Oatly Group AB

Good morning. Thank you for joining us on Oatly's third quarter 2021 earnings conference call and webcast. On today's call are Tony Peterson, Chief Executive Officer, Peter Berg, Chief Operating Officer, and Christian Hunke, Chief Financial Officer. Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could differ materially from actual events or those described in these forward-looking statements. Please refer to the company's final perspectives filed pursuant to Rule 424 on May 21, 2021 and other reports filed from time to time with the Securities and Exchange Commission for a detailed discussion of the risk that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note on today's call, management will refer to certain non-IFRS financial measures, including EBITDA, adjusted EBITDA, and adjusted EBITDA margin. While the company believes these non-IFRS financial measures will provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS. Please refer to today's release for reconciliation of non-IFRS financial measures to the most comparable measures prepared in accordance with IFRS. In addition, Oatly's posted a supplemental presentation on its website for reference. I'd now like to turn the call over to Tony Peterson.

Thanks, Katie. Good morning. We appreciate you joining us to discuss our third quarter financial results. On today's call, I will briefly review our third quarter financial highlights, provide an overview of our business performance, including the continued strong consumer demand for Oatly and the oat category in our key markets, and reiterate the key reasons we believe Oatly is well-positioned for strong growth over the next several years as we benefit from an acceleration to dairy alternatives globally, and we scale our operation to meet this growing demand. Peter will provide an update on the progress we're making to build out our global manufacturing capacity footprint. Then Christian will review our financial results in more detail before we open up the call to take your questions. For those that have been following Oatly since our IPO, you know that 2021 is the most transformational year in our company's history. We're adding new production capacity at an unprecedented pace for our company on three continents to meet the robust consumer demand for our market leading brand and working to execute this during a global pandemic is no small feat. We are continuing to prioritize growth investments over profitability to best position Oatly to serve customers and consumers alike and to focus on taste, nutrition, sustainability, transparency, and trust with a strong emotional connection to our brand. We believe these priorities are critical for accelerating conversion from the global dairy market, which we estimate to be worth approximately 600 billion US dollars in the retail channel alone, with a large food service footprint and growing e-commerce opportunity. We continue to see tremendous consumer demand for our products across each of our regions as we convert dairy users to plant-based milk consumers. Since 2019, plant-based milk penetration in the dairy category has increased anywhere between 35% to 135% in our core markets based on volumes. These figures highlight the transformation that is taking place in the dairy category. However, even with these significant growth rates, the overall penetration of plant-based milk in the dairy category is still very low and ranges between 9% to 11% in our key Western markets, which highlights the tremendous upside still ahead of us. Once the dairy consumer is converted to plant-based milk, we also see very strong repeat purchase behaviors. According to our consumer insight study, 60% to 70% of the consumers use plant-based milk at least every two to three days, and nearly 80% consume it at least once per week. This highlights how quickly consumers switch over to incorporating plant-based milk into their daily routines. The syndicated scanner data also continues to show that the oat category continues to prevail and gain share over other dairy alternatives across our key markets, and we are driving this growth. This is clear from our market shares and our leading velocity performance, even with our limited shelf space footprint today. Year-to-date, we have invested heavily in our business, establishing infrastructure, personnel, innovation capabilities, and partnerships to meet consumer demand. and maintain and grow our category leadership position. We've opened two new facilities in Ogden, Utah and Singapore, and we expect to open our second manufacturing facility in Asia later this month. We are incredibly proud of our global production supply chain and procurement team's efforts to open both the Singapore and China facilities in line with our stated timelines. We believe that adding these two new local production facilities in Asia will support Oatly's trajectory of strong future growth in the region. 80% of the population in Asia is lactose intolerant, and we believe Oatly can gain a larger share of the dairy alternatives market in the region over the next several years. By having localized production in the region, we expect to achieve much better production economics and operating efficiencies, reduce the environmental impact, and increase profitability as Asia will be able to reduce production reliance on EMEA for the first time. In the first half of this year, we also doubled production capacity at our facility in the Netherlands. The production output in this facility was in line with our expectations in the third quarter. And this output will help to facilitate our offensive positioning in EMEA, where over the last 18 months, our commercial sales and marketing teams have consistently faced growth constraints based on our capacity limitations. In total, we produced finished goods volume of 131 million liters compared to 74 million liters for the same period last year, an increase of 77%. It's also an increase of 24% from the 106 million liters we produced in the second quarter of 2021. Now, to dive into our financial highlights in more detail, for the third quarter, we reported record revenue of $171.1 million, a 49% increase compared to the third quarter last year. Our strong growth was broad-based across geographies, sales channels, and product offerings. Now, most companies would be thrilled with this level of growth and execution in any operating environment, but we hold ourselves to a higher standard of execution. based on our bottom-up view of our business, and frankly, we expect it to deliver approximately $178 million in revenue, representing a year-over-year growth of 55%. We believe this is primarily a timing issue, and I will take you through some of the specific events that