This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: 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.
spk06: 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.
spk07: 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.
spk02: Thanks, Tony, and good morning, everyone. It's nice to speak with you today. Turning to the financials, revenue for the second quarter of 2022 was $178 million, an increase of 31.8 million or 21.8% compared to revenue of $146.2 million in the second quarter of 2021. Excluding a significant foreign currency exchange headwind of $11.7 million, revenue for the second quarter would have been $189.6 million, or an increase of 29.7% in current currency compared to the prior year period. In the second quarter of 2022, we experienced growth-based growth across retail and food service channels. as well as strong growth in e-commerce sales in China despite COVID-19 restrictions. The food service channel accounted for 35% of revenue for the second quarter of 2022 compared to 33.2% in the same period last year. As reported on a year-over-year basis, the food service channel was up 28.3% compared to Q2 of last year, which reflects the significant focus that we are placing on expanding this channel. The retail channel accounted for 56.8% of the second quarter of 2022 revenue compared to 61.5% in the prior year period. As reported on a year-over-year basis, the retail channel was up 12.5% compared to Q2 of last year. Consolidated net sales per leader was $1.47 in the second quarter of 2022 compared to $1.54 in the second quarter of 2021, mainly driven by a foreign exchange headwind in EMEA and customer and channel mix effects. As a reminder, our highest regional net sales per leader is typically in Asia, followed by the Americas and then EMEA. Gross profit in the second quarter was $28.1 million or 15.8% gross profit margin compared to $38.6 million or 26.4% in the prior year period. Compared to the first quarter of 2022, gross profit margin of 9.5%, we had a 630 basis points sequential margin improvement as shown on slide 21. This sequential improvement was primarily driven by improving our production model mix as well as increase in house and localized production, reducing reliance on co-packers, the implementation of the EMEA price increase, and lasting the co-packer consolidation charge recorded in Q1 with no such charge in the second quarter. As we have indicated in the past, it usually takes at least three to four quarters and now longer due to COVID-19 impacts before a new facility reaches steady-state utilization of the production lines. During the ramp-up phase, we carry the full fixed and variable cost structure but have not yet reached the steady-state levels of production output that fully utilizes the capacity of the facilities. We continue to expect that the localization and expansion of our production capacity within the regions should improve our production economics over time. With increased production volumes out of Bogdan, Singapore and Manchang, we expect gross profit margins to continue to improve sequentially throughout the remainder of 2022. The positive impact of the higher share of self-manufacturing will unlock multiple margin accreted benefits at the same time. We have executed on broad-based price increases in both EMEA and the U.S. to offset a portion of the inflation we are experiencing for raw materials, logistics, energy, and labor globally. In EMEA, the price increases were completed in May, and in the U.S., double-digit price increases went to effect yesterday, August 1st, across our channels. Based on the impact of supply chain challenges, Inflation, timing of new capacity coming online, mix of the production model, as well as mixed by sales channel and region, we continue to expect variability in our gross profit margin quarter to quarter. Additionally, we continue to monitor the geopolitical impacts of the war in Ukraine, as well as COVID-19 restrictions based on the impact these events have on commercial execution and consumer demand. Second quarter of 2022 EBITDA loss was $62.6 million compared to an EBITDA loss of $43.5 million in the second quarter of 2021. Adjusted EBITDA loss for the second quarter of 2022 was $53.4 million. The adjusted EBITDA loss was primarily related to the lower gross profit, higher branding and customer distribution expenses, public company costs, and other operating expenses as we scale our global operations to support growth across three continents, offset by positive impacts on foreign exchange rates. As we stated on our last earnings call, we expected operating expenses as a share of net revenue to improve. In the second quarter, Total operating expenses as a percent of revenue improved to 57.6% compared to 65% in the first quarter of 2022. We expect this trend to continue in the second half of this year as we closely manage costs given the more uncertain operating environment today and drive to achieve profitable growth. Now focusing on our balance