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.

Thanks, Peter, and good morning, everyone. It's nice to speak with you today. Turning to the financials, revenue for the third quarter of 2021 was $171.1 million, an increase of $56.4 million, or 49.2% compared to revenue of $114.7 million in the third quarter of 2020. As Tony described, short-term headwinds impacted the rate of growth we delivered in the quarter. There was a minimal foreign exchange benefit to revenue of approximately $4.4 million in the quarter. However, excluding foreign exchange on a current quarter versus prior year quarter comparison, we grew at a faster rate in the third quarter compared to the second quarter of 2021 on a consolidated level in America, but also in EMEA. The food service channel continued to increase in the third quarter of 2021 compared to the prior year period, with the reopening of on-premise outlets from the realization of COVID-19 restrictions in our key markets, partially offset by certain COVID-related food service location closures in Asia. For the third quarter, 2021, the food service channel accounted for 35.8% of revenue compared to 27.3% in the same period last year. The retail channel accounted for 59.4% of third quarter 2021 revenue compared to 69.4% in the third quarter of 2020. Consolidated net sales per liter was $1.55. compared to $1.51 in the third quarter of 2020, primarily driven by positive foreign exchange effects in EMEA and Asia, positive customer and channel mix in Asia, offset by customer and channel effects in EMEA and America. Our highest regional net sales per leader is in Asia, followed by the Americas and then EMEA. The net sales per liter was in line with our expectations, except for in Asia, where it exceeded our expectations, driven by channel and customer mix. Gross profit in the third quarter was $44.9 million compared to $36 million in the prior year period. Gross margin decreased by 510 basis points to 26.2% compared to 31.3% in the prior year period. The gross margin decline in the third quarter of 2021 compared to the prior year period was primarily due to higher logistics expenses in EMEA and the Americas, as well as higher container rates for shipment from EMEA to Asia a change in segment channel and customer mix, primarily in America, short-term challenges related to scaling up our production capacity at our Ogden Utah facility, resulting in a higher share of co-packing production, partially offset by positive channel and customer mix in Asia, and a minor positive impact from foreign exchange. We have experienced an increase in trade costs driven by the effects of the pandemic and a shortage in capacity, primarily in the Americas and EMEA, but also related to our shipment from EMEA to Asia. We continue to expect that the localization and expansion of our production capacity within the region will help to offset some of these freight cost headwinds. Going into 2022, we expect inflationary pressure to impact our cost of goods sold more broadly. as we see oat prices and other commodity prices, as well as packaging materials increasing as a result of a number of different factors, such as poor harvest in Canada, as well as supply chain disruptions more broadly. As a reminder, oats account for 8% to 9% of our total cost of the soil. Even with the old drought condition, we are well-precision with adequate oil supply to meet our anticipated growth for this year and for financial year 2022. Grapeseed oil, which accounts for approximately three to four percentage points of our total cost of goods sold, continued to be higher versus second quarter and the third quarter of last year. We expect the geographical localization of our production capacity, including bringing more of the production in-house to provide some offset to inflationary pressures. We also expect increased price of certain products and in certain regions where necessary to help offset some of the commodity and logistical inflationary headwinds. We continue to expect variability in our gross margin quarter to quarter, based primarily on the mix of revenue by geography and sales channels, as well as the mix of our manufacturing output. On an annualized basis, we expect to continue to see improvement in our gross margin year-over-year, starting in 2022, with a long-term goal of 40%. Now focusing on our balance sheet and cash flows. As of September 30, 2021, we had cash and cash equivalents of $403.1 million, $305.2 million in short-term investments, and total outstanding debt to credit institutions of $6.7 million. Net cash used in operating activities was $148.6 million for the nine months ended September 30, 2021 compared to $20.4 million during the prior year period. Capital expenditures were $186.7 million for the nine months ended September 30, 2021 compared to $85.1 million in the prior year period. Cash flow from financing activities were $958.7 million, reflecting the proceeds from the IPO, net of repayment of liability to credit institutions, and repayment of the shareholder loan. The company invested a portion of the IPO proceeds in secure short-term investments. Turning to the guidance. For fiscal year 2021, we now expect revenue to exceed $635 million, an increase of greater than 51% compared to fiscal year 2020, strong growth across regions, and balanced contribution from each of them. It is important to note that based on our previous annual revenue outlook, we expected $178 million in revenue for Q3, as Tony mentioned. and $226 million for Q4 to get us to the $690 million in revenue. The primary reasons for revenue of $178 million or growth of 40%, which is now the implied revenue for the fourth quarter, are due to reduction in our forecasted revenue of $48 million, and this is broken down by region as follows. First, in EMEA, we are starting to build supply to meet consumer demand, but the pace at which we expected to increase revenue in new and existing retailers and to open up new markets is slower than we anticipated as we navigate a dynamic COVID operating environment. We believe this is primarily a timing issue, lowering our revenue in EMEA by approximately $31 million. In the first half of 2022, we expect to have an increased share of shelf space at retail, given our strong velocities and current supply levels. For greater context on EMEA, it's important to remember that during this time last year, our commercial sales team was working with our retail partners on shelf sets and distribution plans for 2021 at a point in which our business was incredibly supply constrained. As a result, we started 2021 with less shelf space than prior years based on our lack of inventory and the fact that we have historically sold all that we have produced. Further evidence of our supply constraints last fall is the fact that for 2021, we had to scale back the distribution of our products for 12 countries in EMEA. We are excited about the discussions we are having with our retail partners in EMEA, and we expect to have a better share of the shelf once resets are complete. We are entering new countries and we will continue to drive industry-leading velocities across the region, all of which we expect to benefit from in 2022. Second, in the Americas, we are pleased with the weekly production output improvement at our Ogden USA facility today in the fourth quarter. Although we are navigating a challenging supply chain environment, and we expect lower production sales volume versus our prior outlook, reducing revenue by approximately $13 million. And finally, in Asia, strict public health measures remain in effect due to an increase in cases of the COVID-19 Delta variant. We are closely monitoring the situation and remain focused on the health and safety of our team. However, given the ongoing restrictions, we are taking a more conservative view on our growth for the fourth quarter, reducing our revenue by $4 million. Assuming no significant changes from where we are today, we expect the fourth quarter exchange rate to be a single-digit tailwind compared to the second half of 2021. We expect capital expenditures to be between $280 million to $320 million a decrease from our previous estimate of $350 million, all due to timing of cash flow. We expect production capacity to be approximately 600 million liters of finished goods by the end of fiscal 2021. That's sufficient amounts of capacity to reach our annual revenue outlook. Long term, we continue to expect to generate gross margin greater than 40%, and and adjusted EBITDA margin approaching 20%, as we benefit from a much larger self-manufacturing footprint globally, greater economies of scale, and continued strong revenue growth. With that review, Tony will now provide a few closing remarks.

