree is it especially here in the UK is one of the undisputed leaders in the category um I think you know we've got evidence there to say that drinks are not international they voted at the number one sell in mixer um for for 11 years running and we've seen that that's that's bartenders who are voting for that so ultimately within the spirits and drinks industry a lot of the time it's the bartenders who are the gatekeepers so if bartenders for over a decade have voted at the number one tonic in mixer then they're still delivering you know whether that be on the on the product quality side or in the brand um but to go back to your your question on on Coca-Cola have they got the strength of of brand definitely not um but I think that's something they they will obviously look to expand upon especially with the Molsonco's relationship um when it comes to the US I think you had some good points I'd just like to add something here first about the asset light uh advantage right yes it's uh it's an advantage it's efficient but it also means they outsource production which does lower control over quality and it limits scale advantages if you ask me especially globally and secondly on the brand yes Fever tree might be a premium name in mixers but I wonder if the brand strength is enough to keep pricing power if cheaper as equally premium feeling alternatives show up and I believe you had the Heinz analogy um in the beginning and it makes sense and I think it holds up but mixers are consumed differently I think no one is really loyal to tonic water the way that they are to catch it maybe at least that's just my gut feeling.
• 27:21
  SPEAKER_03: Yeah I I would I would disagree when it comes to the the tonic water side of things I I think consumers tend to you know remain loyal to certain products you know whether that be Coca-Cola Heinz or tonics I don't see the I don't see um I would not be concerned that fever tree does not have brand loyalty if anything I think it would be the shift in product category I think if you capture a gin and tonic drinker then it's going to be the case that they're a a fever tree drinker for life that being said unless another premium brand of that quality sort muscles in which there has not that has not over the last decade happened we've seen efforts by Coca-Cola to relaunch our premium glass mixers I I don't actually think they're still sold.
• 28:09
  SPEAKER_03: We've seen attempts by Schweppes to take on fever tree even if you look at the companies who are very good at replicating products like Lidl and Aldi they've tried to create their own but fever tree has still has that brand pull through however I think probably the big risk for fever tree outside of that is shifting consumer demand due to um new products.
• 28:31
  SPEAKER_03: You know I think customers perhaps yes we've seen growth in the Spirits market but we've also started to see there's been challenges for the likes of Diagio recently and if customers stop drinking gin and tonic then suddenly fever tree is no longer essential or required we can agree to disagree here I I suppose we don't have to agree on everything.
• 28:50
  SPEAKER_03: I think it would be a good time to talk about the financials uh a little bit um I just want to reiterate that following financials is very difficult in audio format so perhaps we can keep this uh short and sweet what do investors really need to know about fever tree's financials and yeah perhaps you could share some highlights um yeah so for me I think the top line is the fact that revenue growth has slowed significantly in comparison to pre-COVID levels and as a group they're generating um are they generating financial year 2024 368 million um for the margin or the gross margin this came in at 37.5 percent which I think it's worth drawing attention to here because especially during COVID when there was obviously uh um shipping shock and uh challenges with with inflation that gross margin got really or was really eaten into pre-COVID the gross margin was was close to 50% and we're starting to see uh a trajectory where margin is starting to recover however if we reflect back on the revenue side of things we recognise that revenue is slowing particularly in the UK and Europe in fact it's decreasing slightly here however in the US we're still seeing growth and the rest of the world so it's quite imperative that fever tree in the coming year or two certainly has to accelerate that growth and and hopefully that growth will come with the most and cursed partnership.
• 30:24
  SPEAKER_00: And what do you think of the fever tree capital allocation?
• 30:28
  SPEAKER_03: So from my side I think the ROIC for example sits at about 11% I think to your earlier point is there is there challenges around capital allocation and can their their capex spend for example be challenged absolutely however I think fever tree has largely been an asset like business and this has meant that they've not had to take on debt they don't have to service debt with capital and there's there's a lot of equity then has been built up for the shareholder.
• 30:56
  SPEAKER_03: So if if we reflect on the fact they're obviously in in the coming uh years are buying back quite a considerable amount of shares there's probably remains a question mark around a company whose whose revenue is only about 365 or 368 million as to should they be buying back such considerably high numbers of shares or should they be investing more aggressively in growth.
• 31:20
  SPEAKER_00: And what KPIs do you track personally for the company?
• 31:24
  SPEAKER_03: So I will track the revenue growth which I think is quite important and the revenue growth per geographic area and also the gross margin.