sheet and cash flow. As of June 30, 2022, we had cash and cash equivalents and short-term investments of $275.1 million and total outstanding debt to credit institutions of 4.5 million. We also have a fully unutilized revolving credit facility of approximately $432 million, including an accordion. Net cash in operating activities was $127.3 million for the six months ended June 30th, 2022 compared to $72.5 million during the prior year period. Capital expenditures were $111.3 million for the six months ended June 30th, 2022 compared to $134.4 million in the prior year period. Cap expense was lower than expected in the first half of 2022 due to the facing of our facility investment. Net cash used in financing activities was $6.9 million for the six months ended June 30, 2022, primarily reflecting the repayment of lease liabilities and repayment of liabilities to credit institutions. Turning to guidance, in the third quarter, we expect production volume in the range of 135 to 145 million liters, which is typically a leading indicator of our revenue expectation and reflects that our growth is a function of our production output. As I stated a few moments ago, compared to the second quarter of 2022, we expect growth model improvement and operating expenses as a share of net revenue to improve sequentially in the second half of this year. We are highly focused on achieving profitability. As Tony mentioned, for fiscal year 2022, we are updating our outlook and now expect revenue of $835 to $865 million based on constant currency, an increase of 30% to 34% compared to fiscal year 2021 at the midpoint. expects accelerated revenue growth in Q3 and Q4, primarily coming from the Americas and Asia. At the prevailing ethics rates, this implies a revenue guidance range of $800 to $830 million, an increase of 24% to 29% compared to fiscal year 2021. As you know, Currently, exchange rates are volatile and difficult to predict. Our previous guidance was based off of exchange rates as of March 30, 2022, at the time we originally provided guidance. And our updated guidance is now based on stock rates as of June 30, 2022, accounting for approximately $35 million of the change versus the previous revenue guidance. The update to our guidance range is driven by our assessment of the overall macro environment. Although our second quarter performance was strong on a constant currency basis and in line with the full year guidance we reiterated at our first quarter earnings, our outlook for the second half reflects a range of outcomes where there are several external factors that could impact our business performance. To provide more context, In EMEA, oat milk clearly continues to take market share within the plant-based category and establish itself as the non-dairy default. Household penetration in the category is also proving to remain resilient, which reinforces that consumers have adopted plant-based dairy into their day-to-day routine. Across our key markets, We remain a market leader with clear velocity of performance against our competitors. That being said, given the many uncertainties in the macro environment in EMEA, ranging from the war in Ukraine to rising inflation and interest rates and changing retail dynamics, we are taking a more cautious approach in our outlook for the remainder of the year. More specifically, It is impacting the speed at which we are able to expand our distribution footprint in 2022, particularly in food service and new markets, and also taking longer to recruit new consumers at the pace we hope for. However, we are still highly confident in our ability to accelerate growth in all these areas going forward. In Asia, COVID-19-related restrictions remain in place, and the new COVID sub-variant of the virus continues to break out in many cities. During our Q1 earnings call, we communicated that our guidance assumed lockdowns in China would ease by the beginning of the third quarter. However, the recovery in the food service channel so far has been slower than we expected because of lasting concerns over lockdown. As a result, we feel it's proven to reflect the slower food service recovery into our expectations for the balance of 2022. Turning to CapEx, as Tony stated, we are strategically managing spend in order to balance speed, execution, growth, and cash flow management in this uncertain environment, as well as focus on the geographic regions that need more supply sooner. Given the pacing of certain projects and prioritizing Americas and Asia, we now expect capital expenditures to be in the range of $220 to $240 million for fiscal 2022. With the pacing of the CAPEX project, we believe that our sources of liquidity and capital will be sufficient to meet our existing business needs for at least the next 12 months. We continue to expect run rate production capacity to be approximately 900 million litres of finished goods by the end of fiscal 2022. With that review, we are now ready to take your questions. Operator.
spk04: Thank you.
