Fevertree Drinks PLC (FV8.SG) Earnings Call Transcript

Thank you, and good morning, everyone, and thank you for joining us to hear about Fever-Tree's performance over the first half of the year. My name is Tim Warrillow, Co-Founder and CEO of Fever-Tree. I'm joined on the call by Andy Branchflower, CFO; Charles Gibb, all the way from North America, our North American CEO; Ann Hyams, Director of Investor Relations; and Oli Winters, Head of Communications. So this morning, I will start by taking you through how our proactive actions have led to a resilient performance over the first half of the year, remind you of the long-term opportunity that makes this business exciting and provide an update on the current COVID situation. Andy will then take you through the financial review before I present our strategic update, along with Charles, who will update you on our performance in the U.S. So turning to Slide 3. Slide 3 demonstrates how our strong business model, along with the proactive steps we have taken during the half of the year, have led to a resilient performance for the group. While the On-trade has, of course, been impacted over the period, we have performed very strongly in the Off-Trade. We have capitalized on the significant increases in at home consumption. And through our proactive initiatives, we've attracted more consumers to the brand. We've increased our penetration in the U.K., consolidating our #1 position and driven value share gains in the U.S., Europe and as far afield as Canada and Australia. In addition, our strong financial position has been able to maintain our focus on the long-term opportunity and support the customers and partners we work with. Consequently, we've continued to invest, maintaining our previously planned level of operational spend, redeploying marketing budgets as well as acquiring a new subsidiary in Germany just after the period end. We also made 2 notable and successful new product launches during the first half of the year, our new premium soda range in the U.K. and our new Sparkling Pink Grapefruit in the U.S. So turning to Slide 4. While we continue to act quickly and dynamically in the face of the current situation, our long-term strategy remains unchanged as it continues to be underpinned by the global trend to the long mix drink, as well as our excellent track record against the competition. As the left-hand side of this slide demonstrates, spirits, especially premium spirits, have been growing ahead of beer and wine over the last 5 years. In conjunction, mix has also continued to grow at pace, 2 trends that have further accelerated in the Off-Trade over the last few months. The right-hand side of the slide highlights not only that the premium segment of the mix category is growing the fastest, but also that Fever-Tree has almost doubled the growth of the rest of the premium segment between 2012 and 2019. We are, as a result, the #1 premium -- global premium mixer brand and have built an enviable track record in our ability to drive the growth and premiumize the mix of category across numerous markets. So turning to Slide 5. Although we continue to look towards the long term, I must acknowledge the short-term disruption COVID has created as it swept the globe earlier this year. It's important to highlight that we entered the crisis as a strong business and quickly took steps to ensure that we could navigate various COVID impacts in the best possible way. First and foremost, we have continued to offer job certainty to all our employees as well as providing comprehensive support to our On-Trade customers throughout lockdown. At a very early stage of the crisis, we made the decision not to furlough any of our employees, regardless of their role, instead redeploying them to different departments across the business to broaden their knowledge and skill set. In addition, to ensure our operations are impacted as little as possible, we've been working closely with our partners across the supply chain as well as managing our contingency stocks of key raw materials. And although some uncertainty remains and the frivolous impacts are difficult to predict, Fever-Tree is well placed to continue to navigate this period by virtue of the fact that we have a globally diversified business, a diversified channel mix, multiple international production partners, a low fixed cost base and a strong balance sheet. But perhaps most importantly of all, and as detailed in the previous slide, we remain confident that the long-term trends that are driving the growth of long mix drinks are gaining more and more traction. I'll now hand over to Andy, who will take you through a financial review of the first half of the year.