Thanks, Christian. I want to reiterate that our long-term outlook and objectives remain unchanged, although from time to time we will experience variability in our top line growth based on our pace of new production coming online. What remains clear is the tremendous opportunity still ahead of us to continue converting dairy users into only consumers. All of the syndicated scanner data continues to highlight our clear velocity out performance on shelves when we have the supply and the distribution. Although we're currently navigating a more turbulent and COVID-driven operating environment, we continue to expect to capture a disproportionate amount of the category growth going forward. I'd like to thank our global employees for the efforts and dedication that continues to advance the reach and impact of OTIS mission on a global scale. With that overview, Peter, Christian, and I are now available for your questions. Operator.

Thank you. We will now be conducting the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Andrew Lazar with Barclays. Please proceed with your questions.

Andrew Lazar Great. Thanks very much, everybody. I guess I'd like to start off. You're still looking for capacity next year of 1.075 billion liters as a run rate for 22. So first off, I'm trying to get a sense of how much leeway you're building into that expectation, just given some of the challenges that you've highlighted in getting capacity up and running on the timeframe that you all would like. And then secondly, if you reach that level, I guess what I'm getting still a little confused by is how much of what you've highlighted in terms of impacting the third quarter and the fourth quarter of this year do you anticipate moving uh, start to flow into next year. Um, you know, some of these shelf resets in EMEA sound like there have been delayed a bit. Um, does that impact, uh, along with some other things, your expectation for revenues in 22 based on, you know, versus let's say your initial expectations a little while back. Thanks so much.

Peter, please, uh, Maybe you can address Andrew's first question. Hi, Andrew, by the way.