• 31:33
  SPEAKER_03: I think all of these things are quite important and and with fever tree well again if you reflect back on back from sort of 2018 um into 2020 where where there was obviously a decrease because obviously the bars and clubs were closed we're starting to see revenue flatten out so for me as a shareholder I would like to see that that growth overall or that revenue growth sorry return to double digits.
• 32:00
  SPEAKER_00: Yeah definitely anything else on the financials you'd like to share?
• 32:04
  SPEAKER_00: No I think that's I think we're good.
• 32:06
  SPEAKER_00: Well let's see who is running the ship what can you tell us about the management team of Fever Tree and perhaps to combine it with another question does the management have enough skin in the game?
• 32:20
  SPEAKER_03: So Tim Warrell is the one of the co-founders of the business and he's currently the CEO he launched a brand alongside his co-founder Charles Rolfs 20 years ago he still retains just over a 4.5% ownership stake.
• 32:36
  SPEAKER_03: Now for me this is something of a of a red flag both founders have sold about 80 million of shares back in in 2017 when the shares were trading at around 27 pounds so he's he's since been given incentives and uh share options but it's still a relatively small single figure percentage that he owns in comparison to what he did originally own.
• 33:04
  SPEAKER_03: Now you can't perhaps take away from a founder if he wants to take take some equity off the table and and ensure there's there's obviously that safety but it just seems like he's he's taking quite a considerable amount out of the business but if we if we even reflect on our previous conversation about about games workshop we were dealing with Kevin Roundree who had little to no shares in the business and still ran it excellently so perhaps four and a half percent of a business is is better than nothing.
• 33:33
  SPEAKER_00: Yeah it's funny looking back selling at 27 pounds a share and then the share price declined 70% until today which is uh pretty crazy if you think about it.
• 33:46
  SPEAKER_03: He must have known something right perhaps um fever tree certainly was a darling of the FTSE aim index as I say it was it was followed and touted for for many years whether this I I always love the headlines after fever tree announce earnings because there's always a pun on on going flat or popping to some extent so they I I wonder if they get more coverage purely just because the uh the headlines can make a pun off of them.
• 34:11
  SPEAKER_00: Yeah yeah there I do agree that there's still plenty of runway left for uh for them to grow so maybe he just knew that the price was a bit excessive at that point and just you know he it doesn't necessarily mean that he thinks his company's worthless but perhaps uh a$10 billion dollar market cap was just too big at that time.
• 34:33
  SPEAKER_03: What really surprises me about the the price of FeverTree and where we've seen the share price revert to in recent years is that if you consider the likes of Diaggio and even Coca-Cola the fact that Fever Tree just last year and earlier was traded at around or had a market cap of about£1 billion.
• 34:52
  SPEAKER_03: I think Diaggio paid around a billion for Casamigos the Tequila brand and this was a brand that didn't have a lot of traction or proven credibility whereas for me FeverTree would have been the perfect plug in to someone like Diagio's portfolio for a billion or just over a billion pounds.
• 35:09
  SPEAKER_00: Yeah maybe yeah interesting to think about what's also interesting to think about are the risks and opportunities for a company like FeverTree.
• 35:18
  SPEAKER_00: What do you think are the biggest risks to Fever's long-term success?
• 35:23
  SPEAKER_03: I think first and foremost one of the biggest risks is obviously the addition of a product from Coca-Cola or Pepsi that can compete successfully with FeverTree.
• 35:34
  SPEAKER_03: We've not seen that yet but that's not to say that can't come to fruition or or can't come out in the in the near term especially when to your point that the revenue of the of the overall company is actually still relatively small if you compare it to somebody like Coca-Cola and the distribution and reach the company like that has.
• 36:00
  SPEAKER_03: But as the macro environment becomes a bit more challenging and perhaps people spend less on premium products and and luxury goods then fever tree may also be affected.
• 36:12
  SPEAKER_03: In addition I think there's the risk that we've seen younger or the generation or Gen Z sorry obviously has started to consume less alcohol so perhaps fever tree can get round this by offering an alcohol free alternative but I don't think that's that's by any means guaranteed.
• 36:32
  SPEAKER_03: And then lastly I think yes on paper the Molsoncours relationship looks positive but as we've already touched on there's perhaps the risk that in the long term it it devalues the brand or something goes wrong within the US and they can't then recover that market share.
