Fevertree Drinks PLC

LSE:FEVR

Earnings Call Analysis

Fevertree's Strong Performance and Margin Recovery

Fevertree reported robust first-half results, with nearly 80% EBITDA growth, driven by a 520 basis point improvement in gross margin. The U.S. market showed double-digit growth, and although the U.K. market faced challenges, non-tonic product sales grew 10%. Europe struggled due to poor weather, but overall, Fevertree is gaining market share globally. The company remains on track to achieve a 600 basis point gross margin improvement for the full year and expects 4-5% revenue growth. Looking ahead, the focus will be on further margin recovery, operational efficiencies, and potential shareholder returns in 2025.

Navigating Through Challenges

In the first half of 2024, Fevertree Beverage faced a challenging macro environment yet managed to achieve a resilient performance. The revenue rose by 2% on a constant currency basis, totaling GBP 60.3 million. Particularly noteworthy is the strong growth in the U.S., the company's largest market, where it delivered double-digit growth, gaining significant market share. This was despite an overall subdued spirits backdrop, indicating Fevertree's ability to thrive even amidst adversity.

Resilience in Key Markets

In the U.K., Fevertree remains the leading brand by value, although it encountered a 6% decline in revenue largely due to challenges in the on-trade channel and adverse weather conditions. However, there has been a notable improvement in sales during July and August, reflecting a high single-digit growth trend. This resilience showcases the brand’s strong position within the mixer category, as it continues to capture interest from consumers looking for diverse drinking experiences.

Impressive Gross Margin Recovery

A significant highlight from the earnings call was the recovery in the gross margin, which improved by 520 basis points year-on-year during H1 2024. The company expects to achieve a full-year target of approximately 600 basis points margin improvement. This recovery has been propped up by better glass pricing and a reduction in transatlantic freight costs, demonstrating Fevertree's effective cost management strategies in overcoming past inflationary pressures.

Strategic Focus on Growth

Looking ahead to the second half of the year, Fevertree anticipates an acceleration in revenue growth, projecting a reported growth rate between 7% to 10% for H2. This optimism is based on a robust sales trajectory observed recently and a strategic focus on diversifying product offerings, particularly within the non-tonic mix category, which has experienced a 10% CAGR over six years and now constitutes roughly 40% of total sales.

Long-Term Growth Prospects

Moving into 2025 and beyond, the company envisions continued growth amid a market forecast predicting a 2.3% annual increase in the spirits category through 2028. Fevertree's long-term strategies aim to leverage evolving consumer preferences towards premium mixers and low-alcohol beverages, thereby expanding its addressable market significantly. The introduction of innovative products and flavor extensions further positions the brand favorably against competitors.

Commitment to ESG Initiatives

Fevertree's commitment to sustainability was also a notable point in the earnings call. Initiatives such as building a comprehensive net-zero roadmap underline the company’s focus on climate responsibility. Moreover, its active engagement in community and employee welfare drives a robust corporate social responsibility agenda, appealing to socially-conscious consumers.

Financial Health and Shareholder Returns

Fevertree reported strong operating cash flow conversion at 140%, showcasing effective working capital management. The management expressed confidence in returning surplus cash to shareholders by 2025, amplifying its promise to maintain financial health while investing in growth opportunities. This combination of solid financial management and strategic planning should resonate well with potential investors.

Earnings Call Transcript 2024-Q2

[Operator]

Hello, everyone, and welcome to the Fevertree Half Year Results. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Tim Warrillow, Co-Founder, CEO, to begin. Tim, please go ahead.

[Timothy Daniel Warrillow, executive]

Thank you, and good morning, everyone, and thank you for joining us to hear about Fevertree's performance in the first half of 2024. My name is Tim Warrillow, Co-Founder and CEO of Fevertree; and I'm joined on the call by Andy Branchflower, CFO; and Charles Gibb, who's very now got up very early in the morning, our North American CEO.

So this morning, we will talk about Fevertree's robust performance despite the tough macro environment, how we've delivered almost 80% EBITDA growth as we begin to drive strong margin recovery and as well as demonstrating how we continue to position the business for long-term success.

Fevertree continues to gain share across our key markets as the brand grows in strength around the world. The focus of this slide and the following slide is to show how we're controlling the controllables despite the well-publicized headwinds that are impacting the drinks industry around the world.

In the U.S., our largest revenue-generating region, the brand delivered double-digit growth at constant currency despite the subdued spirit backdrop. Fevertree is also outpacing the total mix of category by about 10%, as we continue to drive distribution gains and maintain our superior sales velocity on the shelf.

