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.

Thanks, Tony, and good morning, everyone. It's nice to speak with you today. Turning to the financials, revenue for the fourth quarter of 2021 was $185.9 million, an increase of $58.8 million, or 46.3% compared to revenue of $127.1 million in the fourth quarter of 2020. There was a minor foreign exchange headwind to revenue of approximately $0.2 million in the quarter. As Tony mentioned, while foreign currency was a tailwind for the majority of 2021, in late November, currency became a headwind versus our expectation for a low single-digit tailwind. As a result, our revenue would have been an estimated $5 million higher or 648 million if FX had remained constant from the time we provided our guidance on our last earnings call in November. The food service channel in EMEA and the Americas increased in the fourth quarter of 2021 compared to the prior year period with the reopening of on-premise outlets from the relaxation of COVID-19 restrictions in our key markets, partially offset by COVID related food service location closures in Asia. For the fourth quarter of 2021, the food service channel accounted for 38.3% of revenue compared to 30.1% in the same period last year. On a year over year basis, the food service channel was up 85.9% compared to Q4 of last year. The retail channel accounted for 56.2% of fourth quarter 2021 revenue compared to 66.3% in the fourth quarter of 2020. On a year-over-year basis, the retail channel was up 23.9% compared to Q4 of last year. In 2021, We are pleased to have achieved our expected run rate capacity of 600 million liters in the fourth quarter. Consolidated net sales per liter was $1.50 compared to $1.48 in the fourth quarter of 2020, primarily driven by positive customer and channel mix in Asia and positive foreign exchange effects in Asia, offset by customer and channel effects in EMEA, and Americas and a foreign exchange headwind in EMEA. As a reminder, our highest regional net sales per leader is in Asia, followed by the Americas and then EMEA. The net sales per leader 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 fourth quarter was $29.6 million compared to $35.2 million in the prior year period. Growth margin decreased by 1,180 basis points to 15.9% compared to 27.7% in the prior year period. We have a detail on page 17 of our earnings presentation to show our gross margin bridge. And importantly, on page 18, we provide a bridge illustrating key reasons we believe our gross margin will improve as we progress through 2022. The primary reason for the gross profit margin in the fourth quarter of 2021 was due to additional costs as compared to the prior year period related to the startup of our three new facilities, including higher depreciation of 6.4 million, a charge related to startup production and inventory at our new Singapore facility of 2.3 million, and a higher share of co-packing production than planned. We also experienced higher inflationary pressures, including higher logistics expenses in EMEA, higher container rates, for shipments from EMEA to Asia and unusually high energy costs in EMEA due to the disruption of European energy markets during the latter part of the fourth quarter of $2 million. And we recognize costs associated with the previously announced limited EMEA product recall of $1.6 million and an EMEA asset impairment charge of $1.5 million associated with the company's Lundskrona facility in Sweden. The gross margin also reflects a change in channel and customer mix, primarily in the Americas, partially offset by positive channel and cost customer mix in Asia and the minor benefit from foreign exchange. Going forward, We continue to expect that the localization and expansion of our production capacity within the regions should improve our production economics over time. Although we expect inflationary pressures to impact our cost of goods more broadly. We are seeing higher costs for raw materials, logistics and energy globally, as well as labor inflation. We are strategically taking price increases in EMEA and the Americas to help offset a portion of these higher costs. Price increases are already in effect in certain markets in EMEA, and we will begin to see the benefit of price increases in the Americas starting in the second half of 2022. In addition, we are closely monitoring the current situation in Ukraine and any impact it may have on our business. As a reminder, oats account for approximately 10% of our total cost of goods sold. There was a challenging oat crop harvest in 2021 exacerbated by drought conditions in North America that we have been working through. All suppliers are facing similar effects of COVID-19, such as longer lead times for equipment. We have great relationships with our raw material suppliers that puts us in a position to mitigate raw material shortages, particularly in oat, and we are also expanding our sourcing options. However, to start 2022, we have experienced difficult weather conditions in North America that impacted the timing of rail transportation of oat supply from suppliers to our U.S. manufacturing. which is factored into our outlook. We do have oat and other raw material contracts and supply in place to grow revenue at the rate we expect for 2022 and beyond. We continue to expect variability in our gross margin quarter to quarter based primarily on inflation and supply chain challenges, timing of new capacity coming online and mix of the production model and mixed by sales channel and regions. The conflict in Ukraine brings additional uncertainty with energy prices increasing and the broader implications of Ukraine being a