Thank you, Tim, and good morning, everyone. So turning to Slide 7. Our combination of financial strength and operational agility has informed our approach to navigating the disruption caused by COVID-19 during the first half of the year. Whilst the On-Trade was severely impacted by closures across our regions from March onwards, we delivered a consistently strong performance in the Off-Trade and, as a result, generated revenue of GBP 104.2 million, down 11% year-on-year. Gross margin retracted to 46.8% due to both expected factors, such as best price optimization and due to COVID-related impacts on our channel and regional sales mix. Meanwhile, our continued focus on the long-term opportunity saw us increase OpEx by 3%, contributing temporarily to a contraction in EBITDA margin to 22.8%. Cash conversion has remained strong, with net cash increasing to GBP 136.9 million. And as a reflection of our confidence in the financial strength of the business, we'll be paying an interim dividend of 5.41p per share, which is up 4% year-on-year. Tim and Charles will talk in more detail on performance and the progress made across our regions. But on Slide 8, we break down the group net revenue figure. While there's variation in overall performance across regions, we have seen consistently strong On-Trade performance globally during lockdowns. As a note, whilst we're able to report accurately on sales made into the On and Off-Trade channels in the U.K., due to the route to market in our other regions as well sub-distributors often sell into both channels, it is not always possible to report at an accurate dealer level on relative On-Trade and Off-Trade sales performance. In the U.K., total revenue was down 20%. Now within this, as expected, our On-Trade performance was really impacted, down 61% year-on-year. However, in the Off-Trade, we saw a sustained strong performance from the start of lockdown and delivered 24% growth in the first half. In the U.S., where our sales mix is naturally more skewed to the Off-Trade, we saw a very strong overall performance, 39% growth, which was aided by a strong dollar, but was still up 35% on a constant currency basis. Clearly, this was again underpinned by strong performance in the Off-Trade channel with Nielsen data, which typically covers half of our off-Trade revenue, showing growth of 72% in the first half. Sales into Europe were down by 29% and down 30% on a constant currency basis. Now aside from Germany, we recognized revenue in Europe on the basis of sales made into our local importers, who hold stock and then sell on into the market. Our half year revenue performance in Europe was strongly affected by our importers' understandable decision in the face of considerable uncertainty in March, April, May this year to destock and to not place significant new orders with us. As we moved into June, orders picked up and have continued to build in the period since as importers of replenished stock levels. But at the half year, our reported revenue growth was impacted severely by this destocking effect. Now we can look at the underlying performance of our importers in their relative markets. And if we normalize for the destocking, we would have expected to see revenue down by closer to 15% year-on-year in Europe with, again, strong performance across the Off-Trade channel, with our imported sales made into that channel up by circa 30% year-on-year. Finally, in the Rest of the World, whilst again On-Trade revenues were severely impacted, strong Off-Trade performance, notably in Australia and Canada, we delivered revenue grow growth of 2% across the region. Moving on to Slide 9. We break out the components of the movement in gross margin. Now in the first half of 2019, we reported a gross margin of 51.9%, which then moderated to 50.5% over the full year 2019, which is our start point to 2020. We show here a bridge from 50.5% to the 46.8% reported in the first half. Now firstly, we expected to see some dilution in gross margin as a result of the U.S. price optimization and other factors, including the lapping of some one-off adjustments in Germany as we move to the agency model in 2019. Given these and a small upside from FX, we would have expected to be reporting a circa 49% gross margin in the first half. We commented to the effect of the significant movements in channel and territory mix in the first half. Firstly, in the U.K., we make a stronger margin in the On-Trade than the Off-Trade, a function mainly of pricing. And in the first half of the year, we saw the U.K. channel mix change significantly, such that U.K. On-Trade moved from 26% of total group sales in 2019 to 12% in the first half of 2020. Secondly, we currently make a lower gross margin in the U.S. than in our other regions globally, which is mainly a reflection of the higher logistics cost to service that market from production in the U.K. And in the first half, the strong U.S. performance meant to increase from 17% to 26% of the group sales mix. These movements in sales mix combined to bring down the group gross margin from 49% to 46.8%. As the On-Trade gradually recovers globally, we'd expect to see a recalibration of our sales mix and, with that, the impact on gross our margins to unwind, albeit this will take time, and we're expecting the gross margin to remain effective in the second half of 2020. As we progress further through time, we do, of course, expect the U.S. to increase in our regional sales mix given the size of the opportunity. However, as we move our production locally to the U.S. and in scale with our local partners, we expect to drive improvements in our underlying U.S. gross margin and, therefore, mitigate the potential for the U.S. to dilute the group gross margin as it scales. Whilst the commissioning of our West Coast U.S. bottling partner has necessarily had to be delayed until the latter stages of this year, we will continue to extend our outsourced production model and increase our local footprint in key territories at the appropriate time. The outsourced model we operate is a powerful component of our success and our ability to scale globally. And in the near term, our focus remains on