In the U.K., Fevertree remains the #1 brand by value by a significant margin. The On-Trade channel remains challenging, which was compounded by poor weather in June, but we performed well in the Off-Trade and are delivering good growth from our non-tonic products, which are catering to the greater variety of drinks being chosen by consumers.

Europe had a tough first half of the year with unfavorable weather during the period. However, we remain the largest premium mix of brand across Europe, extending our value share as we grow ahead of the competition.

In addition, our depletions, which represents our sellout to the market, were significantly ahead of our reported sales, which reflects our shipments to distributors due to the phasing of orders between June and July.

Finally, in the Rest of the World region, we delivered very positive year-on-year growth, as we lap the transition to our subsidiary setup in Australia, supported by continued share gains in our 2 largest markets in the region of Australia and Canada.

Another way in which we're controlling the controllables is through our margin improvement. As you all know, the group has experienced significant macro cost headwinds over the last few years, resulting in gross margin pressure on the business. However, we have turned an important corner improving our gross margin by 520 basis points year-on-year during H1.

This is primarily being delivered through better glass pricing and transatlantic freight costs as well as continue to take consistent price increases to offset underlying inflationary cost pressures. And we're confident of continuing this improvement to deliver 600 basis points of gross margin improvement across the full year.

In addition, we've been focused on driving improvements for the long term, including the optimization of our global footprint alongside driving operational efficiencies across our end-to-end systems, from forecasting to procurement and inventory management, which will drive improvements in the years to come.

Despite the headwinds we've experienced, we've not compromised investment in the brand, unlike many of our competitors. We continue to increase our marketing spend across multiple regions as well as extending the brand through innovation, which I'll come on to talk about a bit later.

And the reason we have not compromised on our investment is due to the clear opportunities that lies ahead for the group. As you can see from the left-hand side of the slide, spirits in our forecast continue to grow by around 2.3% every year until 2028. And this will be led by the premium end of the market as consumers care more and more about quality.

We're also seeing a number of important trends develop from a desire for longer, lighter drinks that can be enjoyed throughout the day to interest in a broader set of spirits and serves as well as more mindful drinking, where consumers are socialize with lower or nonalcoholic drinks, but crucially expect them to be the same quality and sophistication as their alcoholic beverages.

And we believe that when it comes to every one of the evolving consumer trends outlined, we are best placed to satisfy these new and evolving expectations. For example, not only do we have the broadest distribution of any premium mix of brand globally, but our range of mixes are unmatched, and we have recently developed products or an extension to our mix range, creating new flavors in formats perfect that of soft drinks.

Innovation will continue to be at the heart of the Fevertree proposition as we broaden the brand into more premium drinking occasions. We've built on our strong tonic range and mixing reputation to a great range of gingers and flavored sodas, which all contribute meaningfully to our growth and gives us the ability to flex our portfolio to cater to differences in consumption habits by market.

In addition, we started to expand our total opportunity beyond our core mixes into both cocktail mixers and adult soft drinks, which attract younger consumers and broaden our reach to any adult socializing occasion.

Consequently, we now have a much more balanced global sales mix. Our non-tonic products have grown by 24% CAGR over the last 6 years and now make up 40% of our sales, up from just over 20% in 2018. We expect the portfolio to continue to diversify as we grow across different markets and enter significant new categories, which gives us confidence about driving growth long into the future.

Before I hand over to Andy for the financial review, I'd like to update you on our progress as part of our ESG agenda. As you can see from the slide, we're driving action across the ESG spectrum. But I'd like to point out 3 areas of focus from the first half of the year: Climate, communities and colleagues.

Firstly, under our climate branch, we started to develop our first net zero road map, which builds on the work we've done to map out our carbon footprint, both at a corporate and product level. Secondly, under the communities branch as well as continuing with our important support of Malaria No More, we've updated our human rights charter, engaging directly with our ingredient supply chain partners on human rights and responsible sourcing practices.

And finally, under our colleagues branch, we have advanced the DEI agenda significantly, rolling out new events, training and employee resource groups to better support our fantastic team.

I will now hand over to Andy to take you through the financial review.

[Andrew Branchflower, executive]

Thank you, Tim, and good morning, everyone. This summary slide sets out the key financial metrics for the first half. I'll talk to the details this morning, including particular focus on the platform we're building is to deliver margin recovery in 2024 and strong profitable growth going forward.

So turning the page. Tim and Charles will talk to our revenue growth by region. The Fevertree brand revenue increased by 2% on a constant currency basis in the first half. And we've made a strong start to H2 and expect to deliver an acceleration in growth as we proceed through the year.

In March, I spoke of our confidence in driving gross margin improvement in 2024, and we're on track to deliver this with a 520 basis point gross margin improvement in the first half, which has helped to deliver a 79% uplift in EBITDA to GBP 18.2 million.