Yeah. Hi, Andrew. Yeah. In terms of 2022, I want to reiterate that our long-term outlook and objectives remains unchanged. Although from time to time, we experienced variability in our top line growth based on our pace of new production coming online. What remains constant is the robust industry tailwind we have globally as consumers increasingly using plant-based milk alternatives and oat leaves. Also, bear in mind, we are moving from a transition year with significantly more volume in 2022 compared to 2021. In terms of 2022, coming back to what I said earlier, we expect to strategically prioritize our oat base for the production of oat milk versus other food products to drive growth and conversion. So we believe this further speaks to our growth potential we have and makes the tail for our growth trajectory even longer. But the revenue mix, as I said, from this item could impact the revenue in terms of net sales per liter and gross margin in 2022. if we sell less food products and rely more on co-packers than plants. So, we are still monitoring the situation because there are many supply chain disruptions right now. For example, we are seeing longer lead times for certain equipment and we are closely monitoring the situation and we are working hard to make the impact as little as possible. So, We will have much more volumes in 2022 compared to 2021. We just need to monitor our expansion plan for next year when expanding Ogden, Melville, and the Lanskrona facilities. It's a matter of months, maybe delays, but we are still monitoring it. So not a huge impact. And we also look at possibility to bring co-packers to mitigate the risks.

Great. Okay, so it sounds like the 1,075,000,000 liters is still sort of the target, but you've got to monitor things as you go. That could be somewhat volatile just based on all the issues that many are facing around the supply chain. And then just the second part of my question was just how many of the issues that you highlighted in 4Q – in terms of the revenue shortfall, do you think flow into next year, or will those be behind you by the time you get to next year? Like, how late are the shelf resets in EMEA, and does that give you some, you know, I guess some delay in sort of revenue versus your expectations, you know, aside from the shift to oat milk versus other, you know, oat products, if you get my question?

Absolutely, Andrew, we do. So, uh, we, so looking at the performance, we feel very, very confident with our business fundamentals and that is recognized by all the retail partners. It's a very, very dynamic environment that we're working out of right now. Uh, but based on the discussions we're having with our retailers across Europe, we feel optimistic about resets and expansion in, uh, in, in the first half of 2022. So we do feel that this is a timing shift and that we feel good about entering 2022. But again, it is a dynamic environment. We have to monitor. There's nothing called normal anymore, but we feel confident. We see the performance solid across all our markets, right?

Thank you.

Yeah.

Thank you. Our next question has come from the line of Rupesh Parikh with Oppenheimer. Please proceed with your questions.

Good morning. This is actually Erica Ilan for Rupesh. Thanks for taking our questions. So first I just wanted to touch on pricing. So obviously in light of the inflationary pressures, it sounds like pricing is now a lever, you know, you're putting on the table. So maybe you could just talk a little bit about, you know, how you're thinking about pricing power for your business and what you're seeing from competitors in regards to pricing to date.

Sure. I mean, maybe I'll speak a bit about inflation first, you know, that currently it's hitting all our markets. But to date, we only see moderate impact on our results for 2021. But we do expect stepped up levels of inflationary pressures in 2022. So in terms of outlook for the fourth quarter, we see oats and rapeseed oil to be relatively flat versus Q3, except for the U.S., where we see a 20% increase in rapeseed oil. We also see some increase in packaging material for the fourth quarter in Europe, a 4% to 5% percentage point. Still at moderate and manageable levels in the fourth quarter for us as a company. Now, turning to next year, in total, we do expect inflation to hit our total COGS by an increase in the range of 5 to 6 percentage points in 2022. And so we see that an impact on several of our key ingredients and cost components, driven by a major increase in the cost of oats in the range of 10 to 35 percent, depending on the region and sites. We see a further increase for rapeseed oil of 25%, and also packaging material between 4% to 10%. But in total, for input material inflation, that will impact our COGS of 3% to 4% in total, 2022 versus 2021. And then we also expect to add another percentage point related to freight, and then remaining COGS another 1%. So that adds to the five to six percentage points. So most of the inflation effect we expect to compensate by price increases in EMEA and the U.S. together with optimization of channel and product mix, and also including savings initiatives within the supply chain. It's important to highlight that we do expect growth margin to improve quarter by quarter in 2022 despite the the inflationary headwinds and this is driven by the ramp up of our new facilities the localization or production as we have discussed in the past so that's i don't know if that was the response to your question there but the high level view yeah no i was just yeah i was just curious you know are you what you're seeing from competitors in regards to pricing to date as well and if there's just any thoughts

in terms of how you're thinking about pricing power for your business as you push those price increases through?