spk00: At this time, we will be conducting a question and answer session. If you would like to ask a question, please raise a star and then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then two if you would like to remove the 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 questions. Our first question is from Andrew Lazar of Barclays. Please go ahead.
spk09: Great. Thanks very much. First, I wanted to get a little bit of a better handle on the significant CapEx cut for the year. I guess in the release and your remarks, you talked about a reduction in CapEx due to the current operating environment. I guess there are some concerns that this move could be driven by closer and liquidity issues. You also mentioned a more difficult time converting dairy to plant-based users, so I guess there's concern that some of this could be a demand-driven decision as well. In the past, it's always taken much more of a growth at sort of almost any cost mentality. So I was hoping you could just sort of address this a little bit. Which one of those is it, or is it simply, as you mentioned, just sort of a closer-in level of conservatism given the macro environment? That would be the first question.
spk07: Hi, Andrea. This is Tony. Thank you so much for your question. Hope you're doing well. So to your question, this is about discipline and adjusting to unprecedented changes that we see in the world. We are pairing with powerful demand dynamics with the latest focused capacity expansion. Execution. So the expansion execution, optimizing the timing of production capacity additions to when we need the volumes. So we're still investing in all our projects, but we are facing them differently. And I think that's what you would expect from any business leader from a global high-growth company. We just have to be smarter and work harder to optimize our capital use without compromising growth. So this has absolutely nothing to do with the fundraising capital and the timing of that. This is us adapting to unprecedented changes that is happening in the world. I'm not sure if that was...
spk09: Yeah, one quick follow-up to that. I guess you're looking for something pretty similar in 23 in terms of the production volume, 1.2 versus 1.3 previously. I guess I'm curious, would that still suggest it can go to one? I think originally you were looking for 1.8 billion liters in 24. Maybe that's a little too far out now to give perspective on, but I'm trying to get a sense of does CapEx ramp up significantly more in 23 to get to a sort of similar place from a production standpoint in 24? Or is this just suggesting maybe a slower production ramp, you know, even for the next couple of years in terms of how we should think about CapEx?
spk02: So, I mean, I think, like you said, Andrew, we are Christian here, by the way. So we're still exiting this year with 900 million liters, as we've indicated. And like you said, we're close to 1.2. as we exit 2023. So it's all about demand and managing the supply accordingly. So it's not more dramatic than that from our perspective. And we're still investing for future.
spk09: Gotcha. Last thing is just we've not really seen how plant-based products like this you know, would perform in a tougher consumer environment, you know, given somewhat the newness of the category. I guess it doesn't sound like you're suggesting the consumer is yet sort of fading away from plant-based products as the environment weakens, but I wanted to make sure I'm sort of hearing you right. Thank you.
spk07: No, that's absolutely right, Andrew. Plant-based is very sticky. This is not about demand. This is about the pace of growth and the timing of how fast you can recruit new consumers into the space. So pace, not demand.
spk09: Thank you.
spk07: Yes, thanks.
spk00: Our next question is from Ken Goldman of JPMorgan. Please go ahead.
spk10: Hi, thank you. And just to clarify or build on that last point, Tony, you say it's not about demand, but I think there was some implication in your words today that it's a little more difficult to attract newer consumers to the product. You know, just given the challenging environment, maybe the implication is that in EMEA, for example, you know, there'll be some consumers that are, you know, you know, just trying to pay the bills this year. But is there any implication or any read-through we can have about, you know, the pricing or the price level of your product, whether that's a little bit more of a hindrance to some people coming in than what we thought? I'm just trying to, you know, kind of square your comments about, you know, the ability to attract new consumers right now with your comment that it's not really about demand.