We delivered strong operating cash flow conversion of 140%, reflecting both an improving EBITDA margin and working capital profile since year-end. Whilst working capital is higher than it was at H1 2023, it has improved notably since the year-end as the elevated receivables held at that point have been collected, whilst we're working hard to optimize our inventory levels leveraging our new ways of working and technology platform.

Looking forward to the second half, we expect revenue growth combined with further margin recovery and working capital improvements to drive continued strong cash generation. As such, whilst our capital allocation framework remains unchanged and we will always prioritize opportunities to accelerate growth, we anticipate being in a position to return surplus cash to shareholders in 2025 and we will announce details of this at the full year results.

Now turning to look at our gross margin progression. As we outlined this time last year, following the headwinds faced over recent years, we're confident that we've turned the corner and we're in a position to deliver margin recovery over the medium term.

In the first half, we saw the continuation of a consistent gross margin improvement since the inflection point we reached in H1 2023, and we remain confident of delivering circa 600 basis points of improvement in gross margin over the full year. The key drivers of H1 gross margin improvement are as we set out.

As expected, improved glass pricing following the U.K. and European glass tender performed last year is delivering margin improvement. Whilst we've laid in hedges with our primary glass supplier, which gives us confidence of delivering further improvement in 2025.

Our U.S. production and logistics is driving margin recovery as we increasingly benefit from lower transatlantic freight rates on product delivered from the U.K. to the U.S. with an operational shift back towards our efficient U.K. production base to capitalize on this.

And finally, net price across regions including the benefits of the new Australian route to market has driven further margin improvement as expected. The H1 gross margin also includes a headwind as we released our opening inventory, which was held at last year's elevated costs to the P&L. As such, in the second half, we'll see the full benefit of our improved 2024 cost base in this bridge. And this is why we expect the gross margin to continue to tick up as we progress through H2 and we remain on track to deliver circa 600 basis points of improvement over the full year.

And we continue to remain positive about the medium-term margin recovery opportunity ahead. The normalization of inflationary pressures, particularly compared to the more extreme headwinds faced on glass and transatlantic freight over recent years should continue to provide a tailwind into 2025, and we remain committed to building out our production footprint.

New U.K. canning capacity is now in line with production scaling over H2 this year, and we'll be commissioning a local production line in Australia in Q1 2025. Whilst we've delivered a good recovery in the local U.S. gross margin this year as we benefit from recalibrating transatlantic freight rates, we remain focused on building and scaling our local production network in the U.S. at the right pace with the right partners and at the right pricing with the current focus on onshoring local can production.

Over time, the ability to produce locally at scale in the U.S. will offset the incremental freight costs of shipping product from the U.K., which will improve U.S. local margins and with it the overall group margin.

And lastly, we continue to work on pricing and a wide range of operational efficiency initiatives as we leverage the investments and improvements we've made over the past few years in our operations team, our ways of working and our technology platform.

Finally, turning to outlook. We've seen an improved sales performance since period end, particularly in the U.K. and Europe. And as a result, year-to-date sales growth at the end of August for the Fevertree brand was plus 4%, a significant improvement on the half year position.

As we look ahead to the remainder of the year, the market backdrop remains challenging across regions. And on top of this, we're experiencing continued FX headwinds. However, we've got strong plans in place, and as such, we're confident of delivering an acceleration in growth with H2 reported growth for the Fevertree brand in the range of circa 7% to 10%, which means we expect full year reported growth for the Fevertree brand in the range of plus 4% to plus 5%, which on a constant currency basis, it's a growth of plus 6% to plus 7%.

As I've already discussed this morning, we are on track to deliver 600 basis points of improvement in gross margin over the full year. As we look forward to next year, whilst there remains the risk of macroeconomic volatility, we are confident that we have sufficient mitigations, opportunities and initiatives to deliver against the consensus expectation of a further 200 basis points of gross margin improvement in 2025.

We will continue to invest in opportunities to drive growth in the remainder of this year and are comfortable with consensus overhead spend of circa GBP 90 million, whilst we also reflect here some minor changes to other key metrics.

With that, I'll pass back to Tim.

[Timothy Daniel Warrillow, executive]

Thanks, Andy. So despite more positive trading post period end, of course, it's disappointing for us to be trimming our full year outlook. However, as the next few slides will demonstrate, there is no doubt that the brand is gaining in strength and our long-term strategy is not only working but opening up even more opportunities for future growth.

The success the brand is achieving is due to our unrelenting investment behind the brand, where many of our competitors have been disinvesting. Over recent years, we have faced significant margin pressures on which that understandably has been real focus. And encouragingly, we're starting to turn the corner on those pressures now.