have delayed either our production output or product availability in certain geographies. So, no, we're not satisfied with our revenue growth. even though we grew tremendously in the global marketplace where many companies are experiencing the impacts from COVID-19 and temporary supply chain pressures. I'd like to provide more details about the specific factors impacted our growth in the third quarter. First, in the emeritus region, we were approximately $3 million below our plan for quarter three. This was primarily due to lower than expected production output at our Ogden, Utah, South manufacturing facilities. We experienced mechanical and automation issues in August during our production ramp-up, which slowed our production progress versus our plan. This was further exacerbated due to COVID-19 related supply chain disruptions, which led to a delay in our team's ability to receive the required equipment to fix the issue in a timely manner. Based on these events, our sales trajectory in the region was pushed out. As a result, our sold volume was 37 million liters per month on average for the third quarter instead of our expectations for sold volume of 40 million liters per month on average for the quarter. Second, in Asia, we were approximately 3 million US dollars below our plan for quarter three. Approximately 75% of our third quarter revenue in Asia was generated from the food service channel. And we experienced a heightened level of COVID-19 Delta variant related food service location closures in Asia. We continue to monitor the situation closely as heightened restrictions remain in effect throughout the region. The health and safety of our team, consumers, and our partners in the region remain our priority. And finally, EMEA was approximately $1 million lower than expected for the third quarter due to a truck driver shortage in the United Kingdom temporarily delaying distribution of products. In addition, During the third quarter, we experienced a noticeable uplift in the food service channel as a share of total EMEA revenue compared to the second quarter of 2021 from 13.8% to 17.7%. We believe this is a result of higher share of out-of-home consumption within the company's key EMEA market as pandemic restrictions have been further lifted and the summer holiday season extended into the fall. We expect these key factors that delayed even stronger growth in the third quarter will abate as we head into 2022. And going forward, while we may experience certain variability in our strong growth rate quarter to quarter as we scale our global operations, our confidence in the size and long-term trajectory of our business is stronger than ever. I'd like to share a few highlights across our key markets to support why we believe Oatly will continue to win a significant share of the conversion to dairy alternatives globally and maintain our market leading position. Our brand has continued to excel on the global scale as evidenced by the following market statistics. According to Nielsen and IRI data for the 52 weeks ended October 2021, in all our key markets, Oakley has the number one selling oatmeal skew in terms of sales value, and the highest velocity skew representing sales per store per week. At the brand level, Oatly continues to be a primary growth driver of the total plant-based milk category. In the UK, our brand contributed the highest amount of sales growth to the dairy alternative drinks category and was the second highest brand driving growth in Sweden, Germany, and the US. In both Germany and the UK, our barista edition item has at least two times the unit velocity levels versus the second and third highest selling skew in the oat category. Our brand accomplished this with a limited skew range and a fraction of the total distribution points versus competitors. In the Americas, demand for Oakley product continues to be incredibly strong. According to the Nielsen, for the 24 weeks ended October 16th, Oakley remains the number one fastest-turning brand in total dairy, plant-based dairy, and oat milk. Oatly is the number two dollar sales oat milk brand in XAOC, and we also reclaimed the number two spot in total U.S. food spin in the latest period. Oatly is the number one dollar sales chilled oat milk brand in the U.S. natural channel and in major retailers, including Whole Foods and Target. as you see on slide 13 of our earnings presentation. In Walmart, Oatly Original is the number one velocity oat milk SKU and the number two velocity plant-based milk SKU, and an additional 1,200 stores planned in April of 2022. If you look at slide 13 in our earnings presentation, you will also notice the velocity has nearly returned to pre-distribution surge levels normally velocity gets diluted when increasing distribution. We expect to see this continue to improve as more cases enter the system. It has certainly been proven that the demand from existing customers is there to absorb incremental cases. Oatly weekly dollar sales have increased more than 25% since July 10th, three months ago, and continues their upward momentum each week. The oatmeal category has increased only 15% during that same period. Oatly velocities have increased more than 21% since July 10th, far more than any competitive brand, and the oatmeal category grew only 3%. And frozen year-to-date, or quarter three, represents approximately 6% of America's revenue. This is an area we continue to be excited about. For example, in the plant-based ice cream category, excluding sorbet, Oatly frozen desserts are number one in dollar growth and number three out of the top ten highest dollar velocity flavors in the U.S. food. We will be launching frozen novelties desserts, which are expected to arrive on shelves beginning mid-December and into the spring. The U.S. commercial teams are in the midst of growing distribution acceptance, with over 8,000 points of distribution confirmed so far. In food service, Oatly is the brand partner of Starbucks in the U.S., Growth of Oatly and Oat Milk has exceeded both of our expectations to date. Current projections from Starbucks continue to escalate based on the success of Oatly's Oat Milk, and we have aligned with them on an ongoing supply plan to continue bringing our products to the broadest possible audience. Starbucks is a strong collaborative partner, and we look forward to growing with them across existing and new geographies. With their partnership, we're able to reach many more people with oatmeal beverages, and in doing so, we can continue to do great things for the planet together. And finally, in Asia, a growth in this region demonstrates the effectiveness of a proven multi-channel expansion strategy. The awareness and trial achieved in the specialty coffee and tea