spk07: No, you're absolutely right, and that's a really good question. So we don't see increased price elasticity due to price increases. So our velocity performance remains outstanding and strong and stable. We are gaining market shares across Europe. We are winning distribution. With recent launches, we see really good initial performance, and food service is growing by 30%. Yeah? But there's a backdrop here in Europe specifically, and we see tremendous challenges for retailers here to just navigate around this unprecedented change that is happening, and also the consumers who are really monitoring their household budgets So, and that goes for food service as well, you know. So this is, there are basically three different things here that is related to timing and pace. It takes longer to expand into new markets. And it takes longer to expand into food service. You know, they're facing exactly the same challenges as retail. And then it seems to take more time to recruit new customers into the category at the pace that we had planned for. And this is an unprecedented set of factors that is impacting in parallel the people and business leaders are navigating through. So this is about pace. Fundamentally, as we can see, not one thing is declining retail. Plant-based milk is growing. That is an important point. And in that, Oatly is extremely strong in our position. So the timing thing is not about demand.
spk10: Okay, thank you for that. And then for my follow-up, you mentioned that there was really not a liquidity issue for the next 12 months, I believe is how it was phrased. Is sort of a messaging there that maybe you won't be doing a cap raise in the near term. I think a lot of observers may have expected that and some may have even hoped for it just to kind of get that overhang behind us. So can you talk a little bit about, you know, how that comment reflects sort of your desire or need to raise capital right now and, you know, how you balance that with sort of what may be, you know, an overriding investor desire to kind of just focus on the fundamentals rather than maybe some shorter term balance sheet questions.
spk02: Yeah, hi, Ken. It's Christian here. I mean, as you said, with these adjustments, we have sufficient liquidity to fund the business now for the next 12 months. So what we have done is provide ourselves with more flexibility in terms of timing to fund our growth, and we're still confident that we have multiple options to access capital. So we're still looking to raise capital to fund our growth. And the $400 million amount that we put out there, is a good estimate of how much capital is required to fund all of the CAPEX projects through 2024. And that is also, you know, the number, that's sort of the reason why we said it earlier in this year. So we made some capacity-facing. We no longer need to raise the entire amount in the single transaction this year. and we have the flexibility to match the facing of the capital rate with the Catholic schedule. And we're also approaching this with an objective of minimizing cost of capital as well. Great. Thank you.
spk07: Thank you, Dan.
spk00: Our next question is from Camille Casaravalla of Credit Suisse. Please go ahead.
spk08: Hi. Thank you. When I think about some of your commentary on macro and, you know, your answer to Ken's question on how conversions may be getting a little harder and stuff. Can we just talk about what your expectations are for that going forward and that we might just be at the beginning of these macro issues, particularly as we get into the, the winter in, in Europe. So can you just talk about what you're expecting versus what you're observing? And is this, is the adjustment to top line just more about what you're observing so far, or do you have expectations for, the chance that things might get materially worse in the next six months or so.
spk07: So, yes, the revised guidance reflects what we see the back end of this year, especially in Europe and then Asia, that is not opening up the way we would hope for. The runway is absolutely massive. So, you know, if Anybody here in Europe understand that it is very shaky, right? People are monitoring the household budget and the living cost is definitely increasing. But our only performance in that environment is stable and has proven to be resilient, even with the price increases. We also see that people are moving more into soft discounts. So when we see, when we are launching in The velocity performance is absolutely massive. It's the more sentiment that consumers have. And I want to add the runway that we have in expanding. That hasn't changed. None of the fundamentals of the business have changed. And there's an enormous white space for us to take in expanding into new markets, more food service discounts, what we are saying is that it just takes longer to close those deals. And also, people are distracted with everything else that is happening in the world. So this is about the remainder of 2022 and nothing more than that, according to us. Okay, got it. And then as it relates to the price increases. I'm sorry, go ahead. Can I just ask? That said, we are expecting accelerated growth for the company for the last half of the year.
spk08: Okay, got it. And then on price increases, can you talk maybe a little bit more about your price increases versus the price increases of your competition, you know, maybe by region? And then also just how are you thinking about the price gaps? You're typically the premium offering in the space. As we are going into maybe a bit of a different macro world, how are you thinking about price gaps between yourself and some of the other players in the space?