Yes. No, we still believe we have a premium brand and that we expect our premium to be a premium brand going forward. And we expect to maintain price precision because I think that's what you're asking for. So that's not going to change.

Okay, great. Thank you guys so much.

Thank you.

Thank you. Our next question has come from the line of Kalmel Gajrawala with Credit Suisse. Please proceed with your questions.

Hi, guys. Good morning, or good afternoon, I guess, depending on where you are. I want to make sure I understood something from the prepared remarks properly. It sounded like there were some shelf space losses, and while I understand that production may not be ramping up at the pace at which you had anticipated, it almost sounded like, unless I heard it wrong, that maybe shelf space went the other way in that Maybe there are some areas, and I think this might be specific to EMEA, where production actually has declined as opposed to not growing at the rate at which you had expected. So can you just clarify that for me a little bit?

Yes. So we did not lose shelf space. We did expect to have the greatest space and more distribution entering Q4s. and that is due to many, many different reasons. Let me just walk you through what's happened here from Q1 to Q4 to give you better colors on what's going on here. So during Q1, Q2, we were under great pressure due to supply constraints leading to lower growth rate, lower fill rates, strained relationship with retailers, lost market shares, consequences of losing 12 markets in 2020. Now, during Q3, The supply output was greater, leading to higher sales and growth, regaining velocities, market shares. And in Q4, there's been very turbulent. The retail environment is really, really turbulent here in Europe. So we've seen pandemic-related events, such as general softer food at home, more consumption out of home, And we had trucker shortage in UK, we had pandemic in the UK. So going to Q4, we're not getting the phasing distribution as expected post-summer. And it's because retailers are navigating these turbulent COVID environment. They're not able to make material changes to the grocery shelves for the remainder of this year, even though our velocity levels clearly significantly are better than competitors. And just as an example, in one of the premium retailers in UK, we drive 27% sales from 7% shelf space. And that was negotiated back in 2020 when we were under really, really heavy constraints in terms of supply. So normally, you do see changes after summer in Europe that we did not see. So it's all pushed. It's a timing thing that is happening here right now.

Got it. Thank you. It's useful. And then if I could ask at least your best guess on what your supply condition in the United States looks like versus the competition. Are some of the domestic folks maybe just in a better position, or are they suffering from similar sort of constraints? Just your best guess on what you're seeing competitively in terms of your ability to supply versus their ability to supply.

Well, as far as we know, we haven't heard about supply issues. We do know that we are balancing our system of demand building across multiple channels, and that's all we know. And we know that we ship every case that we produce in the U.S. We know the demand is stronger than ever, and it's growing, and that we are bringing more capacity on board here in the coming months, and especially entering 2022.

Okay, great. Thank you.

Thanks.

Thank you. Our next question has come from the line of Brian Spillane with Bank of America. Please proceed with your questions.

Hi. Thanks for taking the question and good afternoon, morning to everyone. So my question is just around co-manufacturing capacity and maybe could you talk a little bit about, you know, it sounds like you may be wanting to you know, retain a little bit more co-packing manufacturing capacity than you originally expected. And so I guess my question is twofold. One, is there actually enough, is there actually co-man capacity out there to retain? And then second, is it becoming more competitive to retain co-man capacity? Because, you know, there's certainly competitors come into the market. So just try and understand that. really how viable that pathway is and how much of that capacity has been soaked up by competitors. And maybe if you could add to that, just our commands adding more oat capacity.

Peter, is there anything?

Yeah. Hi, Brian. As said before, OatSafe is our core technology and we will always produce that in-house. So it's about formulation and filling co-packing that we are looking at and we are constantly reviewing our co-packing network and our supply chain operations team constantly evaluate new opportunities in all regions and we will most likely enter new partnership deals linked to mostly linked to we are opening new facilities and then we get oat base in other areas and that open up new co-packing opportunities. So this is something we constantly reviewing. What's most efficient? How do we get the fastest way to market?