Throughout that period, rather than take short-term decisions on pricing or on cost cutting, we remain focused on making the right decisions for the long-term health of this business and brand. We continue to invest, we continue to innovate and we continue to capitalize on our first-mover advantage across the world.

Our long-term approach to both portfolio expansion and geographic expansion has meant that we have an unrivaled presence across the world. In every one of our key regions, we're gaining share and driving category growth with more consumers finding, enjoying and becoming loyal to the brand each year.

And [ vitally ], as I said out earlier, we are right at the cutting edge of the fast-evolving consumer drinking trends that will drive growth across drinks categories over the next decade and beyond with a unique position across alcoholic and non-alcoholic occasions, and that is the lens through which we're making decisions to run this business to ensure we are the best placed to capture the opportunity ahead. And the opportunity ahead is no more evident in than the U.S.

So I will hand over to Charles to talk you through our progress during the first half of the year. Charles?

[Charles Gibb, executive]

Good morning, everybody. Fevertree delivered GBP 60.3 million worth of revenue in the first half of the year, which represents double-digit growth on a constant currency basis, and this despite a weaker consumer backdrop as we continue to gain market share and popularity amongst U.S. consumers.

The brand is performing incredibly well against the competition, getting 3 percentage points of share in Tonic Water and 6 percentage points of share in the Ginger Beer category, which means that we now hold a 27% and 30% value share, respectively, in these 2 important categories, extending our leverage position in both.

We are doing a fantastic job across both the on and off-trade channels as we continue to expand our distribution, both in terms of number of accounts as well as our presence within each account. In the Off-Trade, we've strengthened our position as the category leader in the largest retailers across country.

A strong presence in national grocery has enabled us to introduce new flavors and formats such as our 150 ml cans, which have grown quickly since launch and now make up a significant contribution to our total off-trade sales.

In the On-Trade, we still have a huge opportunity to go after despite more than doubling the number of accounts we are present in since 2009. The team has done particularly well to get large national chains such as Marriott or [ Landry ] restaurants to embrace the brand alongside the increasing number of products' each account stocks, including our menus and incorporating within their cocktails.

We've increased our number of distribution points by over [ 3% ] in the first half of the year as well as featuring the brand as part of various activations, experiential initiatives and pop-up bars including our takeover at the Park Lane Hotel in New York to create a Fevertree Spritz Alley as you can see on the right-hand side of this slide.

Moving on. The cocktail mix of category represents a significant opportunity for the brand, both in terms of scale as well as the ability to attract new consumers into the brand. Our cocktail mixers have gained good new distribution and popularity with consumers, especially in [ hot ], where Fevertree is already the top selling [indiscernible] Bloody Mary brand, less than a year after its first listing.

And in Q4 this year, we're very excited to be extending further and introducing our Expresso Martini mixer just in time for the peak holiday trading period.

We've already received a fantastic uptake from many accounts ahead of the launch as well as attracting interest from both vodka and tequila brands and look forward to updating you on the launch and initial performance during the course of the next year.

Overall, as the last few slides have demonstrated, Fevertree is outperforming in the U.S. market, driven by our unmatched understanding of U.S. drinking habits, our pursuit of innovation, all supported by our strong distribution network and spirit brand partnerships. We still have a long runway ahead, and I look forward to delivering further growth in this substantial market.

I'll now hand back to Tim to take you through the U.K., Europe and Rest of World.

[Timothy Daniel Warrillow, executive]

Thank you, Charles. So the U.K. We've delivered GBP 50.9 million of revenue, which is a 6% decline year-on-year, but this was primarily due to the challenging on-trade backdrop as well as continued weakness of the gin category, both of which were compounded by poor weather in June. And while this is a disappointing result, July and August sales have been much more positive, resulting in high single-digit growth across these 2 months.

This means that our year-to-date sales are closer to minus [ 2% ] year-on-year. Importantly, despite the tough macro, Fevertree is outperforming the mixer category. The brand continues to be the mixer of choice in the U.K. with a higher value share than any other brand by a significant margin as well as being purchased by more households.

Our premium price point, along with our popularity, ensures that we deliver approximately 7x more revenue per store each week to U.K. retailers than any other premium mixers, all of which puts us in a strong position as the macro environment improves.

Fevertree has built an unrivaled portfolio to cater to a broad range of mixing occasions across the growing number of spirit categories. At the end of the first half of the year, our non-tonic products grew by 10% and accounted for almost 30% of our portfolio. And when we break down our value share growth by subcategory, Fevertree has gained over 3% share of all non-tonic mixes over the last year, driven by our versatile soda range with consumers drinking a greater variety of drinks than ever before, both at home and in the on-trade.