spk07: Very good question. So first of all, no increased price elasticity due to the price increases that we made in Europe. And also the relative price gap between us and competition is overall the same. So nothing has really changed from that perspective.
spk08: Great.
spk07: Thank you. Thank you. And we are putting the double digit price increase in place in the U.S. starting yesterday.
spk03: Got it. Great. Thank you.
spk00: Our next question is from Nupesh Parikh of Oppenheimer. Please go ahead.
spk01: Good morning. Thanks for taking my question. So on the cost side, I was hoping to get an update in terms of the cost pressures that you're facing. Just curious the level of cost inflation you're seeing right now versus, I think, the 8% to 9% expectations you had last quarter.
spk02: Hi, Rupesh. It's Christian here. Good question. I understand, of course, it's an interesting topic in today's world. Last year, we didn't speak about inflation at all, but, of course, now it's more relevant. So in total, we expect inflation to increase our total costs with another 5% to 6% in the coming quarters compared to where we are today in the second quarter. So we have slightly increased inflation levels or expectations 2022 versus 2021 compared to where we were when we reported in our first earnings call. So now we'll expect On a consolidated level, low double digits globally. And previously we were high single digits. And this is primarily as a consequence of the coming out of the macroeconomic situation with the war in Ukraine. We have elevated energy costs here in Europe, but it's also impacting cost of materials.
spk01: Do your pricing actions contemplate so far incorporate these additional cost pressures, or do you expect to make more adjustments later in the year or next year?
spk02: We are evaluating additional price increases in Europe.
spk01: Okay, great. And then maybe one follow-up question. Just on the gross margin front, so obviously we saw some sequential improvement from Q1, but last year you did have gross margins in the 20% plus range for the full year. I know you guys maybe aren't providing exact guidance, but any way to frame where we could shake out at an exit rate for Q4 on the gross margin line?
spk02: I think compared to what we have communicated in the past, we sort of remain in that range of mid-20s. exiting Q4.
spk01: Okay, great. Thank you.
spk04: Our next question is from Michael Levery of Piper Sandler. Please go ahead.
spk12: Good morning. Thank you. Hi, Michael. I just want to come back to the revenue guidance and understand. So you're calling out a reduction on some of the macro environment and you've given that color, but you're also capacity constrained or have been and you're holding your capacity expectations for the year. So how do we reconcile those? Should we expect 100% customer service levels for the rest of the year and on just a weaker demand profile? How do I tie that all together?
spk02: I mean, Mike, and then I think Tony will definitely jump in. I mean, it's not a demand issue. It's all about us increasing the output from our new facilities in the second half of the year. and that would be converted into revenue. I think what we have talked about is the pace of growth in Europe driven by the macro environment. It's a bit different. But we still expect very solid and strong growth on a consolidated level, but more specifically in America and Asia. And we're prioritizing U.S. and Asia from a CapEx-facing point of view, which we also have spoken to during Ernie's call.
spk07: Yeah, so my question is, Michael, just to clarify on the field rate, we're at 96% in Europe. We still have and spread out throughout the whole product range. There is more to do in some specific products there. In the U.S., we increased the field rate gaps or closed the field rate gaps throughout the quarter from 60% up to plus 70%, and that's going to continue to increase over time here. But again, it's going... You know, since it's not a demand thing, it's going to be a catch-up game for us, as we always mention. You know, if demand continues to increase for our products, you know, it's going to be more difficult for us to close the gap. But, you know, production is definitely coming on board. So, yeah, we hope there's going to be great progress here for the next part, for the last part of the year.
spk12: If Yulin tells me maybe one more try, I don't mean to be dense, but if there's no supply issue in terms of change, and if you're saying there's no demand issue, is it just a conservatism update then to lower the guidance?
spk07: Well, there are different natures, right? I mean, in the U.S., we are completely reliant on getting the output from all this at full speed. And also we had Millville coming on board, not to forget, right, at the end of this year. So they're completely driven by our ability to supply there.