ensuring we set up operation needs in order to underpin the growth opportunity in front of us across multiple markets rather than driving optimizations and efficiencies, which can come later with scale. Turning to Slide 10. Our financial strength has allowed us to remain focused on delivering against the long-term opportunity despite the impact in the short term that COVID is having on revenue and gross margin. We feel very strongly that our decision to continue to invest and take advantage of cost-effective opportunities, such as our TV advertising campaign in the U.K., has already improved our position especially during a period that other brands may be forced to moderate their spend. As such, despite revenue declining by 11% in the first half, underlying operating expenditure increased by 3%, now representing 24% of revenue. Staff costs and other overheads increased to 16% of revenue. Not only did we take the decision very early, not to furlough any of our staff, but we have continued to build our team, adding 20 new heads, including a chief marketing officer, as well as building out our global strategy. Meanwhile, marketing spend in the first half of the year reduced to 8% of revenue, reflecting the payer impact plans On-Trade and events-related spend from March onwards, including most notably the cancellation of the Fever-Tree championships at the queen's Club. Over the full year, we will continue to redeploy the spend and invest and have significant marketing spend committed for the second half. This continued investment in our people and our brand means that our operating margins will, of course, be impacted in 2020, but we remain confident that this will position us strongly as we emerge from the current period of uncertainty. And as the On-Trade returns, we expect to see a solid recovery in both gross and EBITDA margins. Moving to Slide 11. There's been significant focus on credit control in the first half of the year, initially supporting customers and importers with extended terms and then setting up payment plans. And whilst working capital profile at the end of June can vary from year-to-year, we saw an improvement in the first half with lower inventory and debtor levels, largely a reflection of the reduced level of trading, whilst creditors have remained consistent with the prior period, reflecting strong June 2020 production volumes. The reduction in working capital has resulted in operating cash flow conversion of 146% in the first half and net cash increasing to GBP 136.9 million, up 31% year-on-year. As a reflection of this continued strong financial position, we will be paying an interim dividend of 5.41p per share, which is up 4% year-on-year. Turning to Slide 12. Clearly, there remains uncertainty related to COVID-19 and the potential for further impacts as we enter autumn and winter. However, having withdrawn guidance earlier this year, we feel it is appropriate to now reintroduce guidance based on certain key assumptions. Firstly, with regard to the On-Trade. Whilst this is in the process of reopening globe leads, and there's been some promising trading over the summer period, there's been variation in both the rate of reopening and the level of trading once we open across type of outlets and across different regions. Whilst we are not modeling further widespread lockdowns in our regions, as seen in Q2 this year, we believe the reopening and return to previous trading levels will be gradual as we proceed through autumn, and particularly as we lap the strong Christmas trading period. Therefore, we're modeling On-Trade sales across our regions to remain impacted and be between 45% and 55% down year-on-year in the second half. In the Off-Trade, we expect to continue to see good growth, but model that this will attenuate as the On-Trade gradually recovers, whilst we're also mindful that we are lapping particularly strong comparatives in the U.S. in the second half of the year. Finally, European revenues will benefit from an element of restocking in the second half as well as an estimated EUR 5 million of incremental revenue from GDP portfolio of brands. These assumptions underpin a revenue range of between GBP 235 million and GBP 243 million, with the full year regional growth rate range is set out below. We expect gross margin to remain broadly in line with the first half with a marginal improvement in region and channel mix, offset by the impact on gross margin of the incremental GDP portfolio brand revenue. And as stated in April at our 2019 preliminary results, we expect underlying OpEx, which excludes amortization, depreciation and share-based payment expenses, to be approximately GBP 60 million. And with that, I'll pass it back to Tim.

Thanks, Andy. So Slide 13. I'll now take you through the strategic progress we have made during the first half of the year in the U.K. before handing over to Charles, who'll provide highlights in the U.S. Then finally, I'll take you through our performance in both Europe and the Rest of the World. So Slide 14. All our regions have delivered an encouraging performance in the Off-Trade during the first half of the year, demonstrating the strength of the brand in our more mature markets and how we continue to gain traction in our growth markets. We've successfully launched new products in both the U.K. and U.S. and refocused investments from the On-Trade to the Off-Trade and online across all our regions. This resulted in 2 notable firsts from the period, which, in the U.K., it was producing our first national TV advertising campaign and in the U.S., our first sizable digital campaign, both resulting in higher-than-expected brand tracking scores, a great reflection of the creative as well as our brand appeal. Slide 15. We delivered a robust performance in the U.K. in the first 6 months of the year, given the challenges posed by COVID-19. Revenues of GBP 48.3 million were achieved through a combination of strong performance in the Off-Trade and the material On-Trade decline as lockdown caused closures for almost 4 months from mid-March. Our focus for the On-Trade has been to proactively support our customers through credit extensions and payment