Okay. And then just to, is there more available capacity? I guess what's underneath my question is we, we just, you know, hear a lot from investors about the concern about just how many entrants coming into the market and especially in EMEA in the U S and, third-party capacity ramping up. I guess the question is really just, is that actually true? Is there more capacity coming into the market? Does it present a risk?

Yeah, it's more that we now, for example, in the U.S., have oat-based production both on the West Coast and East Coast, and that opened up co-packing opportunities on the West Coast, as we now have Ogden. And in China, now we have oat-based production in in China, and then we can utilize more co-packing if we want to and need to. So it's mainly about that. We have been constrained from an oat-based capacity because of where it's localized. Now we open up new facilities and get into more regions.

Understood, understood. And then just one clarification on the reduction in capex for this year. Did you say that it's down because of cash flow? Or I didn't quite understand or maybe hear completely why the reason for capital spending to come down in 21.

Hey, Brian. Christian here. So just to clarify that point, on a full year basis, we expect the range to be between $280 and $320 million compared to the previously communicated Low end of the range of 350 to 400 million. So that is a cash flow timing effect of the actually cash outflow shifting to 2022. And this is mainly due to timing of payments related to our 2023 capacity expansion projects in the UK, the third plant in the US, and the third plant in Asia. But on an overall level compared to what we communicated to you as part of the roadshow process, that total still remains.

Okay, understood. Thank you.

Brian, can I just clarify also, within our network today that we have in the U.S., for instance, we know that our co-packing network in the ecosystem capacity are built out, and that is something we're going to benefit from going forward.

Understood. Thanks, Tony. Thanks, guys.

Thanks.

Thank you. Our next question has come from the line of Ken Goldman with JP Morgan. Please proceed with your questions.

Hi, thank you. I wanted to build a little bit on one of the first questions from Andrew. I appreciate that, you know, visibility is limited. I think you used the word, you know, dynamic, which is, of course, totally understandable given the situation right now. But, you know, the street is currently looking for one huge sales of next year you know, of over $250 million. I think it's safe to say that'll come down, but I'm trying to get a sense for how far down that needs to go. And again, I realize your visibility is limited, but you are almost at 2022 already. I guess the specific question I would ask is, do you think it's smart, prudent, whatever word we want to use for investors to kind of model below $200 million in that first quarter of next year, just given that a lot of these headwinds are not going to sort of dissipate maybe till, you know, closer to the back half of the year. So just trying to get a sense for where that number needs to go.

So can appreciate your question. So we can't give quarterly guidance. Uh, we, we don't do that. Uh, we, we, we are really, really, uh, we feel positive about 2022. I want to say that. And we're focusing on really, really do what we can control, which is to bring more, more products, uh, on the market, work with velocity, work with distribution. And right now, we feel good where we are. So, I mean, considering the circumstances, right? But we can't give any guidance quarterly.

And I think the one thing that Peter just said, he said that we might have more milk drinks than we originally had communicated. And that might have an impact on the top line for 2022. So I think that is out there.

Okay. You know, some companies are electing, even though it's their policy long term, not to give quarterly guidance to sort of make an exception or at least give some directional activity right now, just given the situation. But I respect that. And then my second question, very quickly, I think you said you expect to increase price in certain products and regions. I assume that means not all products and regions. So which products, which regions are you not taking pricing in and why?

No, man, I think it's something that we have to evaluate strategically across EMEA and the U.S. by the regional finance teams with the purpose of offsetting the inflationary headwinds that we're seeing on a COGS level to neutralize that impact for 2022. Thank you. Thanks again.

Thank you. Our next questions come from the line of Michael Lavery with Piper Sandler. Please proceed with your questions.

Good morning. Thank you. I just want to come back to the shelf resets in EMEA and understand that a little bit better. I know you're clearly saying that you had ones you thought would have happened by now or in the fourth quarter that are getting pushed out, but are those now specifically set? Do you have confirmation and timing, or is it just indefinitely sometime to be determined still?