spk12: Yeah. Okay. And then just if I could do one more with the color on EBITDA, you called out a positive currency contribution, but obviously it's a headwind on the translation on the top line. So presumably there's some transactional impact there. Can you just explain how that works?
spk02: Yeah, so I mean, if you think about FX, which we are calling out from a translation point of view, like you said, we have headwind on revenue, but we do have tailwind both on COGS and OPEX. So it's pretty neutral on gross profit. But net with OPEX, yeah, we saw a tailwind of 7.8 million or something like that for Q2O. Because we have, you know, we have in European currencies, which have depreciated quite significantly versus US dollars as compared to last year. And that is the impact that you see. Translation. Okay. Yeah.
spk12: So it's SG&A driven.
spk02: Yeah. Yeah.
spk12: Yeah. SG&A driven. Correct. Okay. Thanks so much. Yeah.
spk00: The next question is from John Anderson of William Lee. Please go ahead.
spk11: Yeah, hi, thanks. For my first question, I wanted to focus on the Americas. It looks like your shipment growth in the Americas in the quarter was quite a bit below the retail takeaway, you know, in the IRI Nielsen data. Also, the America sales dollars that you've reported on an absolute basis been relatively flattish around 50 million dollars over the past four quarters or so so just could you give us a bit of an update on what's happening from a capacity standpoint and what's you know when you expect I guess to more fully be able to meet meet demand and and again ship to kind of consumption levels
spk02: So maybe I'll start, and then I'm sure Tony will chime in as well. It's all related to our ability to scale our facility in Odense, having more supply, and that will help us from a channel and customer mix allocation. That's sort of what you're seeing in terms of retail performance compared to your expectations. It's a strategic allocation that we're doing. And when it comes to production in the U.S., we saw great progress in auditing, and we hit around 10 million liters per month by the end of the second quarter, in line with our expectation. So a big uplift from quarter one. And then, of course, it takes some time to get that out to customers, and that's what we expect for quarter three and quarter four. So great improvement in production outputs, both in America and Asia.
spk07: And also want to add, you know, this is the channel mix that we have to balance. And that is the ongoing process.
spk11: So just a quick follow-up on that. So is there a time frame at this point where you would be comfortable or semi-comfortable saying, you know, we expect to be able to ship that 90% 95% kind of fill rates across channels, you know, based on continued ramp at Ogden and the upgrade at Millville? Or is that just too uncertain at this point?
spk07: Yeah, it is uncertain, but we do expect definitely improvement in Q4. Demand continues to increase that we see we have very strong, you know, we went from ACV from 34% to 38% this year, but still with very strong velocity numbers, but we do hope and we really do expect that to improve in Q4.
spk11: Okay. Just one quick follow-up. So you talked about, you know, it's a more challenging time to recruit new consumers into plant-based. And so I'm wondering if, you know, you might focus on leveraging existing plant-based consumers across a broader range of plant-based products, oatly products, so things outside of milk. Is that something that makes sense or you're focusing on, or is the effort, again, with milk in the near term and converting customers, even though it's a bit more challenging at the moment? Thanks.
spk07: Well, I think that's a relevant question. Are focuses definitely at the set previously? No, and that's going to be the biggest contributor of growth throughout the company. We absolutely see a big opportunity in the subcategories here, and we just need to have the production set up to produce those type of products for us.
spk03: Thank you. Thank you.
spk04: Our next question is from Bill Chappelle of Truist.
spk00: Please go ahead.
spk13: Thanks. Good morning or good afternoon to you. A couple kind of follow-ups. Looking again to the U.S. or to North America and kind of the acceleration in the back half, is that the thought that it's going to be largely food service driven as you meet capacity or meet fill rates? Or do you, you know, I guess the question has been for the past year of as you We're not shipping the full fill rates. You lost a lot of shelf space at retail. Do you still think you can get some of that shelf space back at retail, or is most of the growth going to come kind of, as I said, through food service?