plans as well as ensuring that they were well prepared to manage in new ways of trading once lockdown was lifted at the start of July. This included providing stock and point-of-sale materials to support the focus on using outdoor space. This level of ongoing support was gratefully received and has strengthened our relationships with many of our long-term customers. The On-Trade has gradually started to reopen after period end. And whilst we've seen encouraging couple of months of trading, we are assuming a cautious pace of trading will continue for the rest of the year, particularly as we move into autumn. However, our broad geographic footprint and the strength of our relationships across all our accounts puts us in a good position to benefit as consumers return to the On-Trade. Off-Trade's performance over the first half of the year notably exceeded our expectations. We've seen a considerable increase in at-home consumption as consumers' interest in making simple long mixed drink has taken off, leading to an increase of 24% in our Off-Trade sales in the U.K. Consumer purchasing habits reacted to the changes in our lifestyles, and Fever-Tree's agile business model meant we were quick to adapt to this. The preference of larger pack formats encourage us to accelerate the rollout of our 15 x 150 ml can pack, which has delivered a very strong rate of sale in the retailers where it's been listed. We also increased our focus and resource in the convenience channel, which performed particularly strongly as consumes wanted to shop quickly and close to home. Fever-Tree outperformed the market since the start of COVID and has seen us gravitated to brands that they know, like and trust. As a result Fever-Tree's increased volume share year-on-year and remain the #1 mixer by value at U.K. retail with 37.6% value share. Turning over to Slide 16. So turning now to our strategic progress during the first half of the year. While, of course, the impact of COVID caused many challenges, we've been able to not only adapt to short-term changes to consumer habits, but also continue to deliver against our longer-term strategy of producing innovative new products, flavors, distribution approaches and marketing campaigns. Our premium soda range was launched in March and has seen a very positive response in the Off-Trade, with new listings secured and very encouraging rate of sale performance across retailers. Alongside this, we continue to see good growth in our ginger ales, which has started to contribute notably to the overall U.K. business with triple-digit growth during lockdown. As well as the prominence of the convenience channel in the Off-Trade over the last few months, there has also been an acceleration in online purchases, which we have capitalized on by building and strengthening our online distribution channels, particularly the Ocado and Morrisons driving e-commerce sales. Another highlight from the first half of the year was launching our first-ever national TV campaign, another example of how we have taken advantage of a price effective opportunity as we redeployed marketing spend during the On-Trade closure, continuing to create awareness of the brand and reinforce our superior quality credentials. And finally, we were delighted to work alongside Sainsbury's and spirit partners to bring to life our Fever-Tree Gin and Tonic Bay, the first mixer-led spirits co-promotion of its kind at U.K. retail. Shoppers have been encouraged to find that perfect pairing in-store across the Fever-Tree range with recommended gin partners, underlying the brand strength and position as the enabler for consumers to explore and experiment across the gin category. So turning to Slide 17. To conclude the U.K. section, I thought it was important to highlight that despite the short-term disruption of COVID, we remain very confident in the long-term success of the business for a number of important reasons. Firstly, we remain the market-leading premium brand by significant margin in both On and Off-Trade. As you can see from the table, our value share far exceeds the size of all other premium brands combined at retail, and we continue to grow strongly at 37.9% year-on-year over the second quarter compared to a decline of 8% for other premium brands. Secondly, we continue to win new distribution and deepen our penetration within the outlets we already have presence in. And our rate to sell remains well ahead of our competitors, emphasizing the strength of the brand. Thirdly, our innovation pipeline remains strong, building on the successful launch of our premium soda range with further new products to be launched in 2020 and beyond. And finally, we have a diverse customer base and have solidified our already strong relationships with all of our accounts, especially in the On-Trade through our continued support during such a difficult period. So I'll now hand over to Charles to take you through our progress in the U.S.

Many thanks, Tim, and good morning, everybody. I'm delighted to be speaking to you from New York, where the U.S. team has delivered a fantastic performance over the first half of the year in the face of unprecedented circumstances. And I'm extremely proud of what has been achieved. We've continued to build momentum in the U.S. despite the impacts of COVID on our On-Trade business and have delivered GBP 27.4 million of revenue for the first half, a 39% increase year-on-year, which is a testament to the strength of our Off-Trade and our online performance. With a strong team now in place, our expanding distribution footprint and our ever strengthening relationships across our distributors, customers and the trade, the focus at the start of the year was on our price optimization and enhancing our format availability. As I detailed at our full year results, the rigorous analysis we took -- we undertook in 2019 reaffirmed our belief that there was a significant opportunity to unlock an affordable premium price positioning in the U.S. market. We engage with our distributors and our customers and worked alongside them to successfully implement this price repositioning during the first half of the year. These discussions also