large exporter of grains as well as vegetable oils, which could impact global pricing for these items, as well as Russia being a significant exporter of fertilizer. On an annualized basis, we expect to see improvement in our gross margin year over year, starting in the second half of 2022. with a long-term goal of 40%. In Q1 to date, we have experienced similar gross margin headwinds to Q4, from inflation and underutilization of our production facilities, as we bear the full fixed and variable costs without getting the benefit of increased sales volume. Now, focusing on our balance sheet and cash flow, as of December 31, 2021, we had cash and cash equivalents of $295.6 million, $249.9 million in short-term investments, and total outstanding debt to credit institutions of $6 million, as well as a fully unutilized revolving credit facility of approximately $500 million, including an accordion. Net cash used in operating activities was $219. $13.8 million for the year ended December 31, 2021, compared to $44.3 million during the prior year period. Capital expenditures were $273.8 million for the year ended December 31, 2021, compared to $134.3 million in the prior year period. Cash flow from financing activities was $955.8 million, reflecting the proceeds from the IPO, nest of repayments of liabilities 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 guidance, for fiscal year 2022, we expect revenue of $880 million to $920 million, an increase of 37% to 43% compared to fiscal year 2021 with strong growth across regions. Guidance reflects the mid single digit appreciation of the US dollar versus our major European currencies on a percentage basis. We expect revenue to be back half weighted this year as we scale our production given a number of factors primarily related to COVID. Broken down by region. In EMEA, we expect growth to accelerate beginning in the second quarter with the first quarter expected to be relatively flat versus Q4. We have built supply ahead of expansion into the food service channels and new markets later this year. We also see variability in the timing of some retailer resets with some coming as late as the second half of the year. We are very 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 also re-entering markets such as Italy, France, Spain, and Portugal through distribution partners, and we'll expand to select other countries in Europe through 2022. That being said, given the conflict in Ukraine, we are taking a more cautious approach to our guidance and in managing our international expansion plans. In the Americas, we are pleased with the recent production output improvements, particularly in our Ogden, Utah facility. However, given the COVID-related issues in the first quarter, including labor absenteeism due to a local spike in cases, supply chain challenges with raw materials, spare parts and logistics based on the Canada border, including the situation with truckers and bad weather. We expect lower production and sales volume in the first quarter, which will impact our sales by high mid-teens versus Q4 and meaningfully impact our gross margin due to continued ramp up of Ogden and reliance on co-packers. We expect accelerated growth in the back half of the year once Ogden is fully ramped and the Millville oat base expansion is completed. And finally, in Asia, strict public health measures remain in effect due to Omicron. We are closely monitoring the situation and remain focused on the health and safety of our team. However, given the ongoing restrictions particularly in Hong Kong with a zero COVID policy and food service representing over 70% of our sales in Asia, we expect the first quarter to be down low to mid 20s on a percentage basis versus Q4, though still up more than 25 to 30% year over year. We still expect to see strong growth for the full year because as new production comes online, we will be able to broaden our range of products and introduce more formats that are tailored for retail and e-commerce. We expect capital expenditures to be between $400 and $500 million, primarily related to our third-generation plants in each of our regions, Peterborough in the UK, Fort Worth, Texas in the US, and Asia III in China. We expect run rate production capacity to be approximately 900 million litres of finished goods by the end of fiscal 2022. Long term, we continue to expect to generate gross margin approaching greater than 40% and an 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. What remains clear is the tremendous opportunity still ahead of us to continue converting dairy users into oatly consumers. The syndicated scanner data continues to highlight a clear velocity outperformance on shelves when we have the supply and the distribution. We also continue to have strong results from the food service health channel. And we're excited about the future growth trajectory in EMEA now that we have improved supply. We're currently navigating in a difficult operating environment as a result of the ongoing impacts from COVID, and we're monitoring the conflict in Ukraine. However, we continue to expect to capture a disproportionate amount of the category growth going forward. I want to reiterate that our long-term objectives remain unchanged, although from time to time, we will experience short-term variability in our top-line growth and margin profile based on our pace of new production coming online. I'd like to thank our global employees for the efforts and dedication that continues to advance the reach and impact of Oatly's mission on 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 question has come from the line of Ken Goldman with JPMorgan.

