Oatly Group AB

Greetings and welcome to the Oakley's second quarter 2022 earnings conference 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 then zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rachel Osh, please go ahead.

Good morning, and thank you for joining us on Oatley's second quarter 2022 earnings conference call and webcast. On today's call are Tony Peterson, Chief Executive Officer, and Christian Hanke, Chief Financial Officer. Peter Berg, Chief Strategy 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 events or those described in these forward-looking statements. Please refer to the company's annual report on Form 20-S for the year ended December 31st, 2021, filed with the FTC on April 6th, 2022, 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 statement made today. Please note, in today's call, management will refer to certain non-IFRS financial measures, including EBITDA, adjusted EBITDA, and constant currency revenue. 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 non-IFRS financial measures and the most comparable measures presented in accordance with IFRS. Please also note all retail standard data is based on Nielsen for the 12 weeks ended June 2022. In addition, Oatly has posted supplemental presentation on its website for reference. I'd now like to turn the call over to Tony Peterson.

Thanks, Rachel. Good morning. We appreciate you joining us to discuss the second quarter results. Today, I will provide an update on our strong business performance, and I'm very pleased to share our new space production capacity plans. Christian will review our financial results and update the 2022 outlook. Then Peter, Christian, and I will be available for questions. In the second quarter, We deliver strong revenue growth of 22% year-over-year to $178 million, or approximately 30% growth to $190 million in constant currency. This strong performance reflects our belief that we have significant growth opportunity ahead of us, and we continue to believe Oakley is positioned to become the number one plant-based milk company globally. Scanner data continues to show that the oat category is gaining share and becoming the non-dairy default of other alternatives across our key markets, and it continues to grow the category. We believe that the combination of our Oatly brand, our strategic food-service-led multi-channel approach, and our proprietary oat-based production process differentiates us to consumers. And our mission of converting more dairy uses to Oatly consumers centered around scaling and amplifying each of these three factors in each of our regions. I'm moving to our business performance. The consistency globally is that we continue to see tremendous consumer demand and growth momentum, even though the microdynamics that we face in each region are very different. In EMEA, we are seeing highly uncertain and rapidly changing environment. The current macro context and economic conditions, which includes the rippling effects from the war in Ukraine, global inflation, energy crisis, changing consumer behavior at retail, and the speed at which we can expand our channel distribution. In spite of these challenges and the risk to change in consumer spending, the plant-based dairy category has proven to be resilient and continues to grow, reflecting how consumers have adopted our products into their everyday lives. Oakley specifically continues to be the number one selling brand by retail market share and the number one velocity brand in non-dairy in the UK, Germany, Sweden, Switzerland, Austria, and the Netherlands. Even more importantly, our velocity has remained stable so far, despite the macro dynamics. It continues to be at similar levels as prior quarters. Building on this performance and market leadership, we see significant growth opportunities across our channels with product innovation and in new markets. Within retail, which is 82% of our business in EMEA, we expect to continue expanding and elevating our shelf space with existing partners, are also adapting to the current environment by entering new retail partnerships. For instance, we are seeing that consumers are responding to the new economic environment by changing where they choose to shop for the groceries, which now increasingly includes soft discounters. To better position ourselves for this dynamic, we are growing our presence in soft discounts while maintaining virtually the same price point as in our other retail channels. We recently launched with approximately 900 legal stores in the UK and approximately 770 overseas locations in Germany. Our launch with legal in March has been very successful to date, and we're seeing strong velocity performance. Food service represents approximately 18% of our business in EMEA and Q2, and it's a core focus for expansion going forward, too. Year over year, our food service business in EMEA increased 37%. So far this year, we have partnered with Deutsche Bahn, Chibo, Dunkin, and Aramark. And I'm excited to announce the partnership with Aral, the biggest German petrol station chain in October. Oakley products will be found at the coffee stations in 1,250 stores, as well as on the convenience store retail shelves in 950 locations. Within innovation, there is similar runway for further growth in product development, as most of our markets still only have limited skew range due to our historical production capacity constraints. We're starting to accelerate the expansion of our portfolio and recently introduced new formats of our best-selling barista skew, with the launch of chilled barista in over 3,000 stores in the UK, Germany, and Netherlands, as well as the half-liter mini barista across the same market. These new formats enable us to reach new consumers and invest in different usage occasions. While it is still early, the initial velocity data looks very promising. Beyond our current geographic footprint in Guinea, which is limited to four markets, we have a long runway to expand into neighboring markets that are ripe for disruption. We have proven models to launch in new markets that drive category growth and has led to a leading market position. The most recent case studies of this success are increased into the Netherlands, Switzerland, and Austria. In Italy, we recently launched with Esalunia, Conal, and Despar in June. Overall, we are very excited about this widespread opportunity in driving more conversion globally. Turning into America, demand for oat food products equally remains very strong. We are the number one oat food brand based on missed sales, and according to the Nielsen data, the 12 weeks ended June 18, 2022. We remain the number one fastest-churning brand in total dairy, plant-based dairy, and oat food in America. The opening category has become a non-dairy default and held market share of 22% as of June 2022, while almond and soy milk