demonstrated the potential for incremental distribution and a broadening of our format mix. However, many of these have been delayed by COVID-19 and will likely, therefore, impact 2021. We're very pleased with the initial results of the price change, which allows us to be perceived as an every day, affordable treat rather than an occasional luxury product, broadening our consumer reach, encouraging trial and, above all, increasing consumption. Moving to Slide 19, and turning to our impressive Off-Trade performance during the first half of the year, started strongly and then accelerated as we went into lockdown. Clearly, there are a number of factors contributing to the strength of our sales during the period, which are detailed on the left-hand side of this slide. We entered lockdown in a great position after positive trading in January and February as we continue to increase brand traction, supported by this continual trend to simple long mixed strengths. We were also benefiting from some good distribution wins during the second half of 2019, which we've recently started to annualize, leading to a slight slowdown in our extremely high Nielsen rates over the last couple of months. Following the initial country loading, which saw significantly increased sales during March, we witnessed a sustained shift to at-home consumption once the On-Trade was closed. At the same time, our price optimization was gradually being introduced on shelf between March and June. And although it is too early to isolate the exact impact of this on our rate of sale, given all the other factors influencing the Off-Trade growth, certainly benefits in sales as new customers were encouraged to try the brand, and there was a growing interest in making simple long mixed drinks at home during lockdown. Our sales in the first half of the year have also been driven by our continued investment behind brand awareness and funds, seamlessly pivoting our activation into the online space, expanding brand visibility, brand engagement with millions of video revenues and, above all, driving more consumers to purchase. As a result, as you can see from the right-hand side of the slide, we've consistently outperformed the mixer category. And consequently, we remain the clear market leader in the premium mixer category accounting for more category growth in tonic water and ginger beer than any other brand. On to Slide 20. Talking about innovation, NPD and growing the brand's visibility. We launched our sparkling new -- our new Sparkling Pink Grapefruit to pair with tequila and to create the perfect Paloma, leveraging the exceptional growth of tequila, which has continued its recent acceleration during the first half of 2020. This has been our most successful new product launch in the U.S. since taking control of the business ourselves, already gaining significant attention from retailers and consumers. And we remain very optimistic about the Pink Grapefruit opportunity as we look forward to 2021. We've also increased our level of investment during the COVID-19 crisis, redeploying spend to where it will be most impactful. And throughout lockdown, spend was focused on digital execution to gain maximum exposure and visibility, broadening our work through the Google Accelerator program, working closely with partners such as Time Out, renamed themselves Time In during this period, and engaging with bartenders to create online content delivered by social media takeovers, videos and e-mails focused on creating simple long mixed drinks at home. Finally, we're also very well placed to capitalize on e-commerce trends as we've already established relationships with the leading retailers and can utilize their e-commerce arms to generate a best-in-class experience for the consumer. In addition, we started to build strong relationships with a number of dedicated online retailers with performance across Amazon especially notable as volumes increased by 130% over this period. Moving to Slide 21. Our long-term strategy for the U.S. was fundamentally underpinned by our Four Drinks strategy, which allows us to tailor innovation to U.S. drinking habits, drive growth in every popular drinking occasion and incentivize our customers across multiple drinks, therefore, broadening our offer in any outlet. For example, in the On-Trade, whether a consumer's looking for a tonic drink, a ginger highball, a mule, a spritz or a Paloma, Fever-Tree is able to elevate every drinking occasion as well as hitting the core trends of naturalness, authenticity and lower calorie or better-for-you drinking. Finally, I thought it was important to reiterate why we continue to be so confident in our long-term growth in the U.S. market. One of the main reasons behind this is the belief that the macro trend to long mixed drinks remains strong. It is clear that spirits continue to outperform wine and beer, transit to amplify during lockdown as consumers enjoyed making cocktails at home. Fever-Tree's unique strength as a brand, along with a fantastic team and solid route to market we've built has put us in a good position to take advantage of all these trends. In addition, our ability to invest, to drive trial and awareness, to proven online media as well as the continued focus on innovating using our Four Drinks strategy with our Sparkling Pink Grapefruit's initial success is a testament to our knowledge of the U.S. consumer. Our important relationship with Southern Glazers goes from strength-to-strength, our national agreement with them that covers over 30 states across numerous channels, including liquor stores, where we see fantastic growth in the near and long term. In addition, we continue to win new distribution, both in terms of the number of accounts as well as increasing our depth per account, expanding the number of accounts, who are now embracing the concept of premium mixers. As I trust you can see from these few slides, we not only delivered a strong performance over the first half of the year in the U.S., but we remain as confident as ever in the long-term opportunity for the market. Thank you for your time. I'll now hand back to Tim to talk about Europe and Rest of the World.