We're also seeing good growth from our Ginger Ale, which is gaining particularly good traction in the off-trade as well as our newer cocktail mixer and adult soft drink ranges, which have already gained over 8,000 and 9,000 distribution points at U.K. retail, respectively.

So as I mentioned at the start of the presentation, the group has continued to invest behind the brand. And I want to use the last slide to give you an insight into a few of our initiatives during the first half of the year.

Firstly, we continue to remind consumers of our strong tonic credentials through marketing campaigns as well as new product development. This summer, we introduced our latest limited edition Summer Garden Tonic, which has served to excite the category and open up new distribution and partnership opportunities.

We've also focused our above-the-line marketing efforts on our cocktail mixers to increase awareness of the new range and highlight their simplicity using a radio and poster campaign to show consumers how to create a variety of exciting cocktails in just 3 simple steps.

Finally, we launched a completely new style of product, a Rose Spritz in collaboration with Mirabeau, an award-winning founder-led Rose brand. The 2 businesses have worked together to create a beautiful product by combining Mirabeau's Rose Wine with Fevertree's Raspberry and Orange Blossom Soda, which has attracted a lot of PR interest and traction with our customers.

So as you can see, despite the headwinds the U.K. market is facing, there's a lot to be optimistic about, and the brand remains as strong as ever, making us well placed to return to growth as consumer sentiment improves.

So turning to Europe. The Fevertree brand delivered GBP 44.5 million worth of revenue, a decline of 10% at constant currency. Our reported sales were impacted by subdued consumer confidence and poor weather across the region alongside the phasing of distributor orders.

The underlying brand revenue increased by 1% year-on-year, with positive depletions growth in Southern Europe, offset by Central and Northern Europe. However, we had a good July and August, helped by the phasing of orders as expected, with 22% growth year-on-year across these 2 months.

Fevertree continues to grow its value share in the total mixer category across Europe, especially in Nordics and Southern European markets. The brand is seeing a greater outperformance when compared to other brands, as we continue to gain distribution and invest behind marketing and innovation, where many other smaller brands are being forced to cut back on investments as a result of tougher macro backdrop.

This places Fevertree in an even stronger position as consumer confidence returns. The right-hand side of the slide highlights some of the new products we've launched by market including our new cocktail mixers in North and Central Europe and our Pink Grapefruit across multiple markets.

One of the strengths of the Fevertree brand is being able to drive growth by using our broad portfolio to increase our applicability to specific drinking trends by market. We've done this to a great effect over the last year, growing the contribution of non-tonic products from 24% of sales in H1 '23 to 28% in H1 this year. Our Ginger Beer growth has been very strong as we start to create a significant category within Europe, growing our sales by 19% over the last year, outperforming the total category by 14% and extending our lead as the largest Ginger Beer brand in Europe with just over 37% value share.

This year, we have launched 2 of our most popular versatile products, Ginger Beer and Pink Grapefruits in 250 ml cans as an on-the-go adult soft drink option for consumers. We supported this launch of Fevertree-branded fridges at a number of locations, such as petrol stations and convenience stores to enhance the brand's visibility and extend its occasionality.

So overall, while the first half of the year in Europe presented a challenging backdrop, we look forward to the second half of the year with more optimism as the brand remains strong. In addition, the investments we've been making behind the brand to set the business up for continued success, especially as consumer confidence improves.

Our final region is the Rest of the World, where Fevertree delivered GBP 14.9 million revenue, a 56% increase year-on-year and 57% at constant currency. This strong growth is due to a combination of strong underlying performance of the brand as well as lapping of a prior year inventory buyback as we transitioned the Australian market to a new subsidiary setup.

Our 2 largest revenue-generating markets within the Rest of the World region are Canada and Australia, both of which delivered good brand growth and grew share in the first half of the year. In Canada, the brand is gaining traction in the market and growing ahead of the category, increasing our market share by 2% and our household penetration by 30%.

In Australia, we spent the last year building our new team's capabilities with a focus on marketing, sales and distribution as well as strengthening our customer relationships and resetting our activation plans to accelerate our growth in the market.

Fevertree continues to grow ahead of the competition, now has 17% value share of the total market with a lot more opportunity to grow, especially through our portfolio extensions. The brand continues to make good progress in a number of other markets within the Rest of the World, particularly in Japan through our distribution partnership with Asahi Breweries as well as through our work with high-end on-trade and spirit partners across Asia more broadly.

So I'd like to finish by summarizing the key messages I want you to take away today. Firstly, as I said at the outset, we are controlling the controllables, despite the tough macro backdrop. Our sales growth of 13% across July and August has been encouraging. And importantly, Fevertree continues to outperform the category and gain share across our key markets as the brand grows in strength around the world.