• 36:50
  SPEAKER_00: And to flip the script a bit what are the biggest opportunities for Fever Tree then?
• 36:55
  SPEAKER_03: We've seen the success that Fever Tree has had within the UK they've they've dominated the market and it's there's absolutely no doubt that they're finding success with a diversified product base particularly in the in the ginger beer category and the you know outside of the tonic category so the opportunities are certainly within the US and the rest of the world if they can maintain their market share in the in the UK or in Europe there's opportunity but really within the US I think we we have to keep an eye out for that growth of of forex if they can achieve that within the say next decade or 20 years then they should basically be on track but I think outside of that if there's if there's that stagnation of growth in the US or or any challenges I think that's could be could be a red flag.
• 37:44
  SPEAKER_00: Yeah definitely yeah so what do you think of the valuation of fever tree?
• 37:47
  SPEAKER_00: We just mentioned that the share price is around a billion pounds at this time at first glance I think the price to earnings ratio is pretty high but that could be due to depressed earnings so what do you think of the current valuation?
• 38:02
  SPEAKER_03: So for me as we've already talked about FeverTree for so long was it shut such a high valuation that there never seemed to be an opportunity to to invest successfully however I've I've now had the opportunity to invest in Fever Tree on on occasions where it's around£6 to£6.50.
• 38:20
  SPEAKER_03: Fortunately there's been a little bit of growth since that point and if we consider the the price to sales ratio I think it sits at around 2.7 just now which historically is is very low and it's not fair to sort of say well just because it's at at a low historically it's a good a good valuation and but it's worth worth pointing out that fundamentally on most metrics fever tree is is at at a near low point or has been if we sort of just consider early 2025 on a on a DCF basis as well I I think I have it working out about£12.50 which for me there's there's still a little bit of margin there.
• 39:04
  SPEAKER_00: I think you're about a third of a discount whereas if you're buying and it's at about£650 you're obviously offered about a 50% discount just a little question to think about imagine if Coca-Cola steps in tomorrow and just buys fever tree outright what would you do if um if they did that would you would you sell if the price they paid is high enough would you would you hold and see where it takes you or what would you do?
• 39:33
  SPEAKER_03: I think that fever tree has been built as a product to almost or a business to be sold.
• 39:38
  SPEAKER_03: I I can't see fever tree succeeding as an independent business for 10 more years.
• 39:44
  SPEAKER_03: I think there will be some form of acquisition and perhaps the the the fox is in the hen house with Molesoncours coming in there has already been a suggestion that Molesoncours perhaps could be a longer term buyer.
• 39:58
  SPEAKER_03: I think the the article then quoted that there was cold water poured in this suggestion but as soon as something like that has occurred I think other buyers will be on the lookout.
• 40:10
  SPEAKER_00: If anything I'm just surprised it hasn't happened more recently I thought that perhaps they would have been acquired at about a billion pounds of market cap so if you look at historic share price they're still relatively cheap for somebody to come along and buy them okay that's that's very interesting I I wouldn't have expected you to say that so if you had to pitch fever tree to to someone what is so interesting about this business and perhaps you can give your bullish thesis on uh fever tree and say a minute.
• 40:45
  SPEAKER_03: So I would say it's a premium product with a premium brand.
• 40:48
  SPEAKER_03: I think those two once somebody tries fever tree or begins to drink fever tree they won't then move away from it.
• 40:54
  SPEAKER_03: I don't think you can go back to a cheaper or lower quality tonic or a mixer once you have tried fever tree.
• 41:01
  SPEAKER_03: The bull case especially here in the UK is diversification.
• 41:04
  SPEAKER_03: They've taken their brand and they've diversified into cocktail mixers and other adult soft drinks perhaps the upside as well could be the fact that there's opportunity within the US we're optimistic we'll see increase in revenue driven by the distribution of mules and courses and there's also going to be opportunity within the rest of the world as we're seeing growth there as well.
• 41:26
  SPEAKER_03: We need to be considerate of other markets there's been success in Australasia where fever tree perhaps will find it more challenging is is in Asian markets and I think we also need to be mindful as well of a point you've rightly pointed out is um of Gen Z consuming less alcohol so we need to be mindful and and watch whether fever tree becomes an alternative or in fact it's just discounted along with younger consumers drinking alcohol.
• 41:56
  SPEAKER_00: So to follow up on that what would be like three or four key reasons to sell fever tree aside from valuation?