Please proceed with your questions.

Hi, thank you. With the understanding you're not providing EBITDA guidance at this time, I'm a little concerned that analysts, including me, right, might overestimate where EBITDA will come in, right? And I'm trying to avoid further disappointments, or I'm hoping to avoid further disappointments on that line. I'm just trying to get a general sense of how you think about EBITDA for the year, EBITDA margins, and any help you can provide there I think would be welcomed by the street. Otherwise, there'll be sort of this vacuum of information. Thank you.

Hi, Ken. It's Christian here. Thanks for the question. Good question. In terms of EBITDA guidance for 2022, we are seeing a lot of uncertainty in the marketplace driven by COVID. We have the inflationary pressures. We have the geopolitical situation in EMEA with Ukraine and what's happening over there. So that puts us in a situation where it's quite difficult to assess where we will be. What we can say is from a gross margin point of view, we see some headwind in the first quarter, which we spoke to in the earnings call release. But that will improve over time throughout the year with the scaling of the organ facility and the facilities that we have in Asia. So we will see an improvement throughout the year from a gross margin point of view. And the long-term outlook, Kenneth, still remains the same. So we are focused on the long-term. And we should see, over time, operating leverage from our top line and how that will improve and see leverage from an operating and EBITDA perspective. So that's sort of at the high level where we are. It's under the current circumstances with everything happening around the world that makes it a bit difficult for us to sort of pin down a number for EBITDA. In terms of SG&A, what we will do, we will continue to invest in our infrastructure and organizational capabilities, which are putting us in a place to support our growth trajectory. We will maintain our investments in branding and marketing activities across all our markets. Growth continues to be our priority, and that's what we're investing behind. But over time, we should expect to see operating leverage from our top-line growth resulting in SDNA reducing as a share of our revenues.

Okay, thank you for that. And then quick follow-up. How locked in are you for the year in terms of oats and edible oils? And what's your best estimate right now for total COGS inflation? Again, with the understanding that the current situation is unpredictable.

So I think in terms of COGS in general and inflation, so we expect that to increase in the range of 8 to 9 percent in 2022 versus 2021 globally, which is a sort of a slight increase from what we communicated in the third quarter. So we expect increase for several of our key ingredients and cost components. And we spoke about O2. in the past, so we see the cost for oats increase in the range of 8 to 50 percent, depending on the region and site. Where America, we see perhaps the increase at the higher end of the range. We also continue to see cost pressure for rapeseed oil that are quite significant. So if you were to split cogs into different pieces, you know, in terms of material cost inflation, we expect that to be in the 5% to 6% range, freight to add another 1%, and then you have the remaining components of cogs, including labor, energy, and co-packing, which will be in the range of 2% to 2.5%. But we have the supply that we need in terms of oats for 2022 in our growth projections. It's tight in America, where we use gluten-free oats. And we talked about the poor harvest, I think, in our last earnings call as well. So we have experienced some lost dates of production in the first quarter, where bad weather and COVID were some factors impacting our miller, who is providing us with the oats. But we have the supply necessary for our top-line growth throughout the year. And in addition, in terms of the price increases or the cost increases that we have experienced, we are planning to offset some of those increases with some strategic price adjustments that we are making in EMEA. Some of those are already being executed now in March and in EMEA that will sort of last through May. And in America, the management team are planning on second half price increases to offset some of the inflationary pressure that we're seeing.

Thanks so much.

Thanks, Ken.

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

Yeah, thanks. Good afternoon where you are. Just kind of following up on Ken's question about the EBITDA, I'm just curious, you know, is there an expectation if we assume that you were kind of at about a 26% gross margin in Q3, Is there an expectation that by the time we get to Q4 of 2022 that we would be back towards those levels or above? And if so, help us understand because, for instance, you mentioned taking price. You know, inflation was a 480 bps headwind on your gross margin this quarter. How much pricing do you expect to or how much of an offset do you think pricing is to inflation as you just laid out?

