Oatly Group AB

Greetings and welcome to the OTRI's third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Rachel Ulsch, from Investor Relations. Please go ahead.

Good morning, and thank you for joining us on Oatly's third quarter 2022 earnings conference call webcast. On today's call are Tony Peterson, Chief Executive Officer, and Christian Hanke, Chief Financial Officer. John Christoph Blattin, Global President, and Daniel Ordonez, 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 Private Securities Litigation Reform Act of 1995, including statements regarding our future results of operations and financial position, industry and business trends, business strategy, market growth, and anticipated cost savings. 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 20F for the year ended December 31st, 2021, filed with the SEC on April 6th, 2022, our report on Form 6K for the period ended September 30th, 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 applied 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 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 of the non-IFRS financial measures and the most comparable measures prepared in accordance with IFRS. In addition, Oatly has posted a supplemental presentation on its website for reference. And now I'd like to turn the call over to Tony Peterson.

Thanks, Rachel. Good morning. We appreciate you joining us to discuss our third quarter results. Today, I will provide an update on our business performance, address strategic actions we have taken as an organization, and our future growth opportunities. Christian will review our financial results and update a 2022 outlook. Then Jean-Christophe, Daniel, Christian, and I will be available for questions. As a reminder, our new global president, Jean-Christophe Platin, and chief operating officer, Daniel Ordonez, joined Oatly in June. These two accomplished industry leaders have over 60 years of combined experience at global and fast-growing consumer brands. Since joining, they have focused on activating multiple growth initiatives and positioning Oatly for the next phase of growth. Since our last earnings call in early August, we have faced challenges mainly driven by COVID-19 restrictions in China and ramp-up setbacks due to technical issues in our Auburn facility in the US, as well as FX headwinds. And the third quarter results fell short of our expectations. However, we believe these challenges are transitory, and we are encouraged by our current volume growth, underlying consumer demand, and future growth opportunities. In the third quarter, we saw year over year sales volume growth of 15% across all regions and continue to see strong category leading velocities. So global demand remains resilient. Yet, I am disappointed with our ability to translate this third quarter gross profit margin and sequential EBITDA improvement due to our operational execution shortcomings, as well as the worsening macro environment, which I will touch on more shortly. the 2.7% gross margin fell well below our expectations. The past two years have taught us the hard way that being a high growth company in an unprecedented, complex, and volatile environment demands an even sharper allocation of resources and capital. This is why, as shown on slide five, we have made strategic decisions with immediate action items to achieve three goals. First, prepare for the next phase of continued high growth. Second, to increase the simplicity and agility of the organization. And third, to drive profitability with more asset-like strategy. With these goals and increased focus on balancing growth with profitability, we expect to be adjusted EBITDA positive exiting Q4 2023. Christian will walk through the path of profitability shortly. Turning to slide six. This reset plan involves two fundamental streams, adjusting our supply chain network strategy and simplifying the organizational structure. Starting with the supply chain network strategy, one of our company's core strengths is our proprietary expertise in oat-based technology, which forms the foundations of our product portfolio. Going forward, we will simplify our supply chain strategy by focusing our investment in our oat-based technology and capacity. which will also reduce the capital intensity of our future facilities. As such, we are actively pursuing and are in discussions with manufacturing partners to create a more hybrid production network across our geographies. We are specifically looking at transitioning the Fort Worth and Peterborough plants to hybrid facilities versus end-to-end. This move towards a more hybrid network is expected to significantly reduce our future capital expenditures and have a positive effect on our cash flow outlook. It will also enable us to support growth and provide us with more flexibility to expand capacity faster in the future. In addition to the phasing on CapEx project we laid out last quarter, which has already improved our cash flow to the near to medium term. Moving to the organizational structure, we have been reviewing our organizational structure to adjust our fixed cost base globally for a more balanced growth and profitability equation. To start, we are executing an overhead and headcount reduction impacting up to 25% of the costs related to the group corporate functions and regional MEA layers. By doing this, we expect annual savings up to 25 million from the reorganization, which should take effect starting in Q1 2023. We have identified incremental opportunities in the rest of the organization, from which we expect up to 25 million in additional annual savings in the first half of 2023. As part of this review, Jean-Christophe has assumed oversight of the global supply chain network following the departure of our chief supply chain officer, while Daniel has assumed oversight of the EMEA markets following the departure of our EMEA president. We continue to evaluate our global operations and potential opportunities to recalibrate our global organizational structure for the next phase of growth. As shown on slide seven, growth remains a top priority The strategic actions we are taking are expected to strengthen our positioning entering 2023 and beyond. It's important to remember we are operating in a category that is still very strong and this reset is necessary to prepare for the next phase of growth. Plant-based is growing globally and OAT continues to be the growth driver within plant-based beverages. Where our supply is stable, we have strong position, and even