22nd Mar 2023 14:30
(Alliance News) - Fevertree Drinks PLC on Wednesday showed it had been hit hard by an increase in the cost of manufacturing glass bottles, reporting a sharp drop in annual profit for 2022.
The London-based premium drink mixers producer said pretax profit totalled GBP31.0 million in 2022, down sharply from GBP55.6 million in 2021, while operating profit fell to GBP30.6 million from GBP55.6 million.
Revenue, meanwhile, climbed by 11% to GBP344.3 million from GBP311.1 million. This was driven by 23% growth across the UK and 14% growth in Europe, in particular, the company said.
Fevertree explained that industry-wide inflationary pressure hurt its margin during the year, most notably in glass costs and trans-Atlantic freight costs.
The gross margin reduced to 34.5% from 42.1% a year earlier.
Analysts at Liberum explained that glass is an important part of Fevertree's premium position, so it is tough for the firm to pass on rising costs through price increases, as the price premium to competition will grow even wider.
"The group is therefore dependent on energy costs to normalise, and while there are positive signs in this regard, it is not something one can reliably depend upon."
Further, with input and logistics cost pressures set to remain for 2023, Liberum questioned if the group would be able to return to its historic levels of profitability.
"We had been positive on the stock in 2022 on expectations that the company will be able to pass through some of these costs to the end consumer, as well as benefit from various efforts to improve the structural profitability of the business, some of which have already started to kick in, like local US bottling. However, the inability to pass these costs on to customers and dependence of a recovery in profitability on glass costs coming down makes us wary of recommending the shares at the moment."
"We remain 'hold' but note the risks and questions the group need to answer for us to be more positive," they concluded.
Aarin Chiekrie, equity analyst at Hargreaves Lansdown, was equally as cautious: "When 80% of your sales are bottled in glass, any fluctuation in energy prices is bound to have a material impact on your costs. These elevated energy costs are eating into profitability, and this problem is expected to persist throughout 2023."
"That's making the current valuation hard for us to stomach, despite the growth prospects in the US. We'd like to see concrete signs that overseas expansion is boosting the bottom line to help justify the mammoth valuation," he said.
Despite the looming price pressures and logistical challenges, Fevertree reiterated its full-year guidance for 2023. It expects revenue between GBP390 million and GBP405 million and earnings before interest, tax, depreciation and amortization between GBP36 million and GBP42 million.
In 2022, Ebitda totalled GBP39.7 million, down from GBP63.0 million in 2021.
Moving forward, Fevertree said it is focused a "substantial" programme of activities to mitigate further inflation. It grouped these actions into four key areas: expanding its production footprint; optimising its existing footprint; re-tendering its glass partnerships and widening and on-shoring its supplier base; embedding technology across its global operations.
"We are confident that the implementation of our profit-driving initiatives this year, reduced exposure to sea freight through on-boarding of local production alongside any recalibration of the currently elevated energy pricing will drive improvements in profitability in 2024 and beyond," it said.
Shares in Fevertree were up 10% at 1,186.48 pence each on Wednesday afternoon in London. AJ Bell's Russ Mould suggested that Fevertree's plan to boost earnings had "restored some fizz" to its share price amid the disappointing results.
The stock remains down roughly 35% over the past 12 months, however.
By Heather Rydings, Alliance News senior economics reporter
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