Oatly Group AB

Greetings and welcome to Oatly's fourth quarter and full year 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Katie Turner of Investor Relations. Thank you. You may begin. Thank you.

Good morning, and thank you for joining us on Oatly's fourth quarter and full year 2021 earnings conference call and webcast. On today's call are Tony Peterson, Chief Executive Officer, and Christian Hunke, Chief Financial Officer. Peter Berg, Chief Operating Officer, will also be available for questions. 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, including financial projections for future periods and fiscal year 2022. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could differ materially from actual results or those described in these forward-looking statements. Please refer to the company's final prospectus filed pursuant to Rule 424B3 on May 21, 2021, and other reports filed from time to time with the Securities and Exchange Commission for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note in 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 and the most comparable measures prepared in accordance with IFRS. In addition, Oatly's posted a supplemental presentation on its website for reference. With that, I'd like to turn the call over to Tony Peterson.

Thanks, Katie. Good morning. We appreciate you joining us to discuss our 2021 fourth quarter and full-year financial results. On today's call, I will provide an overview of our business, including the strong consumer demand we continue to experience globally for Oatly and the oat category, and discuss the key reasons we believe Oatly continues to be well positioned for increased revenue growth and profitability. Christian will then review our financial results and 2022 outlook. Finally, Christian, Peter, and I will be available for questions. We are pleased that we achieved record sales volumes and revenue in each quarter of 2021. Our annual revenue increased approximately 53% year over year to 643 million US dollars. If foreign currency remained constant from the time we provided 2021 guidance on our last earnings call in November, our sales would have been approximately 648 million US dollars. Globally, the Oatly team did an exceptional job in a very challenging operating environment to remain focused and agile while executing on our growth strategies across more than 20 countries. Not many companies have ever opened three production facilities in one year during a pandemic, but we did. We added this new production capacity at an extraordinary pace to help us bridge the gap between our supply and the overall consumer demand for our products. We are confident in the size of the category of opportunity and the future long-term trajectory of our business. And I'm excited to share more detail with you today on why we believe this is the case. We're pleased to have ended the year with over 600 million liters of run rate capacity representing an increase of 72% compared to 2020 and in line with the expectations we provided at the time of our IPO. Importantly, We believe our run rate capacity provides us with required volumes to achieve our anticipated revenue growth for 2022. We are continuing to prioritize growth investments over profitability to best position Oakley to serve customers and consumers as we convert dairy users to plant-based milk. We have invested heavily in our business, establishing infrastructure, including IT, personnel, innovation capabilities, and partnerships to grow our category leadership position. We believe these investments are critical for accelerating conversion from the global dairy market, which we estimate to be worth approximately $600 billion in the food retail channel alone, with a large food service footprint and growing e-commerce opportunity as well. Once the dairy consumer is converted to plant-based milk, we see very strong repeat purchase behaviors. According to our Consumer Insights Study, 60 to 70 percent of the consumers use plant-based milk at least once every two to three days and nearly 80% consume it at least once per week. This highlights how quickly consumers switch to incorporating plant-based milk into the daily routine. These figures also demonstrate the transformation that is taking place in the dairy category and the staying power of the plant-based dairy category including oat milk. The syndicated scanner data shows that the oat category continues to gain share of other dairy alternatives across our key markets. And we are an important driver of this growth. Now, before I get into more details on the success we're seeing in our key markets and our 2022 key growth drivers, I'd like to review our production capacity ramp, which is an important component in achieving our growth. As we grow, we believe owning and controlling our global operating footprint is paramount to addressing the significant consumer demand for Oatly's products. In the fourth quarter, we achieved an all-time high for our total global production and have built excess inventory, primarily in EMEA and Asia, that will contribute to sales in the first half of 2022. For perspective, over the last 18 to 24 months, we've had to limit growth in the region and even back out of some markets due to supply constraints. Today, we're in 25 countries in EMEA and we're excited about the runway for future growth in new and existing markets, which I will provide more detail on shortly. Since 2018, we have been shipping our products from Europe to support the growth in Asia. Now, with our two facilities in Singapore and Mahachan, we expect to begin to gain operating and financial efficiencies and sustainability savings from localized production and expect to phase out shipments from EMEA in the first half of this year. We should also have the opportunity to further diversify our sales and distribution in Asia, since the local production should enable us to introduce new formats and SKUs for future growth in retail and e-commerce. We continue to scale up capacity of our existing facilities, and