where we have not been able to fulfill demand, including in the US, we still have the leading velocities, despite a higher price point and lower promotional spend. Turning to slide eight, we see a significant white space opportunity as we work to convert dairy users to Oatly consumers globally. We expect to drive conversion by increasing our brand reach, pioneering through new product innovation, driving asset-like production capacity expansion to support demand, expanding our presence across channels, and entering new markets. Now moving to our business performance on slide 10. Third quarter revenue was 183 million, a 7% increase compared to 171.1 million in the prior year period. However, FX was a significant headwind The revaluation of the dollar versus all European currencies and the RMB impacted our results by 16.6 million in the third quarter. In constant currency, revenue increased 16.7% year-over-year to 199.7 million. We saw volume growth across regions, and we still have the number one selling oatmeal skew and highest velocities across key markets. We have also successfully rolled out new product launches across geographies and continued channel expansion. Turning to the region, starting with EMEA on slide 11, EMEA third quarter revenue was 82.6 million, with strong FX headwinds impacting revenue by 14.5 million in the third quarter. In constant currency, EMEA revenue increased 11% year-over-year to 97.1 million. Sales volumes increased approximately 7% with steady performance across different markets in Europe. This was in line with our expectations, but also reflects the difficult macro environment. We see our continued ability to drive category growth, proving the resilience of our brand and business model by improving velocities and market shares across the board. Turning to slide 12. This is the result of driving growth in our existing markets through, one, the synchronization of our brand, portfolio, and in-store activations. Two, disruptive brand events with the unique deployment of out-of-home activation. Three, focused distribution and execution of new product development with Chilled and Mini Barista, as well as the ice cream launch in Dach. And four, distribution gains, both retail and food service. Going forward, we still have a significant international expansion opportunity in EMEA, as our current key markets consist only the UK, Dutch, the Nordics, and the Netherlands. This quarter continued macro condition in EMEA slowed our new market and channel expansion, and we incurred one-time charges related to higher scrap and co-packer volume adjustments. Turning to the Americas on slide 13. America's third quarter revenue increased 22.7% year-over-year to $60.7 million, which was below our expectations. Demand for the Oakley brand in the U.S. remained strong, with minimal signs of elasticity to our recent pricing action and number one velocity in the total dairy and plant-based milk categories. Our ACV is still limited by supply in the U.S. at only 36%, with significant upside once we have supply to meet demand. The increase in third quarter sales was driven by the progress we have been making. However, we are still limited by supply. Turning to slide 14, we ran into production challenges in Ogden at the end of August and into September that disrupted this progress. The technical issue led to one of the two Ogden boat baselines being down for approximately three weeks. It has since been resolved. Production is stabilizing so we can start rebuilding inventory, but it did have an impact on Q3 and will also have an impact on the volumes we can sell in the fourth quarter, which is the main driver of a guidance update Christian will touch on shortly. With all the production back on track and mill with second oat baseline expansion ahead of expectations, We expect production volumes to improve in Q4 and into 2023. With more volumes, we expect to close the field rate gap and drive distribution and market share gains with our leading velocities. We also expect accelerated revenue and margin performance in 2023 based on production improvements. Turning to Asia on slide 15, Asia third quarter revenue was 39.8 million. In constant currency, Asia revenue increased 22.5% year over year to 41.9 million, which is below our expectations. We are seeing that zero tolerance COVID policy is having a continued impact in changing consumer behavior. A number of businesses have shortened business hours, consumers are traveling less, and preventive health measures have been tightened with resurgent outbreaks. The restrictions not only had an impact on top-line performance, but also e-profitability, which Christian will expand on later in this presentation. Our Asia team has been resilient and will continue to adapt the best we can in this restricted environment, including accelerating our expansion into retail and e-commerce. Retail and e-commerce sales represented 13 and 24 percent of total Asia sales this quarter, respectively. and continue to be an important growth driver going forward. Turning to slide 16, we continue to see the power of the Oakley brand across Asia. Oakley has been nominated as the star top brand by Yi magazine for being a leader in the food industry and named as a leading brand by several other outlets. We continue to have the number one plant-based brand on T-Mall with 48% market share in the new plant-based category and 24% market share in the overall plant-based category year-to-date through September. Our innovation is performing well with T-Master expected to be in 25,000 stores by the end of Q4. We also recently partnered with Shang Pia Piao Food Company to jointly develop prepackaged plant-based drinks under the Langfeng Yuan and Oatly brand. We have two ready-to-drink co-branded products available today at convenience stores such as Family Mart and e-commerce platforms including Tmall and JD.com. From a production standpoint, in September, our facility in Singapore started producing at fully ramped capacity, and the Ma'anshan facility is continuing to increase production. The localized production will enable us to expand into other international markets across Asia as well. But COVID-19 weighs heavily on our results for the third quarter and our outlook for the remainder of the year. Underlying demand remains strong, and we continue to be excited about the growth opportunities across Asia as these external pressures abate. With that, I would like to turn the call over to Christian to walk through the financials and guidance.