This is particularly true in the U.S., our largest region, where we continue to grow strongly and well ahead of the competition. Secondly, the business remains focused on margin improvement. We delivered strong margin recovery in the first half of the year and are confident delivering 600 basis points of gross margin improvement across the full year as well as further margin improvement in the medium term.

And thirdly, our strategic pillars remain firmly on track, namely the brand is in robust health, growing in popularity, distribution and gaining share. We're successfully diversifying the range to capture a far broader long-term opportunity, and we continue to grow and diversify our geographic footprint.

So overall, the brand remains uniquely positioned to make the most of the growing opportunity that lies ahead. And the balance sheet remains healthy, allowing us to invest for growth and returning cash to shareholders.

So thank you for listening this morning. Andy and I, along with Charles in the U.S., are now happy to answer your questions.

[Operator]

[Operator Instructions] And the first question goes to Edward Mundy of Jefferies.

[Edward Mundy, analyst]

So 3 questions, please. They're all slightly more longer term, I think. So look, on Europe, I appreciate there's a bit of phasing given weather and shipment phasing, but it's not -- probably not lost any that brewers are becoming more interested in soft drinks at a slightly faster growth category. I mean, how do you think about the trade-off between your existing distribution model in Europe versus perhaps going with a larger player to get more scale?

And as part of that same question, any learnings from Japan with your tie-up with Asahi from a distribution standpoint? That's the first question on Europe.

The second one is in Australia, where the ready-to-drink market is on fire, which really points to an appetite for low-ABV mixed drinks. Could you talk about the interplay between ready-to-drinks and then the premium long drinks occasion? Do you think it helps to recruit into spirits and longer-term makes consumers more likely to drink spirits with premium mixes? That's in Australia.

And then the third one is for the U.S. for Charles. Clearly, RTDs are flying within the U.S. and the big spirit companies are missing out on this wave, given the new-to-world brands are really driving a lot of the growth. As the RTD cycle rolls over, how do you think about the opportunity for premium spirits plus premium mixes to fill in that vacuum as a successor to RTDs over the medium term?

[Timothy Daniel Warrillow, executive]

Thanks, Ed. I'm furiously scribbling down your questions. I hope I remember them correctly. But let me tackle the first. Look, yes, you mentioned Asahi. You're right, they came to us because their strategy was to broaden beyond beer. And they also saw this growing opportunity with adult softs and we were the first people they called as a result. And as I've just reported, we're growing well with them, and our joint ambition is growing in that market.

So that's been a very positive move for us. And of course, as you infer, that's not lost on other distributors. And as I've always said that we spend a lot of time looking at and making sure we've got the right distributors for the right markets at the right time.

And with the Fevertree brand growing the way it is and broadening our range, clearly with everyone increasingly looking at total beverage opportunities, we sit right at the heart of that opportunity, so ever more interesting for bigger players. And so these are things that we will certainly consider going forward.

With regards to the RTD category being on fire in Australia. Yes, we're watching that same trend. And I suppose the long and short of it, as we've always said, is that we've always believed RTDs are an interesting opportunity for us, but we want to do it at the right time, and we want to do it in the right way. But it's something that is clearly a growing interest as the category grows, and you won't be surprised to hear that we've had a growing amount of people approaching us to work with us collaboratively on this. So what I would say is that that's something that we are looking hard at, but nothing to announce yet.

And then I think the third one is over to Charles in the U.S.

[Charles Gibb, executive]

Which I think is pretty much -- I mean, a very similar answer to the one that Tim just gave regarding Australia. I think the interesting thing here is that we're seeing the major successes in RTD in the U.S. have all been new-to-world or new-to-market brands much, much more so than branded RTD collaborations, where you take our spirit and the new-to-world brands such as [ highnoon ] for example, have been the ones dominating the market here.

That said, I think this is also a great -- it's a great opportunity because what it does is it reinforces in many cases, the strength and the opportunity that we have with our sparkling portfolio, with our Sparkling Lime and Yuzu which is great with vodka and tequila.

Our Sparkling Pink Grapefruit, obviously, with tequila but also with -- and Sicilian Lemonade, which is great with bourbon or with vodka. And so I think it gives us the opportunity to leverage off the back of that as consumers are looking for the longer, simple mixed drinks and for us to be able to present those in bars accordingly.

[Timothy Daniel Warrillow, executive]

Thanks, Ed. I hope that answers the questions.

[Operator]

The next question go to Rashad Kawan of Morgan Stanley.