• 42:05
  SPEAKER_03: I think a deterioration in revenue is is an absolute red flag for me if there was a real pullback in sales if there was a deterioration in margins is another would be another point if there was a considerable amount of debt taken on and I think again fever tree has appealed to me as a company because it has had next to no debt historically and then lastly I think if Tim uh sorry if Tim Warlow stepped down this would be a cause for concern because yes perhaps as we already talked about he only owns about four and a half percent of the business but he is still it's owner operator owner operated and if he was to step aside then perhaps we just need to be again mindful of those you know that person who who took took over running fever tree or who took took over his business.
• 42:56
  SPEAKER_03: Yeah definitely so to close off this analysis of uh fever tree any closing thoughts on uh on the company I would just say that first of all if you've not tried fever tree as a as a product or mixer for any consumers they should they should go out there um and perhaps mix it with a a gin or a rum or just try it not for you know with no alcohol I think this is Sonny you're a bit biased I think this is advice to you as well because I'd I'd like to see by our next conversation that that you have seen fever tree in the Dutch market.
• 43:28
  SPEAKER_03: And I think I think is Holland not the the home to gin?
• 43:31
  SPEAKER_03: This is where gin comes from I don't I I don't I don't know but I'm I'd I'm definitely going to try it I have to and then you can determine would you choose to replace it with another another tonic or would you choose to um stick with fever tree?
• 43:44
  SPEAKER_03: So I think that's that's one of the key points.
• 43:46
  SPEAKER_03: I think I'll be curious to see over the coming years if if fever tree is acquired or somebody like Molsoncoors perhaps buys more shares.
• 43:55
  SPEAKER_03: And then I would also be interested as a shareholder to see if they can truly achieve growth within the US that as we've discussed, if there's opportunity to achieve a sort of 4x on their market share in the UX or growth, then if they can truly undertake this, then there's going to be real value delivered for shareholders.
• 44:13
  SPEAKER_00: Awesome, Sonny.
• 44:15
  SPEAKER_00: It's not really my type of company, but it's pretty clear to me that this company has the potential to be acquired or has the potential to grow it's for for a long time, but perhaps not on its own.
• 44:27
  SPEAKER_00: So I do think that the acquisition of Molson Course or the acquisition of a of a large stake rather is probably net positive for uh Viva tree in the long term.
• 44:38
  SPEAKER_00: Yeah I think you did a great job um explaining the company to to to us to our listeners to me and um yeah thank you so much for uh for for doing so so thank you very much for having me I'll just I'll finish on on one final point of of anecdotal evidence all right that do with it as you will but as somebody who's who's uh who's worked in the alcohol um segment for for actually over a decade now um fever tree has always been and and perhaps this is why I'm biased fever tree's always been the the go-to brand so I I won't name any names but there was a a gin event here in in the UK it was a very popular gin event and they entered administration and I always remember hearing a customer quote that they knew that company was in trouble when they swap uh swapped out fever tree for sweps and for me that summarizes the company and the competition perfectly I'll uh I'll I'll take the anecdotal evidence and uh next time we meet up I'll I'll definitely have to taste and um yeah I definitely need to try it and uh just just being curious do you think you have um as perhaps an industry insider do you think you have an edge with determining whether this company is um is a good investment or do you think anyone can can really see this?
• 45:56
  SPEAKER_03: I think I I tend to have some sort of insight now perhaps that might bias me with fever tree but what I do tend to notice if you go to any events or or anything particularly in the UK that tends to promote alcohol especially gin you will just find fever tree is always the go-to mixer and if it's not the go-to mixer people always question this so for me that shows strength of the product and strength of the brand yeah that makes sense it's hard for me to to to see and feel the the strength right next time we will be recording and talking about a completely different company the largest luxury holding in the world or well used to be largest I think her mess surpassed them uh recently in uh in market cap.
• 46:42
  SPEAKER_03: Yeah I'm excited to talk about uh L VMH next I'm very excited I've I've started my research and it's considerably more complicated than than fever free as a business but um I think Bernard Arnault has done has done an incredible job and he really is the the Warren Buffett of the luxury industry.
• 47:00
  SPEAKER_00: And on that note we'll end this analysis.
• 47:02
  SPEAKER_00: I'm looking forward to talking to you in a few weeks and uh thank you so much for uh doing the research for for us and uh yeah thank you so much.
• 47:12
  SPEAKER_03: Great thanks for having me