both declined year-over-year. Starting yesterday, August 1st, double-digit price increases went into effect across our channels, and we'll start to see a positive margin contribution impact in Q3 and expect to realize the full benefit in Q4. From a production standpoint, we achieved record-level production volumes during the second quarter, with a continuing ramp up above them, and our northern old baseline expansion is well underway on track to start initial production runs in the fall. As we increase our production capacity with significant distribution upside in the U.S., where we only have 38% ACV in retail. However, the focus near current is to close existing fill rate gaps with current And finally, in Asia, I'd like to applaud our team for the efforts this quarter in net-based operating environment with COVID-19 lockdown. Despite this adversity and the impact it had on our food service channel, the team managed to achieve record revenue of $44 million in the second quarter, over 70% year-over-year growth in conference currency, and a 52% increase compared to the first quarter. Putting it in perspective, At the height of the lockdown, more than 7,000 coffee shops, 10,000 mid-tea shops, and 1,000 QSRs were closed. However, the team used the lockdown to sharpen our multi-channel growth strategy to better position us both in the near term and longer term. In aggregate, e-commerce community buy-in sales accounted for 30% of total in Q2, up from 14% in Q1 given by the 2019 lockdown. We also successfully launched new products as a client, including a 216-millimeter Prisma, T-Master, and i3 product. This is the original successful product of the market, and now we're going to start to store new channels in the online client. The new channel is estimated to be at least twice the size of the specialty coffee channel, so it's a huge opportunity for growth. We continue to maintain our number one position on Tmall with Oatly at 53% market share in their new plant-based category and 4% share in the total plant-based category. During 6-18 promotion, which is one of the largest shopping festivals in China, Oatly will rank number one in the plant-based category and second in beverage category on Tmall and Tmart. We have also the top seven skew in the beverage category on JD.com. With the capacity from the new production line in Singapore, we have started expanding to new countries such as Malaysia, Indonesia, Vietnam, Cambodia, and Mongolia in the first half of the year, and expect to launch in additional countries in the back half of the year. While COVID-19 has not completely dissipated, and new variants of the virus continue to break out in many cities, we're navigating as best as we can. We plan to further diversify and expand our channel and geographic reach to our route to market strategy and believe we'll remain well positioned in Asia as COVID-19 headwinds subside. Turning to production, in the second quarter, self-manufacturing increased to 34% of our total volume compared to the co-packing of 27% and hybrid at 39%. Total production volume was 124 million liters, up 17% since the first quarter. We are pleased with the recent performance in our Ogden, Utah facility and have successfully increased output in line with our expectations. We are now taking continued steps to further improve output in the back half of this year. In Asia, Singapore is on track to be fully ramped during the second half of the year and Malaysia will continue to ramp throughout the year. We expect to produce between 135 to 145 million liters of finished goods in the third quarter, driven primarily by improved production output in Ogden and our two Asia facilities. As we look towards the future capacity expansion, I'm happy to share we have adjusted our capacity-facing plans that will reduce our 2022 Catholic guidance from the lower end of the $400 to $500 million range to $220 and $240 million without compromising our growth. We believe investing in our growth is critical to establish the infrastructure necessary for a high-growth global company and to drive the conversion of dairy users into plant-based milk consumers. In light of the unprecedented changing world around us, we are adapting like any fast-growing company would and should do. taking into consideration longer supply chain lead times, higher cost of construction, and uncertainty in direct. So, our focus is on investing in our growth. We are being practical with our CapEx project management in order to balance speed to market with supply chain execution and cash flow management. We will continue to prioritize our investment in the regions where our fill rate gaps are the highest and therefore, where the need for additional production volumes is the most pressing in America and Asia. We are prioritizing port work, and it takes three to open first. The expansion in Las Cronas' additional oat baseline is now targeted for 2023, so Peterborough is now planning to open in 2024 to align the timing of production with when we need the volumes. The Millwood expansion project also continues to be a near-term priority that we expect to produce initial rounds in the fall of this year. We continue to expect groundwater capacity of approximately 900 million liters, exiting 2022, and now approximately 1.2 billion liters, exiting 2022, which would support our growth to 2024. So we'd like to make it very clear that although the world has changed, the fundamentals and the strength of our winning model and therefore our ambitions and confidence have not. We expect to have enough liquidity to support the global growth and expansion of our business for at least the next 12 months. We're updating our revenue guidance to $800 million to $830 million for the year, or rather $835 million to $865 million in constant currency. In light of the uncertain operating environment and macro factors, especially in Enea and Asia, that we cannot ignore. Christian will review our annual guidance in more detail momentarily, but we continue to expect accelerated revenue growth in the back half of this year. In closing, I want to reiterate how strong the global demand opportunity is. We are in the early innings of a societal shift. The majority of plant-based meal consumers joined the category in the last two years. We believe that we are driving the plant-based movement in the markets we enter, accept change that is better for people and the planet and will continue to drive this global conversion from dairy to plant-based. That has not changed and is as important today as it ever was. What has changed is the global macro environment and we're adjusting our projections and plans accordingly, but not deviating from our mission to make it easier for people to eat better and live healthier lives without recklessly taxing planet's resources. With that, I would like Now to turn the call over to Christian.