spk07: So first of all, we didn't lose any shelf space in the U.S., and then it's going to be a balanced growth between all these channels. So all the channels are going to grow.
spk13: Okay, I guess not lose, but it seems like a lot of competitors have filled tangential shelf space, so it doesn't sound like you will be adding shelf space from here. It's more sell-through at retail.
spk07: First of all, it's to close the fill rate gaps that we have with existing customers. And we are still the number one, I'm sorry, the number two in measured channels in the U.S. and the number one overall in the U.S. in terms of net sales. But certainly, the output from all of them and the new bill coming on board is going to help us greatly in expanding or really gaining market share in measured channels, which is going to be visible to you, again, hopefully by the end of this year.
spk13: Okay. And then a follow-up to Camille's question on pricing. Not necessarily your direct oat competitors, but how will the pricing change the gaps between dairy, between almond, between soy? Does it put you at more of a premium or less of a premium versus the others? Even within plant-based, there's more switching or trading up or trading around? No.
spk07: I think our position has remained extremely strong, especially in Europe through this turmoil. We don't see any changes between crops and competition. What we can see in Sweden, which is extreme, dairy prices increased by 20%. So that's like what stands out in what we see on the market. But other than that, the balance is intact.
spk13: Okay, great. Thank you.
spk03: Thank you.
spk00: Our next question is from John Baumgartner of Mizuho. Please go ahead.
spk14: Good morning. Thanks for the question. I wanted to focus on the middle of the P&L on the SG&A line. It's still a pretty big number relative to the size of the business. And I'm wondering how you think about discretionary costs and adjustments within that. I mean, as revenue growth is more moderate, obviously your leverage is more moderate as well. But how do we think about the ability and timing for outright cost reductions in that line, whether it's the external consultants or anything else? When do you think you can really begin to see compression there in those costs?
spk02: Hi, John. It's Christian here. I mean, I think we are already today more disciplined in our spending related to our day-to-day activities and business operations. And we're being also a bit strategic as we're looking for the second half of this year, how to best manage that cost pool. But we believe over time that this is an area that we are looking at. to ensure that we are finding the right level in relation to how we're growing as a company. But then you also have part of our SG&A that is growing as our revenue grows. So if you take customer distribution expenses to keep that in mind, as our top line is growing in the second half of the year, our SG&A will grow as well. And that is sort of a direct link to revenue growth.
spk14: Thanks, Christian. Just a follow-up. When we think about sort of the macro pressures, you know, delaying consumption increases, I'm curious, just given how long the company's been around, you know, look at, you know, per capita consumption in North America. It's higher than a lot of places in Europe. It's lower than places like Spain. Have you ever seen over the years sort of a period where the rate of consumption sort of levels off, even independent of macro environment, you know, in some of your countries in Europe? And what sort of prompted that sort of reinvigorated growth going forward? Because I feel that some of this may just be growing pains for the category, where you get a moderation of new consumers coming in, maybe even independent of the macro backdrop. I'm just curious your thoughts there. Thank you.
spk07: No, we don't see any such things, and we have been driving the category, and we're still in the very early. If you look at the household penetration from a volume perspective, it's very low still. And yet this space, you know, once you try the way to get, once you get into the space, it is very sticky. You don't go back. And that's what we see across all our markets. Now it's about the pace, especially in Europe, in how fast you can drive new consumers into the space, given everything else that is happening in the world, right? So also the fundamentals hasn't changed. You know, What we've said, what we've said all along, it's still very much true. This is like the opportunity is absolutely massive. This is important for, this is equally, will be equally important for people as time flies.
spk03: Okay. Thank you very much. Ladies and gentlemen. Yes.
spk07: Go, go. So for all the questions, right, so I just want to thank everybody for joining us today, and we look forward to speaking with you on our next earnings call in November. And we certainly hope everyone has a great rest of the summer.
spk03: Thank you. This concludes today's conference. Thank you for joining us. You may now disconnect your lines.
Disclaimer