Thanks, Charles. So Slide 22. Turning to Europe. Our revenue for the first half of the year was GBP 20.5 million, a decrease year-on-year as the impact of COVID have been compounded by imported destocking and are therefore not fully reflective of underlying trading, as Andy explained earlier. In fact, our Off-Trade sales were strong, increasing approximately 30% on the basis of an underlying sales made by our importers. Despite the fact of COVID, we continue to invest in the region as we look to the long-term opportunity, which we remain very excited about. Mirroring the U.K. and U.S., we refocused spend from the On-Trade to focus on channels, which could drive spend over the period. This principally came under 3 categories: up-weighting our presence in retail, including new Fever-Tree displays to increase brand visibility; co-promotions with various spirit companies across Europe, including campaigns with Lillet in Belgium to promote Spritz serve, Bombay Sapphire in Germany to promote the gin and tonic occasion, et cetera; and thirdly, digital communications in e-commerce, such as online master classes and events. So turning to Slide 23. This slide is the demonstration of our confidence in the European opportunity and, in this case, specifically in Germany. Just after period end, we acquired GDP, our long-term partner and well-established sales agents in Germany, to provide us with a strong operational footprint with which to continue to drive our growth. Germany is currently Fever-Tree's second largest market in Europe and represents a notable opportunity for the group. It's one of the largest mix markets in Europe and is underpinned by emerging premiumization trends evident in both the mixer and spirits categories. As you can see from the table on the left-hand side of this slide, the premium mix of category is growing at over 3x the size of the total category. And Fever-Tree is growing even faster at 25%, which is over 3x faster than the main premium competitor, Thomas Henry. The acquisition of GDP, with established management, distribution relationships and sales channels already in place, allows the group to accelerate the strength and depth of its presence in Germany, much faster than they could have been achieved by building the same capabilities from scratch. They have a strong record of growing premium brands using a portfolio approach, which is highly suited in size and outlet fragmentation of the general market. Moreover, having a portfolio of premium brands will give us more influence with wholesalers and key accounts, makes it more cost-efficient to have a larger sales team and will deliver approximately EUR 10 million of incremental brand revenue on an annualized basis. So Slide 24, strategic focus. As outlined at our full year results, the next slide summarizes our strategic approach to Europe, where we break down the region into core markets, next-wave markets and earlier-stage markets. Core markets, including Belgium, Denmark and Ireland, contributed to about 1/3 of our European revenue last year. These are markets where premium tonic has achieved a large or market-leading share and Fever-Tree has a strong position, providing a blueprint for what can be achieved elsewhere in the region. Our focus is on maintaining the position we've established in the tonic category whilst driving growth through range and formulate extensions. Next-wave markets, including Germany, Spain and Italy, contributed to about 45% of our European revenue last year. These are countries where Fever-Tree currently has relatively low penetration in sizable mixed markets and where significant growth opportunities exist. The relationship with our local imports remain strong and are focused on identify opportunities as the On-Trade reopens. While Spain, as an example, has the mature mix market, we view it as a next-wave market for Fever-Tree, as we remain relatively under-penetrated and still see a significant amount of white space to go after across the country. And then finally, we've got earlier-stage markets, such as France and the Netherlands, which contributed about 1/4 of our European revenue last year. In these markets, we focused on establishing the conditions and infrastructure we need for growth within currently in mature mix of categories, including building the optimum and distribution and route to market as well as increasing headcount where appropriate. So Slide 25. Finally, through the outline from the U.K. and the U.S., I want to take a step back and remind you that despite the uncertainties and short-term disruption COVID has brought, we remain confident and optimistic about the medium and long-term opportunity in Europe. Importantly, the trends of long mixed drinks is growing in most European countries, and we are the largest premium mixer by value across the region. This puts us in an incredibly strong position, not only is capitalizing the supportive underlying trends, but also to drive these further by premiumizing the mix category and partnering spirit brands to promote specific sales.. While we have a good and growing presence across the region, there's still a significant amount of white space in both the On-Trade and the Off-Trade. We are confident that we can exploit this through our strong relationships through key partners such as Grupo Damm in Spain. Overall, there are a good number of markets of varying phases in maturities offer good potential for Fever-Tree going forward, and we continue to invest and focus the opportunity that they present. So our final region, Slide 26, is the Rest of the World, where we had a strong first half performance across our key territories despite On-Trade closures, generating total revenue of GBP 8 million for the region, an increase of 2% year-on-year. Both Australia and Canada continue to win significant distribution gains and increase their rate of sale in outlets where Fever-Tree is present as the brand starts to gain traction in key On-Trade and Off-Trade accounts. In Canada, we grew tonic sales by over 100% year-on-year to become the #1 tonic brand in the country, a fantastic achievement by the team. In Asia, we continue to optimize our route to market and build our distribution with important new distribution partners in both China and Hong Kong. In addition, we signed a significant deal with our core hotels, the largest hotel group in the region to become their preferred supplier across their premium portfolio in Asia Pacific, which gains us an important foothold in this key channel. As a result, we remain very optimistic about the medium and long-term opportunities in a number of territories across Asia Pacific. Slide 27. Our priority within the Rest of the World region is growing the brand in Australia and Canada, 2 markets with strong supportive trends and recent brand success for Fever-Tree to start to grow and premiumize the mixer categories. In Australia, Fever-Tree continues to be the clear mixed category leader and is responsible for driving growth within the segment, generating 50% of incremental tonic value in Coles and Woolworths during H1, which together account for 85% of the Australian grocery market. Long mixed drinks continues to gain popularity, led by the gin and tonic. Gin was the fastest-growing spirit category in 2019, and Fever-Tree is driving the growth in the tonic category with the premium segment leading the way as well as maximizing the momentum in gin and tonic sales, we also see opportunities to premiumize other mix of categories, such as gingers, going forward. In Canada, Fever-Tree has used its strong presence in the premium mixed category to increase trial and awareness and secure new distribution with a number of key accounts. We are now the largest tonic brand in Canada at retail with a 34% share of the category and continue to achieve strong rate of sale in major retailers as well as winning new distribution, both in terms of number of accounts and phasings into store. This is underpinned by the premiumization of the mix category, led by Fever-Tree, with premium mixes far outpacing the growth of standard serves. So turning to the last slide, Slide 28. I'd just like to finish with really the same important messages that I started with this morning. Over the last few years, we've been strengthening our global leadership position versus our premium competitors and establishing a strong platform to deliver long-term sustainable growth. This meant we entered the crisis in a strong position, a business with a diversified channel mix, a strong net cap position and operational flexibility. Consequently, we've been able to act on the front foot, taking proactive steps not only to mitigate the short-term impacts of COVID, but also to take advantage of the growing consumer interest in making long mixed drinks at home, which has accelerated over the last few months around the world. I continue to be proud of our fantastic team and our ability and willingness to invest ahead in terms of people, route to market, portfolio and marketing. And while the current crisis has created challenges, it has also created opportunities. And I have confidence they will exit the crisis in even stronger position than we entered it. So thank you for listening this morning, and I know Andy, Charles and I are now happy to answer some questions. Thank you.