So, I mean, I think in terms of growth margin, maybe we should give sort of the bigger picture because that might answer many of the questions that you have. And if I didn't answer some of them, we can take it from there. So I actually want to start with the fourth quarter and then we can kind of take it from there. We do that journey. Just to take us back to that, we had a record production output quarter driven by the new production capacity that we added this year, resulting in us achieving the record revenues for the quarter. Now, in terms of margin performance, the key driver for our margin performance is our ability to scale our facilities. This will reduce our reliance on co-packing, specifically in the US. And on top of that, we're also executing price increases I just spoke to that will offset some of the inflationary pressures that we're seeing. As we have indicated in the past, it takes at least three to four quarters And now, in some cases, a bit longer due to COVID-19 impacts before a new facility reaches steady-state utilization of the production lines. And during that ramp-up phase, when it's not at steady-state levels, we carry the fixed and variable cost that we still have to carry while we have not reached that steady-state capacity. So in terms of looking ahead for 2022, We expect that the reported margin for Q1 will continue to be impacted by the underutilization of our new facilities in America and Asia and the higher inflationary pressure that we're seeing. And we can go into the various regions in America and Ogden and the difficulties that we had there. I mean, I think we have laid that out. in the earnings release, but we can go into it. They had a bunch of different challenges with labor, absenteeism, supply chain challenges and the like. So that's sort of the first quarter in America, but also in Asia, we're still dealing with strict public measures remain in effect due to Omicron, and we're closely monitoring the situation there. So that means that we have some headwinds going into the first quarter. So in America, we see an impact of high mid-teens. And so that will meaningfully impact our growth margin in Q1. And the same with Asia, we also expect some sort of a decline. Okay, I appreciate all the... Then the key thing is, as we kind of note on slide 18, that the key driver to margin performance, coming back to that again, will come from the improved utilization of our organization facilities, which will help to improve our production mix, reducing our reliance on co-packing and shifting more production to self-manufacturing. So we will start to see meaningful growth margin improvement in the second quarter, which will continue towards the second half of 2022. And then on top of that, we spoke about the price increases as well. So it's all about coming back again, our ability to scale our new facilities. We see some headwind in the first quarter related to that, but that will start to improve in the second quarter and proceed into the second half of 22.

I appreciate all that color, Christian. And then just to follow on, Maybe the question I get asked most often is about cash burn and capital needs going forward. So I'm wondering if you could just address that as we look at the increase in operating expenses this quarter. And obviously, we have some inflationary pressures that aren't going to moderate in the very near term. Just kind of what your capital needs are going forward and the options you have to that end.

So, I mean, we ended 2021 with 546 million US dollars in cash on hand. And on top of that, we also have the unutilized revolving credit facility of around 500 million US dollars, including the accordion. So we have sufficient liquidity to fund our business for 2022, but we are continuously and opportunistically monitoring capital markets for favorable opportunities.

Appreciate it. Thank you. Thank you. Our next question is coming from the line of Kamil Gajruwala with Credit Suites.

Please proceed with your questions.

Good morning or good afternoon, I suppose. A couple of questions on what happened in or what's happening in 1Q. You mentioned labor and staffing and that March got a bit better, but it doesn't sound like labor or staffing is getting any better. Was this just like a first two weeks of January type of thing, or is this labor issue maybe more persistent?

I mean, if we speak about Ogden specifically, that was more related to COVID-19 and the Omicron impact that we saw at that facility. But that has sort of since improved from a labor absenteeism point of view.

Okay, great. And then just... Just to make sure when we think about where you intend to go with long-range margins and the shift to own production versus, has anything structurally changed that suggests, I know the timing has shifted due to lots of different things, but has anything structurally changed that suggests that maybe you can't get those margins back to, or get the margins to where your goals were last year?

No, we're still executing on the long-term plan. We are just living in unprecedented environment currently with the crisis in Ukraine and COVID and all of that. And that's what we're dealing with in the short term. Longer term, we still are executing on what we set out to do last year. And we will see meaningful improvement to gross margin in EBITDA over time.

Okay, great. Thank you.

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

Good morning. Thanks for taking my question. So first, just given some of the development in Ukraine and Russia, just curious what you guys are seeing right now on the ground in Europe, just given some of the geopolitical currents, like have you started to see any changes in behavior or anything of note on the consumer demand side?

Hi there. This is Tony. That was a good question. And firstly, as Europeans, we're closer to the conflict than our colleagues or people here in the US and our hearts and prayers go to go go to all people impacted by the situation. Just to clarify, from office perspective, we don't do any business in Russia, Ukraine, we are monitoring the situation, I think Christian highlighted some of the impact that we need to look closely at and follow. But the situation definitely creates uncertainty in Europe, like, for instance, energy prices. And, again, we are monitoring it, but we don't read any behavioral changes from a consumer perspective at this very moment.