Hi, Michael. Hope you're doing well. Well, we have ongoing discussions with our retailers across Europe for resets between January and May. But what you can see, I mean, all this performance data is available for everybody to see And we're drawing significant growth from, you know, disproportionate less shelf space in all our key markets in Europe, for instance. And definitely you're going to see some changes there on the shelf in the beginning of next year. So it's an ongoing discussion. It's in nobody's favor that we have less shelf space than what we deserve, given the how much growth we are driving across these regions.

Okay, that's helpful. And then just one on the food service side, you called out the Blue Bottle Partnership as well and highlighted that on the slide. It's on the Americas page, and so I understand that's certainly where it's focused, but Could that expand outside the United States and at least also work in Hong Kong or potentially springboard, give an entry for you into Korea or Japan?

Do you mean Blue Bottle specifically?

Yeah, because that's obviously a partner that you have in one geography at least. Yeah.

Yeah. We're working regionally with the bigger accounts. They normally do have different organizations across the regions here. Blue Bottle is a premium chain. We have a very good collaboration with them. We don't have anything that is planned for in 2022 with Blue Bottle specifically, but of course we do have ongoing discussions as we do with all the different partners that we have. Of course, you know, also given that, you know, coming from a supply chain situation for, you know, a long period of time, we are now bringing more capacity on board, which will allow us to open up all these discussions across all the different regions, right? So if you look at Europe, for instance, we don't have, we haven't been able to approach the QSARs properly, the bigger change in food service due to the supply constraints, right? Now we're going to be in different situations. pursuing and opening up those discussions. And that goes for Asia as well, right? Two factories in Asia, giving us more volumes to be more broad and be more on the offense going forward.

Okay, great. That's helpful. Thanks. Thank you.

Our next questions come from the line of Lorenz Grande with Guggenheim. Please proceed with your question.

Hey, good morning, afternoon, everyone. I hope you're doing well. So I'd like to come back to Amy, actually, two questions. So the first one is despite entering new countries, as you mentioned last quarter, you lower by about $31 million, if I'm correct, I mean, our revenue in the fourth quarter. That's about, I mean, 30% lower than that significant. So if you were to bucket the gap, what would be coming from the shelf set reset, packaging supply, and potentially the quality issue you mentioned? So if you were to bucket that and then in the shelf space reset, I mean, what are you losing? Is it you are not getting as many SKUs expansion as you expected? or do you get more out of stock as your velocity you mentioned is growing? So I'd like to understand what's the consequence of not having as much shelf space as you expected.

Yeah, I mean the shelf space is a significant thing. Again, we do have disproportionate shelf space across all our key regions and again the The example that I mentioned is quite extreme, driving 27%, and that is one of the biggest retailers in UK, and UK being our second biggest market, right? So it's substantial. So we were driving, again, 27% of the sales from 7% shelf space. You see the same disproportionate numbers in Germany and other countries. That has a significant impact. nothing happened during, we know that nothing will happen during Q4, right? And which will eventually will happen during the first half of 2022. And yes, we do have supply, so we can build, we can build more, put more offense behind ourselves in terms of building more velocity, continue, you know, extremely solid velocity performance that we see We increased from the lows in the summer in all our key markets, very positive performance from summer to where we are today in terms of velocity. And we will increase branding as well. We haven't done anything in terms of branding, right? So that is an opportunity that we have going forward as well. And then also there's a timing thing with opening up the new markets, the old markets that we closed back in 2020, which is taking longer due to this environment that the retailers are operating in related to the COVID-19 situation. And that's the reality. So on multiple levels, we can just jump into higher sales. And also, Laurence, I just want to say a distribution, an increased distribution with existing partners as well is also a major point.

Thanks, Tony. And one more thing. You said in your pre-remark, you are investigating a quality issue in one of your production facilities in Europe and you will destroy some inventory. So how big

is and and what it is and it is something that is a usual we should expect them in time to time yeah we're running a food company things like this is you know always present you know frequently not not not not too frequently historically and But these things, it's just part of running a food company, right? And during a planned maintenance stop at our Lungs Krona facility this weekend, we self-identified a potential quality issue. And as you know, we always put safety and product quality first and immediately initiated a quality assessment and activated the relevant procedures. We have full traceability for all our products. and as a precaution are conducting the assessment. There is the potential that this assessment may result in the destruction of inventory and corresponding lost sales in the Maya region. However, we do not expect this will limit our ability to achieve our 2021 outlook. Thank you. And we will provide more information when we have more.