And the first question we have from the phone lines comes from Edward Mundy from Jefferies.

Tim, Andy, Charles. I've got 3 questions. The first, probably for Andy, is on gross margins. I really appreciate that slide where you looked at the gross margin evolution between last year and H1. If we think about that slide for 2021, on the one hand, assuming the On-Trade recovers, you should get that 90 basis points back from the U.K. negative channel mix, but the 2 questions really are around the regional mix. Do you expect that to continue? And then also the U.S. price reposition, is that also complete or is there further to go? The second question is on the U.S. opportunity. Clearly, very good growth within the Off-Trade within the first half during COVID-19, great opportunity to get new consumers into the product. I appreciate you're going to be lapping some distribution gains, but why are we not seeing faster growth in H2? And then the third question again on the U.S. I was hoping for a bit more of an update on what you're seeing anecdotally between sort of tonic and non-tonics as to whether the consumer base has been broadened, and as to whether there's been any pushback to sugar within your product.

Okay. Thanks, Ed. Look, I'll pick up on the first one, and also pass it to Charles. You may want to add to that to the second question. But on your first question about gross margin kind of recovery, look, it just really is a question of how that On-Trade recovers and the timing of it. I mean, we actually do expect that U.K. channel mix to redirect. Whether that's going to be fully presented in the 2021 numbers or if you're looking at H2 2021, by that point, you've seen that redirection. It really is going to depend on pace of recovery, but we do expect that correction to margin to happen. On the regional mix, you saw a really significant move in the U.S. sales mix. It went from 18% last year all the way up to 26% in the first half. Now clearly, that was driven by the U.S. fantastic performance, but also is influenced by -- if you look at Europe, for instance, we declined by 29% because of that destock rather than probably 15%, which is a truer reflection. So we do expect in the near term that U.S. to reduce in the sales mix. And that will again contribute to the recovery of the gross margin. I think in the longer term, absolutely, we expect clearly the U.S. to improve in that increasing that sales mix. And whilst we do met that lower margin in the U.S. currently, it's really important to talk about it, in fact, that, number one, from a cash margin perspective, it's still a strong margin in the U.S. We have a good, strong price point, but we do have incremental costs, and they're mainly on the logistics line. At the moment, we're making that product in the U.K., shipping it to the U.S., holding high levels of inventory to be able to service the growth there. Now as we move production more and more locally to the U.S. and ex-COVID, we would have been bottling on the West Coast by now. That has to be delayed, but we're still confident we'll be commissioning that line and getting going in Q4 this year. I wonder there's no further changes to the rules in California. As we start to bottle in the West Coast of the U.S. and then move more and more of our production locally in future years, we're clearly going to make savings on that logistics line. Therefore, we're confident in the longer term, whilst the U.S. will increase in the group sales mix, also that delta between the U.S. gross margin and the rest of the group will narrow. So as the U.S. increases, it's not going to dilute the total group margin to the same extent you've seen just in the first half of this year. I think in terms of U.S. price, I think we're radically confident. I think most of that has been factored in, in the first half. We changed our price on invoice relatively early in the year, from February onwards. There's been delayed subsequently in how that's been implemented on shelf just due to COVID, but, in terms of our P&L, we're comfortable we've captured the majority of that in the first half. And coming on to your second question really was around H2 growth rates, I think, in terms of our guidance, obviously, plus 39% in the first half. We're guiding our range between GBP 0.20 and GBP 0.25 in the second half. And there's a couple of factors there. I mean, we really are lapping tough comparators in 2019. If you look at our 2019 revenue split in the U.S., it was GBP 19.8 million in H1, GBP 27.8 million in H2. So we saw significant revenue build in the second half. A big contributing factor for that was this high level of increased distribution we received and started to be implemented around H1, which was our target public, big increases in the number of stores that fed into that H2 growth rate. Subsequently, in H1 this year, we've been -- we haven't been annualizing that distribution yet, but we're going to start to in the second half. I think it's also fair to say in the second half of last year, we increased our promotional activity in the U.S. We were testing that new price point. We had a significant cost co-promotion as well and these are things that aren't going to be repeated to the same extent. So look, I still think given the growth range of 20% to 25% for the full year, if you strip out and allow for the gradual recovery for the Off-Trade, still very strong retail growth in those numbers. And 30% to 40% retail growth, which is still very strong. So whilst it is going to slow down, I think we're still seeing strong U.S. growth in the second half. Charles, I'm not sure if you want to add to that.