we are in the development stages to open up additional facilities in the US, UK, and Asia over the next few years. However, like many companies, we are experiencing longer lead times for certain required equipment related to our planned capacity investments for 2022 and 2023. We are closely monitoring and assessing all of our projects and believe a more conservative, phased approach is prudent given the dynamic operating and supply chain environment. In the light of the overall macro environment, we're taking a very focused approach to execution of our capacity expansion projects and we are strategically facing the timing of certain smaller oat-based projects to follow after the completion and ramp up of our end-to-end facilities. This will impact the timing of Ogden and Askrona oat-based expansions. This approach should allow our teams to have all resources focused on our greatest opportunities to add meaningful production capacity, including the upcoming manufacturing facilities in Petersburg, UK, Fort Worth, Texas, and Asia. Last week, I had the opportunity to spend time with our Americas team in Ogden, Utah. The facility is impressive. We worked to make continuous improvements over the past year, adding additional experience to the on-site management team and hiring a team of more than 100 high-quality technicians. The factory and team have recently received the highest double A rating in its BRC third-party audit. As we scale production, we're confident that Ogden will prove to be an amazing facility for us. And our Millville, New Jersey, manufacturing opening facility continues to be very high-performing in terms of efficiency, of output quality, and safety. Recently, the Millville facility had an unannounced external plant audit, which resulted in a AA-plus rating, 100% score, with zero no conformances, in a BRC Global Standard Food Safety Audit, the highest score a food production facility can obtain for the second consecutive year. Great job to the team for this accomplishment. Over the next few years, we expect to drive profitable growth through increasing our self and hybrid manufacturing models, as well as localizing our production footprint, which should improve our production and supply chain economics, economies of scale, and our service levels. In 2021, sales manufacturing was 21% of our total volume compared to co-packing at 45% and hybrid at 34%. Our gross margin was impacted in Q4 by the slower ramp-up of our production and shift in mix of revenue by sales channel. This was further exacerbated due to supply chain challenges and inflationary pressures from COVID, which Christian will discuss more in detail. We're taking price to help offset cost inflation in our key markets. Our target over the long term is to have 50 percent to 60 percent of our total volumes come from self-manufacturing, reducing co-packing to 10 to 20 percent and hybrid manufacturing to 30 to 40 percent. We believe that this manufacturing mix should increase gross margins and profitability. Going forward, we intend to continue to invest in our innovation capabilities build our manufacturing footprint and expand our consumer base, all supporting our growth trajectory. I'd like to share a few highlights across key markets to support why we believe Oatly will continue to win significant share of the conversion to dairy alternatives globally and maintain a market-leading position. Our brand has continued to excel on global scale as evidenced by the following market statistics. According to Nielsen data for the 52 weeks ended in December 2021, Oatly is the number one selling oat milk brand by market share in the UK, Germany, Sweden, Switzerland, and the Netherlands. We are gaining market share in the UK and Germany in the total plant-based category, and we continue to see strong velocity performance. Our brand contributed in the highest amount of sales growth to the dairy alternative drinks category in the UK, Austria, Switzerland, and Netherlands. In Sweden, Germany, and UK, Arborista's addition item is the number one selling SKU in plant-based milk and oat milk. Our brand accomplished this with limited SKU range and a fraction of the distribution points. We have significant distribution potential for future growth in these markets, with the competition having more than three times the distribution of Oakley today. To illustrate using the UK, in Q4, Oakley's total doors increased 8% compared to Q3 with 1,000 new stores added. And in 2022, we expect to continue to add more shelf space in the UK and leading retailers within EMEA. For example, in a large grocery chain in the UK, we confirmed a 10% increase in distribution and more space on shelves. In addition, this includes our first ever full permanent pallet displays. And we have more shelf space and secure placement planned through the spring and into the fall for both our oat milk and food products in EMEA. With our improved supply infrastructure in EMEA, we are now able to act more aggressively into deepening our footprint within the retail channel, as well as widening our reach by focusing our organization on unlocking the food service channel, which we were historically not been able to do due to supply constraints. One early proof point of this strategy was the announcement of a major collaboration with Deutsche Bahn in Germany, which began in January. Deutsche Bahn is one of the largest railway companies in Europe. They're now carrying Oatly Barista Edition on board as the first ever plant-based milk alternative offering for consumers. We have a lot more exciting and significant food service partnership expected to be announced in EMEA during 2022. In addition to expanding our distribution coverage in our existing markets, we are also now in position to selectively re-enter, expand into new EMEA markets. A great example of this opportunity is Switzerland. which we entered in the spring of 2021, have already become the number one retail plant-based milk brand. We're also reentering markets such as Italy, France, Spain, and