Thank you very much. Thank you very much. I pass it on. Thanks. Thank you.

Thank you. Our next question has come from the line of Dara Mohsenian with Morgan Stanley. Please proceed with your questions.

Hey, guys. So first, just that quality issue in EMEA, is it a significant portion of revenues? Obviously, it's early to sort of specifically quantify it, but just trying to understand, is it a cross-product category? Is it more of an isolated issue? And are you comfortable that it's Related to that one plan and not something that could be an issue elsewhere And then the broader question is more just as we look at the implied q4 guidance It does seem like the Disappointment sort of versus what you originally expected is much larger than what we saw in q3 but conceptually Ogden's in better shape Perhaps there's not as much food service pressure in Asia as there are not as many closures. It seems like some of these issues should be getting better relative to Q3. So just sort of trying to understand why the magnitude of impact seems greater in Q4 relative to Q3 as you run through these various issues where it seems like there might be some progress conceptually.

Yeah. Hi, Dara. So just on the quality thing here, yes, it's the same. It's one facility. So that is clearly identified. And we are still assessing the situation. And we will provide more information as soon as possible, if necessary. So we're still assessing the situation.

But I mean, I think currently we can say that we do not expect that this will limit our ability to achieve our 21 outlooks.

Yes, correct. That is correct. In terms of the... And in terms of the magnitude 424, there are mainly three components here, right? Yes, Europe is definitely bigger because it's the biggest region with 51% of our sales. But if you look at the regions here in the U.S., it's related to the organ production output and that it was slowed down by the COVID-driven delays in delivery of manufacturing equipment. And for Q4, we're being conservative to ensure we deliver on what we've updated you on today. Until we have more consistent output from Ogden over multiple months, we want to see more stability there. And in China, we were aware of the COVID situation during the summer, but we weren't aware of the magnitude and the endurance of the COVID related issues. And it resurfaced again in China. And remember that food service is a major portion of our business there. And we only have one SKU basically in China, business to consumer, with the barista edition because of our supply constraints. And last year, we were able to redirect sales quickly to e-coms during the height of the pandemic, which was less developed for us at that time. And now we're quickly shifting to expand our offering with new SKUs and formats. to further develop the e-commerce business and retail, both with massive potential for growth starting in 2022. And I think we mentioned everything we can about Europe. We saw, we see, and the thing is that the retail is working in a very dynamic and turbulent environment. just trying to navigate what's going on there in terms of out-of-home consumption, in terms of resets, in rebuilding the planograms and all that. We are relying on our performance. We are relying on our velocity, our market share gains, and that we are bringing a massive amount of growth into the categories in each of our key markets. It won't happen until beginning of 2022.

Navigating the pandemic environment, we see shutdowns in Germany, again, the closing down societies, and that's kind of what we're sort of navigating through as well as a company. But fundamentally, you know, we have high beliefs in our business.

You're right, Christian. We believe the majority, maybe all of our EMEA key markets will continue to have certain level lockdown. And Netherlands just recently locked down again. And we know that Germany is heavily impacted by COVID-19. And we see our neighbors in the Nordics. And which makes us, well, it doesn't make us think. We know that the recalibration on the retail shelf won't happen until the first half of 2022.

Okay, thanks.

Thanks, Sarah.

Thank you. Our next questions come from the line of Brian Holland with Cowen. Please proceed with your questions.

Yeah, thanks. Hello. I want to focus on the U.S. A lot of conversation around the distribution dynamics at retail in EMEA. But obviously, the data points that investors are looking at every other week are primarily trained in the U.S. Again, completely appreciate that this is a fairly small part of your business. But as you are navigating channel initiatives, as you referenced earlier, initiatives across multiple channels, are you still in a situation where you're shorting maybe retailers or And I'm curious if you think you're going to get back to a better position in the first half of 2022. What's the timing for maybe improving your in-stock situation in the U.S. such that we might see some share stabilization in the tracked conventional grocery channels, which, mind you, excludes SPINS data?