Okay, great. And then second, I know you guys are in the process of taking pricing. Maybe you have some initial reads. So just curious, just in terms of where you're taking pricing, any reads on elasticities? And I guess as you look at the efforts that you're doing on the pricing front, is the goal to fully offset the cost pressures? And is that something you expect to have pricing in place to be able to do that this year? Or is that something over time that you'll be able to offset all the cost pressures you're seeing?

Yes. So just we see a wide price increase across categories and a majority of the regions. Not all of them, though. And We are taking price increments in Europe and U.S., and as Christian stated, it started already in Europe, and in mid-year, the U.S. team is going to implement that in the U.S. And we are premium price, but the relative price position remains the same. So we won't have a negative price gap. The key reasons for why consumers buy our products is the performance of the product and our brand that we have.

so um yeah that's basically how we look at the pricing okay great thank you thanks thank you our next questions come from the line of laurent grande with guggenheim please proceed with your questions yes good morning and uh good afternoon um thanks for the very detailed review of your of your business so i'd like to um To continue on pricing, actually, first, in retail, I mean, you've been specifically in the U.S. quite late to increase price, especially in comparison to other food and beverage companies who started. I mean, in fiscal year 21 and then the second half. So is there any specific reason for that, especially could I think that with constrained manufacturing, you could have increased price to get that benefit at least? So that's my first question, and we'll come back for the second one on pricing.

Yeah, so just to give you a little bit of an overall picture here, the supply constraints hasn't helped us in pursuing those discussions in the U.S., but now we do feel ready, and we have ongoing discussions in the U.S., and also it's multiple channels that we're addressing with multiple different partners. related to the start of the discussions, it's mainly linked with our supply constraints.

Okay, thanks. And actually, I mean, talking about, you know, segments of the business, how much of your food service business is contracted, i.e., where potentially you've got less opportunity to increase price as those prices may be contracted for a few years? So, specifically, I mean, thinking about Starbucks or those big clients, I appreciate you will not tell me the price of Starbucks, but if I can appreciate the dynamics here and if it's maybe a headwind for you to increase prices as much as you would like.

No, we are going to apply a price increase across all the channels.

Okay, thanks. The last one, then, because you're going to be very short, one of the major kind of growth opportunities is, especially in the U.S., to increase significantly the distribution from mid-30s. So how should we think about the ramp-up in terms of distribution now that you've got more supply? Should we think about this coming more in the second half of this year, or should I be getting higher from the start of this year?

Widely across all channels, you're going to see increments starting late Q2 or beginning of H1 here. And I'm glad you're mentioning the ACV because we're still at 34%, even though we are supplying more volumes into the measured channels. But this is related to the strong velocity performance and increments there. Yes.

Thank you. Thank you.

Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next questions come from the line of Michael Lavery with Piper Sandler. Please proceed with your questions.

Good morning. Thank you. Just want to come back to the shelf resets in the EU. And you've said in the past those typically or at least maybe primarily are January through May. Maybe a couple things. One is just have you seen anything yet to date given we're about halfway through that window? And you touched on some coming later in the year. Maybe just update us on how to think about all those moving parts.

No, that's a good question too. Hi, Michael. So in Europe, where reset is confirmed, we are getting fair shelf space based on volumes. And we have very good dialogues with our key retailers across the region. And as we mentioned, we already received multiple commitments to increase our shelf space. For instance, in UK, one of the largest retailers has confirmed an increase of 10% in distribution as well as increased shelf space. that will get us to fair share. And this includes, for the first time ever, full permanent pallet displays in the top 300 stores. Another retailer in the UK has confirmed reset for April, which sees us increasing stocking points by more than 90%. Now, Germany is a decentralized retail category, so the expansion of shelf space will be more gradual, but we are also winning new distribution there. At the same time, to remind everybody, the retail environment continues to be volatile, which impacts when we are able to follow through on these shelf space expansions. In general, our retailers have extended the timeline over which these shelf spaces resets will take place. For instance, some of our retailers have flagged that they are only able to accommodate a shelf space reset in the second half of 2022, which is very unusual. But where we are getting things confirmed, we are increasing our shelf space, as we said in the earlier earnings calls.