Portugal through distribution partners, and will expand to select other countries in Europe through 2022. In the Americas, demand for Oatly products continues to be strong. According to the Nielsen data for the 52 weeks and the January 8th in 2022, Oatly remains the number one fastest-turning brand in total dairy, plant-based dairy, and oat milk. We've accomplished this with a household penetration of approximately 4%, representing a lot of room for future growth. The oat milk category continues to gain market share in the U.S., growing from 15% in January 2021 to almost 21% in January 2022, while almond and soy milks both declined. Although our market share of the total dairy alternatives category has continued to grow from 4% to 6% since the start of 2021, we believe that this low market share also indicates the significant distribution potential is still in front of us. We're also very excited about the frozen business in America. This is a great example of how we're expanding the conversion universe. Heading into 2021, we already had a strong core offering with ice cream pints In the course of 2021, we further built out our portfolio with a trial-friendly software product and a great new innovation with frozen novelties that started to hit store shelves in Q4 and Q1. Our US team has a robust pipeline for growth in 2022, building on the record results in 2021. We look to expand our oath base of retail distribution with high-quality partners, increase the depth of relationships with existing partners, expand our footprint in food service and specialty coffee, as well as further our acceleration in frozen products with our pint and new novelty business. And finally, in Asia, our team has done very well navigating a very difficult consumer environment based on the zero COVID policy in China. Our food service business represents over 70% of our Asia revenue, which was significantly impacted by the COVID-related closures. The resilience of our team has led to outstanding growth with added distribution in food service, as well as establishing the infrastructure to launch our brand in the retail channel. We also continue to maintain our market leading position on Tmall, which demonstrates Oatly's ability to consistently outperform in a highly competitive marketplace. In double 11 in China, the largest and most popular annual global shopping holiday in the world also ranked number three among all beverage brands on Tmall. This was really exciting for us since Double 11 serves as the window to observe China's latest consumer trends and brands. Now with two new local production facilities in the region that we are ramping up, our Asia team has an aggressive plan for multi-channel growth strategy focused on, one, accelerating our expansion into the retail sales channel in major cities, two, driving growth and maintaining our leading position in the coffee and tea channel through new and existing partnerships. The tea channel in Asia is larger than the coffee channel. And three, diversifying our growth in e-commerce and in new and existing product categories through new SKUs and oat milk food product innovation, including ice cream and oat curds. Our successes in a difficult operating environment across more than 20 different countries with varying levels of COVID-related restrictions, demonstrates the resilience of our global team, the strength of our product portfolio across multiple categories, and the increase in consumer appetite for Oatly across channels. That said, and as we have consistently highlighted since our IPO, we expect that we would experience certain variability in our margins quarter to quarter, as we rapidly scale our global operations. Our performance in 2021 was an example of this, but the variability was further compounded by multiple external factors that also impeded our growth for the year. To start 2022, we experienced the efforts of Omicron, like everyone else, but Christian will review our outlook. It's important to understand that we believe our growth in Q1 will continue to be impacted by heightened restrictions and lockdowns in certain countries with the risk of COVID-related absenteeism in our production facilities, significantly supply chain delays and disruptions, and increased inflationary pressures. As a result of these factors, January and February proved to be difficult from a production ramp-up perspective, And this also further impacted our revenue and gross margin in the first quarter of 2022. Yet we still expect revenue to be up low to mid-teens on a percentage basis year over year. We started to see improvements across many key areas of our business in March, including production in the US and Asia, as well as revenue in EMEA, Americas and Asia. We believe that we have visibility into increased distribution to fuel an improvement in the amount of revenue we expect to generate each quarter of the year. And in total, we expect 2022 to be another record year of revenue for our business. Our global team is focused on the controllable aspects of our business, and we believe that we're taking necessary steps to position ourselves for an improved rate of growth in 2022 as these macro headwinds subside and we experience reasonable containment of any COVID-related infection rates globally, including the easing of COVID restrictions and lockdowns. We're maintaining a responsible and prudent approach to our costs and expenses as we navigate this environment. Across the regions we operate in, we believe that we have further distribution potential, innovation, and new market development. and we plan to capitalize on them in each of our regions as we look to make Oakley a natural part of people's lives. In summary, I'd like to thank our global team for their efforts in achieving our goals. We believe a strong foundation and business fundamentals should help us capture a disproportionate amount of growth in both retail and food service as consumer demand continues to accelerate for plant-based alternatives. I will now turn the call over to Christian.