Yeah, so a couple of things here. Hi, Brian. So on the fill rate, it's improved significantly since the lows we had in, you know, pre-summer here. And we are continuously increasing that volume. And we also see that the velocity is still growing in a very positive direction. So, again, what we said last time, like, how do we get, you know, how do we close that gap, fill rate gap, when demand continues to accelerate? Well, we feel very positive going into 2022 that we can do that. and also serve more broad into other channels. Again, for us, it's about the system of demand that we want to build, and we need to balance strategically between the various channels here. But the fill rate, we're not at full fill rate. We're not at full fill rate anywhere, but we've proved the fill rate considerably since summer.

Okay, appreciate the color. And then last question for me. You know, I think you said last quarter you expected to be back at 100% supply at Starbucks. Their commentary a few weeks back suggested they'll continue to call on secondary sources. So just curious, you know, maybe if anything's changed in that relationship, is there now an expectation on your end that they will call on secondary sources of supply to meet the full demand? And just any update there would be appreciated. Thanks.

Yeah. Again, the relationship with Starbucks is just excellent and we're both excited and thrilled about the success of our opening launch there. We will service 100% of the Starbucks network December and January. And White Label will enter in February and stay through the end of calendar 2022. So during 2022, we will service around approximately 85% to 90% of the total Starbucks network after White Fable returning. And that said, as we increase production, we're constantly thinking about our supply allocation and how we can balance our channel mix to drive our sales growth and profitability, but also to expand our reach and brand awareness. This is a very strategic topic for us internally since we also generate great economics from our retail and coffee channels. But we feel more confident as we bring more capacity in the U.S. for sure.

Thanks, Tony. Best of luck, everyone.

Thank you.

Thank you. Our next questions come from the line of John Anderson with William Blair. Please proceed with your questions.

Oh, hi, everybody. Thanks for the question. I wanted to ask, I know you're limited in what you're able to say about 2022. But there were pretty significant or expectations for pretty significant gross margin improvement in 2022. And just hearing some of the commentary today around focusing the production capacity that you have on milk more so maybe than other food, some manufacturing delays, perhaps the use of co-packers for a longer period of time. How should we think about that in the context of the margin improvement you originally anticipated in 2022? Does that get pushed out? Is the rate of improvement more moderate than the original plan?

Hi, John. It's Christian here. Yes, I think I mean, first of all, fundamentally, we do believe, and this is sort of the case as well, that gross margin is expected to improve quarter by quarter in 2022, despite the inflationary headwinds, despite what we were experiencing in Ogden and the ramp-up complications over there. And that improvement is driven by The new facilities, the localization in each of the region, making them self-sufficient on their own production volumes and sales volumes, increasing the share of self-manufacturing, and a general improvement in freight and distribution costs coming from the localization of our production capacity in each of the region. Now, will the growth margin improvement in terms of what we might have indicated before be slightly less? I would say that's probably a fair assessment, but we will come back to that when we meet during our fourth quarter earnings call.

Okay, thanks. One quick follow-up. This was, I guess, kind of addressed earlier, but in the U.S., your your ACV or distribution at retail is, I guess, half maybe the number one brand at retail by market share. And I'm just wondering if you have kind of a visibility or plan to try and narrow that gap and bring your ACV up from, I think, high 30s now to... you know, a much more broader distribution and what that timeframe might look like. One of the concerns I hear is that, you know, this window of time is giving, um, you know, competitors an opportunity to generate trial and perhaps brand preference, um, you know, while, while you're, you're working to, to kind of scale up. So your thoughts there would be helpful. Thanks.

Absolutely. So you're absolutely right there. Hi. Hi, John. ACV today in the U.S. is 34%. The biggest brand has 89% ACV, right? If you look at total distribution points, it's like 10 times more distribution points. So number one priority for us is to close the fill rate gaps and work with the retailers that we have. That is number one. Because the demand continues to increase, which is very, very positive for us. And in terms of retail, there's always room for the best performing brand. Like our performance data is so over indexing versus competition that I think that we have flexibility in terms of timing or working our distribution and ACV over time as we bring more capacity on board. So it just speaks about the runway we have, John, more than anything, because of the solid performance we have, especially in the U.S.

Thank you.

Thank you.

Thank you. There are no further questions at this time. I'd like to turn the call back over to management for closing remarks.

So thank you for your questions. We really appreciate it and appreciate our discussions with you today and look forward to continuing our dialogue here. So have a great day, everybody.