[Rashad Kawan, analyst]

Just a couple on go-forward expectations from here. I know you touched on it in your opening remarks, but can you get into a bit more detail around expectations for next year? I think consensus is expecting about 8% growth, 200 bps of margin expansion. It would be great to get your thoughts on top line across key markets first, whether you're seeing any fundamental change in the longer-term TAM opportunity?

And second, on expected margin evolution into next year? And on that, I know you mentioned hedging on energy and glass costs for 2025, what level of prices do you expect that to come in at compared to this year's prices, please?

[Andrew Branchflower, executive]

Yes. Sure, I'll take that in the first instance. In terms of guidance for next year, we're clearly not giving formal guidance at this point. I think as I said, we -- from a margin perspective, we see enough opportunities, efficiency initiatives, tailwinds effectively taking us into next year that we're very confident of delivering against the 200 basis points of gross margin improvement that we have -- that consensus has.

And I suppose, coming on to your hedging point there and the part of that relates to, for instance, the level we're hedged on glass for next year, which at this point is circa 70%, and it will increase as we progress through the year, but that kind of hedge price is an improvement on the -- sorry, the hedged level of energies, an improvement on the average hedge that we've had going into this year's glass pricing in 2024.

So that will naturally provide a tailwind into next year. I think in terms of top line guidance, yes, you referred to that consensus is plus 8%, we're not going to get into the specifics region by region of how we see that building.

But look, if you look at where this year's growth is on a constant currency basis of circa 6% to 7% and given the uncertainty around the tough trading backdrop that we've talked to this morning, then that's probably a reasonable place in the short term for revenue to be, but that doesn't necessarily reflect our thoughts on the long-term total addressable market. And I think Tim.

[Timothy Daniel Warrillow, executive]

Yes, just to pick up on that, as I hope came through from the presentation that what is exciting for us is the size of the opportunity that lies ahead is that now we are spreading our wings. We've started life very focused on the world of tonic, we moved into a broader range of mixes. And now as we've been very, very purposely doing over the last 5 years investing in this broader category of adult soft drinks, cocktail mixes and indeed non-tonic mixes.

So with that, our addressable market has certainly grown. And we've just touched on with Ed's question about the world of RTDs, and that clearly is something that is also in our consideration going forward.

So there's no question that the future total addressable market is much more significant than we first set out, but we want to go about it in the right measured way because there is a speed to this growth and a speed to the way you need to develop these things.

But the way these are growing for us, as I mentioned about our CAGR of our non-tonic products growing at 24% over the last 5 years is very encouraging, and we're very confident in being able to grasp this bigger opportunity into the future.

[Operator]

The next question goes to Anubhav Malhotra of Panmure Liberum.

[Anubhav Malhotra, analyst]

A couple of questions from me, please. Just wanted you to elaborate a bit on your non-tonic categories in the U.K. So you mentioned they grew 10%. Maybe give a bit more clarity on whether it was more driven by off-trade versus on-trade? And particularly for the new categories, you have the cocktail mixers and the adult soft drinks, do you see off-trade as a bigger opportunity there versus on-trade?

And on the same, if you could put in context the 8,000 and 9,000 distribution points that you mentioned, how would they be in context to how many distribution points you have for your Tonics portfolio?

And lastly, on the Gin category itself, that's obviously the key part of your U.K. sales. What's your view on where that category in general is going, the gin and spirits category? And how do you see that evolving? And then scope for improvement there?

[Timothy Daniel Warrillow, executive]

Sorry, I'm just furiously scribbling your questions, but let me take the first. You're talking about the U.K. and as you rightly say, we saw 10% growth with our non-tonic products and these include our gingers, our sodas and within that, our newly launched pink grapefruit, but also our growing adult soft drink format and flavors, and indeed our cocktail mixers.

So it covers quite a plethora. And the off-trade has been the sort of primary driver of that growth over the last year. But we are very encouragingly seeing the on-trade starting to adopt our adult softs and cocktail mixes, but we've got a long way to go.

We're in about 2,000 accounts now with our softs and cocktails. And when you think that on tonic, to answer to your question, we're over 50,000 accounts. There's an enormous amount of headroom there, but it's positive the way that's developing.

And then with regards to the 8,000 and 9,000 that we've got for adult softs and cocktail mixes, that accounts for about, I'd say, about 1/3 of the kind of tonic distribution points that we're in at retail. But you've got to remember that within those distribution points at retails on tonic, we've got a good amount of shelf space.

So actually, it's a lot more in terms of tonic in terms of our actual SKUs in the off-trade. So again, we've got a lot of headroom to go there. But the great thing about it is these categories are developing. They're still -- the cocktail mix category is very much in its infancy, but the retailers are increasingly interested in this opportunity.