Okay, great. Thank you. And just one more, actually, back on pricing. I know you're trying to take pricing and all the inflation headwinds, of course, make that perfectly logical. But you've also historically had relatively low promotional rates. With the higher pricing and or because of the growing capacity, should we expect increased promotional activity, or do you think that will likely hold more similar to historical levels?

It will hold to historical levels.

Okay, great. Thank you.

Thank you, Michael.

Thank you. Our next question has come from the line of John Baumgartner with Mizuho. Please proceed with your questions.

Good morning. Thanks for the question. I guess first off, I don't think it was disclosed, and forgive me if I missed it, but to what extent are you hedged on energy costs in 2022 in light of the European gas price volatility?

Thanks, John. From a guidance point of view, we have assumed pretty significant gas and energy prices in EMEA. So we expect energy costs to increase in the range of 10% to 30%, and EMEA being at the high end of the range. And that's what we've assumed in our inflation forecast for 2022.

Okay, thanks for that. And just wanted to come back to Ken's earlier question on EBITDA and specifically on the SG&A line. For what you can control in 2022, how do we think about advertising and marketing spend in the context of sales being up, call it 40%, I mean, should we expect a sizable increase there year on year? And then in terms of personnel, you know, obviously a big ramp here the last couple of years. Where do you see personnel and, you know, sort of consulting costs in 2022? Is that a year on your headwind or have you sort of reached kind of the run rate you need? Just trying to get a feel for, you know, in live investment, like where that investment may be concentrated. Thank you.

So, I mean, I think in general, in terms of SG&A, we sort of reach the run rate and the levels that we need to grow the business over time. In terms of marketing and branding expenses, that historically has been in the range of 8%, 9%, 10%, and we expect that to remain in the medium term to support the growth and the business and the opportunities that we see in the business to help to grow. So that will remain.

Okay, thank you. Thanks for your time.

Thank you.

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

Good afternoon, everybody. First question is just on the product mix. How should we think about the focus going forward? You know, given capacity constraints that you've talked about, are you – shifting your focus to core oat milk products and kind of deferring the launch of or expansion of other product types such as oat girt or frozen novelties? Or am I misreading that? Can you kind of tell us how you're thinking about product innovation and product mix in the portfolio over the next 12 to 24 months? Thanks.

Hey, John. Thanks. Good question. So, yes, as we stated earlier, the focus is definitely oat milk and to drive the conversion of the plant-based movement. And I think that's where you find the influx of new consumers, and that's what we see in the consumer behavior. However, I just want to say that innovation remains a very important part of our business. And if you look at the – there are different regions here. And in Asia, you will see a wide range of product innovation coming alive sooner than in U.S. and Europe, for instance. But this is a matter of timing in these regions and also, like you said, linked with the supply ability that we have. So when timing is right, we will be able to expand more. But you're right. The focus is oat milk.

Okay. And then one quick one on capacity. Targeting, you said 900 million liters of run rate capacity exiting 2022. Is that accomplished with the existing six facility footprint? And then as you look to the three additional facilities beyond 2022, I think Petersburg, Fort Worth, and a third location in China, Are you rethinking the timing of those three additional plants given some of the lead time challenges that you talked about? Thank you.

No. Hi, this is Peter. So, no, because as both Christian and Tony said prior, We are still building out our manufacturing capabilities to support the 1.8 billion liters of technical capacity by the end of 2024. However, as we said, the situation is still evolving in terms of potential supply chain disruption. For example, we are seeing longer lead times for certain equipment, which we expect to have sound impact to our production timeline. We are therefore taking a focused approach to execution of our capacity expansion project, and strategically delaying the timing of certain smaller oat-based projects in Ogden and Las Corona. So this will allow us to focus all the resources on the greatest opportunities to add meaningful production capacity, including the upcoming manufacturing facilities in Peterborough, Fort Worth, and Asia Suisse. So we are clearly monitoring and assessing all our projects, and I believe a more conservative, phased approach is prudent, given the dynamic operating and supply chain environment. Therefore, the number has come down from $1.75 billion to $900 billion. Okay, thank you.

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

Thank you, everybody, for listening to Jordan's call, and I will be speaking with many of you shortly.

This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.