Britvic's price increases drive growth

Soft drinks producer Britvic (BVIC) concocted a steady if mixed set of annual results, demonstrated by the muted share price reaction on their release. Revenues rose across the company’s markets, with only a limited volume contraction despite chunky price increases, but margins and profits headed in the wrong direction as cost pressures continue to bite.

Top line growth was driven by pricing action and strong performances from key brands. The company, which sells a mixture of its own brands and Pepsi brands, recorded average realised price (ARP) growth of 9.1 per cent. Volumes were down 2.2 per cent, but these were impacted by unfavourable weather in the fourth quarter.

Revenue in the vital British market, which contributes almost 70 per cent of sales, climbed 7.9 per cent on the back of an ARP per litre uplift of 10.6 per cent. Pepsi and Tango sales rose 7.7 per cent and 20.7 per cent respectively. Sugar-free Pepsi Max is the fastest-growing cola product on the UK market, with the company pointing to the importance of flavour variation. 

Elsewhere, revenues were up 9.2 per cent in Brazil and 7.9 per cent in other international markets. Irish trading was robust, while the performance in France was weak. 

Premiumisation remains a major trend in the beverage space, and the signs are that the company is taking advantage. Its premium brands London Essence and Mathieu Teisseire grew double-digit on a combined basis in the year, and it has added premium juice brand Juxx to its portfolio as part of a bolt-on acquisition in Brazil. 

The fall in pre-tax profits was down to higher costs, with the company's fixed cost base rising 9 per cent on a like-for-like basis. Higher investment also had an impact, as management injected £5.3mn more of advertising and promotional spend into the business. 

It can't be ignored that margins remain lower than those at beverage sector peers such as AG Barr (BAG) and Nichols (NICL). Britvic's adjusted cash profit margin fell 20 basis points against last year to 12.5 per cent, while gross and operating margins were down by 110 and 150 basis points respectively. 

The shares currently look relatively cheap, trading at 13 times forward consensus earnings compared to a 5-year average of 15 times. Trading has been resilient despite cost of living pressures, helped by brand equity. Consumers may be swallowing higher prices, but margins aren't impressing. Hold. 

Last IC view: Hold, 940p, 16 May 2023