So we're starting to have discussions about more shelf space and that is absolutely the case with adult softs because this is still pretty early on in this journey, and the retailers themselves are starting to look at giving a lot more shelf space to these adult drinking occasions. And so as you can imagine, being the leader that we are in this adult positioning, we're having those conversations.

So there's a lot of headroom ahead. But as I said earlier, these take time, but the way they sell, the way they are performing is very encouraging.

[Anubhav Malhotra, analyst]

And just last one on the Gin category and your views on that?

[Timothy Daniel Warrillow, executive]

Okay. Could you repeat -- yes.

[Andrew Branchflower, executive]

Could you repeat the final question, sorry.

[Anubhav Malhotra, analyst]

Yes. The question was on the U.K. Gin sales, and the tonic sales basically are 70% of your U.K. sales still. So your views on the Gin category, which has been in decline for a while now on if you see any scope for improvement there and what the spirits brand themselves are doing? Is there any more engagement with the consumer there in this space -- in the Gin category?

[Timothy Daniel Warrillow, executive]

Yes. Look, you're right, I mean Gin has been coming off from its sort of 2018 high. But don't forget, it's still a very significant, very substantial category, enormous amount bigger than it was 10-or-so years ago. And we are anticipating that, that decline will start to stabilize.

That's certainly what IWSR are anticipating, the fact that this stabilization will start to occur over the next couple of years. But it's very hard to predict precisely the speed, but there's no question in our mind that we believe that, that will start to stabilize.

[Operator]

And the final question goes to Matthew Ford of BNP Paribas Exane.

[Matthew Ford, analyst]

Just 2 questions from me. First one is just on kind of the midterm growth outlook both in the U.K. and in the U.S. I suppose, firstly, on the U.K., it looks like in '24, probably not going to see growth -- top line growth there for the market. But I was just interested to see what are your expectations kind of over the midterm for the U.K. business? Now obviously, as it starts to pivot away from core tonics, when would you expect that business to kind of return to growth on a more consistent basis? And then in the U.S., 10% growth in H1, clearly, quite a lot of things going into that.

In consensus, midterm expectations of around kind of mid-teens growth in that market. Is that kind of the level that you're thinking about in the U.S. based on the opportunity as you see it or do you think perhaps that's a bit too much from this level?

And then the second one or just a small one, was just on the EBITDA guidance for the year. Obviously, you kind of pulled the 15% margin target. You've given the moving parts around gross margin and the like. But any thoughts on your decision to kind of pull that entirely rather than lowering that guidance from here?

[Timothy Daniel Warrillow, executive]

Let me just take the first one on the U.K. Look, I mean, we are predicting, projecting that H2 will return to growth in the U.K., albeit just plus 1%, but we anticipate being able to take that into next year. So we are anticipating growth back in the market for next year. But albeit that will be low single digits. But we are still optimistic that we can drive that to a high level going forward for all the reasons that I outlined earlier about the rest of the range growing positively and opportunity opening up for that.

And we believe that, that will help drive the U.K. again, particularly when Tonic, as we were just referring to, starts to stabilize alongside Gin. So there's no question in our mind that we are confident that we can drive the U.K. back to good growth going forward. For the U.S...

[Andrew Branchflower, executive]

Yes. I mean from a consensus perspective, I think we're comfortable with where U.S. consensus revenue sits. Obviously, the pace of growth isn't linear, but it's certainly, that kind of CAGR going forward reflects where we are relative to what remains a very significant opportunity.

I think from an EBITDA guidance perspective, look, we -- what's driven the margin dilution of this business over the last 3 or 4 years has been the impact to gross margin. And what we were very focused on is driving recovery in gross margin and we talked this time last year about our confidence in being able to turn the corner in gross margin recovery and delivering 600 basis points in 2024, which is what we're on track to do.

From an EBITDA margin perspective, we could deliver 600 basis points of EBITDA margin improvement as well, but that would require us to pull back on our overhead spend in Q4, in line with the revised revenue outlook.

And what that means in real terms is pulling back on marketing spend, planned marketing activities and just in line with everything we've said this morning and how we view the opportunity and the importance of continuing to invest in brand and the benefit we're seeing from that and the extent to which that's setting us up for the future, that's not something we're planning today.

And hence, therefore, you're going to see a little bit of operational kind of deleverage, if you like, in the final part of the year, which means our EBITDA margin won't quite deliver 600 basis points of improvement this year. But the engine for margin recovery in this business is gross margin.

And all of the work we've done over the last couple of years, whilst we've been dealing with all of these pressures, it sets us on a very, very good step to continue to drive good gross margin recovery over the next couple of years.

[Operator]

Thank you. That's all the questions that we have time for today. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.

[Timothy Daniel Warrillow, executive]

Thank you.