challenge is critical to educate the market about plant-based dairy and establish our leadership in Asia. we continue to maintain our market-leading position on Tmall, which demonstrates Oakley's ability to consistently outperform in a highly competitive marketplace. In food service, we're now fully distributed in Starbucks in mainland China and KFC. We also have great opportunities to expand with existing customers. McDonald's is just one example of where we can expand distribution as we are in approximately 40% of their locations today. Last week, we launched in Ayuki a top two modern tea brand in China with the market's first old cap tea drink. This product will be available in more than 700 stores nationwide. At retail, Oatly can be found in anywhere from 10 to 50% of total available existing customers doors. For example, we are present in 800 of 1,500 total stores with Yonghui, one of China's largest retail chains. There's significant proof of distribution expansion in retail once we scale capacity with just existing retail customers alone. Due to our supply constraints, we have not prioritized the retail channel in Asia so far, but still have been able to make significant progress. Our successes across the U.S., Europe, and Asia demonstrates the strength of our product portfolio across multiple categories and the increasing consumer appetite for Oatly and our brand's ability to travel where consumers choose to shop. Our mission and core belief in driving societal shifts towards a plant-based food system unifies our company in our quest for purpose-driven growth. As humanity faces massive challenges of climate change and lifestyle disease, our mission is even more relevant and powerful. We aim to inspire people to make small changes in their lives that are beneficial to themselves and the planet. Our in-house creative teams create ways for Oakley to have an emotional bond with consumers who are already becoming more health conscious and more environmentally conscious. And we have a proven, disciplined, and thoughtful multi-channel strategy that we believe sets us apart from the competition as we're already building our brand successfully across three continents with a tremendous amount of white space to add new markets. In summary, I'd like to thank our global team for their efforts in achieving our growth. We believe a strong foundation and business fundamentals will help us capture a disproportionate amount of growth over the next several years as consumer demand continues to accelerate for plant-based alternatives. I will now turn the call over to Peter.

thanks tony i will focus on our global production and capacity build out as we have previously communicated production capacity has been a major constraint on our growth and we have made substantial investments to scale our production capacity and address supply shortages due to the massive demand for our products globally in the third quarter Our consistent production output in EMEA enabled us to begin to build supply to meet the consumer demand across the regions for our products. Our expanded glissing and hybrid facility, which started full production runs in July, is progressing well, and the facility generated production in line with our expectation for the quarter. As Tony discussed, the main reason for our lower than expected total production output was related to mechanical and automation delays at our new self-manufacturing facility in Ogden, Utah, beginning in late August as we continue to scale up leaders produced. As we discussed on our quarter two call, in July, we opened our Singapore hybrid manufacturing facilities. representing our first local production available in the region this is an important corporate milestone the facility will have 75 million liters of annual finished goods capacity at full production since 2018 we have been shipping our products from europe to support the growth in asia and we are excited about the operating and financial efficiency we expect to gain from our new Singapore facility. In addition to Singapore, this month we will open our second facility in Asia. Mashan China will be our first self-manufacturing facility in the region, creating the opportunity for a total of 225 million liters of production capacity in Asia. For the year, we expect little to no financial contribution from Machan as they perform initial test runs required before ramping production. Despite the short-term headwinds we have discussed, October was our highest production month in the company's history, as you can see on slide 21. We expect our production output to increase again for the month of November and December. We continue to expand capacity of our existing facility, and we are currently in planning stages to open additional facilities in the US, UK and China in 2023. These three facilities are estimated to add an incremental 450 million liters of finished goods by the end of 2023 to support the demand for our products globally. like other companies we are noticing longer lead time for certain require equipment related to our planned capacity investments for 2022 and 2023 we are seeing some delays in 2022 capacity expansion projects and are closely monitoring and assessing any potential impact on projects in 2023 Based on the strong demand we continue to experience across our market, we expect to strategically prioritize our oat space for the production of oat milk versus other food products to drive growth and conversion. We believe this further speaks to the growth potential we have and makes the tail for our growth trajectory even longer. But the revenue mix from these items could slightly impact our revenue and gross margin in 2022 if we sell less food products and rely more on co-packers than plants. For the first nine months of 2021, sales manufacturing was 21% of total volume compared to co-packing at 47% and hybrid at 32%. demonstrating continued progress toward our production goals. As we grow, we believe owning and controlling our global operating footprint is paramount to addressing the significant consumer demand for Oatly products. Our goal is to have 50% to 60% of our total volumes come from self-manufacturing, reducing co-packing to 10% to 20%. with 30% to 40% from hybrid manufacturing. We expect to drive profit growth through increasing our self and hybrid manufacturing model, as well as localizing our production footprint, which will improve our production and supply chain economics and economies of scale and service levels. Going forward, we intend to continue to invest in our innovation capability, build our manufacturing footprint, and expand our consumer base, all supporting our growth trajectory. I'll now turn the call over to Christian to review our financials.