No, I think you've covered that. I think the key there is if we look at what we achieved with Walmart, Kroger, Target, most of -- all those distribution gains took place essentially in the May, June period of last year. So we've just finished cycling those. And those were significant and substantial increases in our footprint, which have not been replicated this year because we expanded into that many more stores. And of course, COVID has thrown many of the resets sort of back several months for this year and some people not taking on new products this year because they're just sticking with the portfolio that they've got. So we certainly see a recovery of that in 2021 as people start to sort of adjust to new normal and all the rest of it. But I think we feel very -- I think the H2 growth in the U.S., we're forecasting plus 30% in retail over that period, which remains a very strong -- strong performance off a bigger base, of course. If -- just moving on to your second question there about -- so the tonics versus the rest of the portfolio. I think that the position that we find ourselves in now is that we're -- the strength of the portfolio means that we've got a very balanced portfolio. So we've got our tonic drinks, which -- and tonic has performed extremely well during lockdown. I believe that the kind of the scale of tonic consumption in the On-Trade, which is very hard to measure because of all the soda gum business that comes out of a big syrup box, has flipped. And we've really seen much, much stronger growth in our tonic business over the first half of the year. And I think that, coupled with this trend towards premiumizing gin and premiumizing the gin and tonic experience at home has absolutely helped to drive growth. But equally, our gingers continue -- particularly ginger beer, continues to perform extremely well. We are the leading premium ginger beer in the marketplace now. And I think the other great thing, listen, are the balance in the portfolio coming from the spritz drinks, so, in this case, the Paloma, which just fits this wonderful strong tequila business. Tequila has been probably one of the star performers during the last couple of years, but particularly the last 6 months, tequila has really been the category that's on fire and the Paloma being a key tequila drink. And of course, on top of that, this is our low-calorie offering from a Fever-Tree perspective. So only 30 calories in a bottle. And that really fits with that consumer trend of wanting to drink better. On to your final point regarding sort of lower sugars. What we are certainly seeing is a growth -- a much, much stronger growth in our light tonic water, our light ginger ale, our light ginger beer, as our light ginger beer gets a bigger and bigger distribution footprint, this is one of the fastest-growing products within the portfolio. And of course, our low-calorie Paloma offering, the Sparkling Pink Grapefruit. So absolutely, we see huge opportunity for lower-calorie, lower-sugar offerings and continue to press forward in that space. So we remain very, very buoyant and very, very confident about our ability to grow the refreshingly light range here in the U.S.

And, Andy, just to sort of come back to the first question around margins, I appreciate there's still a lot of moving parts, do you feel at this level that the sort of margin reset that's taking place during fiscal '20, I mean, partly COVID-related, do you think we've hit a floor on gross margins and we can start to build going into 2021 as the On-Trade comes back?

Yes, I think we do, Ed. I mean, I think underlying, we expect an improvement. The thing that's -- our guidance is to be consistent in H2 and that's just the dilutions and the portfolio of brands in GDP. So if you exclude those, we absolutely start to see an improvement back from the 46.8% we're reporting here in H1.

We now have the next question from Richard Felton from Goldman Sachs.

My first question is on the U.S. Congratulations on very strong results. Look, I appreciate the U.S. is a very complex, large market. I'd be really interested to hear about any regional differences that you might call out. So how's the strong growth you saw in H1 being very broad based? Or do you have some states that are flying and others that are lagging performing slightly? That's my first question. Then I was wondering if you could comment a bit more on your latest innovation in the U.K., the premium sodas. How broad-based is your distribution in the U.K. Off-Trade for that product? And are there any numbers you can share about the encouraging rate of sale that you've referenced in your presentation? And over time, do you see that product having more of an Off-Trade focus or do you see as yet having good potential in the On-Trade, too?