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.

Thanks, Tony, and good morning, everyone. It's nice to speak with you today. Turning to the financials on slide 18, Revenue for the third quarter of 2022 was $183 million, an increase of $11.9 million, or 7%, compared to revenue of $171.1 million in the third quarter of 2021. Excluding a significant foreign currency exchange headwind of $16.6 million, revenue for the third quarter would have been $199.7 million or an increase of 16.7% in constant currency compared to the prior year period. As Tony mentioned, third quarter revenue results were below our expectations, primarily due to production challenges in Odin and continued market restrictions in Asia due to COVID-19. However, We experienced growth across retail, food service, and e-commerce channels. Moving to slide 19, sold volume for the third quarter of 2022 amounted to 126 million liters compared to 110 million liters last year, an increase of 14.5%. We experienced broad-based growth with 7% sales volume growth in EMEA, 17% growth in Americas, and 38% volume growth in Asia. Consolidated net sales per liter was $1.45 in the third quarter of 2022, compared to $1.55 in the third quarter of 2021, mainly driven by foreign exchange and promotional activities in Asia, offset by the pricing action in Americas and EMEA. 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 third quarter was $5 million, or 2.7% gross margin, compared to $44.9 million, or 26.2% margin in the prior year period, well below our expectations. Compared to the second quarter of 2022, gross profit margin of 15.8%, we had a 1,310 basis point sequential margin decline as shown on slide 20. We did not achieve sequential improvement as we had anticipated, primarily due to the mentioned production issues in America at our organ facilities and continued COVID-19 restrictions in Asia The decline was mainly driven by continued pricing actions of 390 basis points to offset higher cost inflation of 380 basis points. Continued COVID-19 restrictions in Asia resulted in short-term underutilization of our Asian facilities, higher promotional activities, co-packer and inventory positions of 490 basis points. Unexpected production challenges at our Ogden facility, impacting our margin by 110 basis points. Continued macro headwinds in EMEA slowed our new market and channel expansion, which impacted cost of production and resulted in charges related to higher scrap and co-packer volume adjustments of 630 basis points, most of which are expected to be non-recurring. and other items net of approximately 90 basis points. We have seen improvement in October growth margin already, which is what gives us confidence in our ability to achieve higher growth margin in the fourth quarter. The growth margin improvement in Q4 2022 and into 2023 is expected to be driven by lapping these transitory, largely macro-related challenges, as well as by a select number of key actions that we are executing on. First, continued pricing actions to combat inflation. Second, driving steady production progress at Ogden and our new Millville Oat Baseline. Third, optimizing the utilization of our supply chain network driving cost and production efficiency. Fourth, expanding our channel footprint and product portfolio in Asia to navigate the COVID-19 uncertainty. And lastly, improving our operational execution with a simplified organizational structure. Some improvements in utilization are already taking place. In Asia, Singapore is now at fully ramped capacity, and in America, Millerville's oat baseline expansion has commenced commercial runs in November. We expect that the continued and improved ramp up of our production facilities in the fourth quarter of 2022 should result in improved fixed cost absorption as well as a better sales mix and the implementation of pricing actions will drive gross profit margin expansion. Moving to slide 21. Third quarter of 2022 EBITDA loss was $92.2 million compared to an EBITDA loss of $36.5 million in the third quarter of 2021. Adjusted EBITDA loss for the third quarter of 2022 was $82.7 million The adjusted EBITDA loss was primarily related to the lower gross profit of $39.9 million and to a lesser extent driven by higher employee branding and customer distribution expenses offset by lower consultant dispense and positive impact from foreign exchange rates. In the third quarter, total operating expenses at the percent of revenue increased to 59.7%. compared to 57.6% in the second quarter of 2022 due to the lower than expected revenue. We expect operating expenses as a percent of revenue to improve in the fourth quarter as we closely manage costs with the actions Tony mentioned earlier. However, we will not see the full benefit until 2023. Now, focusing on our balance sheet and cash flow. After September 30, 2022, we had cash and cash equivalents and short-term investments of $120.3 million and total outstanding debt to credit institutions of $4.4 million. We have not drawn any loans under our revolving credit facility of approximately $320 million, excluding the accordion of an additional $76 million. Net cash used in operating activities increased by 66.6 million to $215.2 million for the nine months ended September 30, 2022, compared to 148.6 million during the prior year period, driven by our higher loss from operations. Capital expenditures were 170.5 million for the nine months ended September 30, 2022, compared to 186.7 million in the prior year period. Cap expense was lower than last year due to the phasing of our facility investments. Net cash used in financing activities was $10 million for the nine months ended September 30, 2022, primarily reflecting the repayment of lease liabilities and repayment of liabilities to credit institutions. Turning to the guidance on slide 22 for fiscal year 2022, we are updating our revenue outlook and now expect revenue of $755 to $775 million based on 2021 exchange rates or constant currency. an increase of 17 to 20% compared to fiscal year 2021. At the prevailing ethics rates, this implies a revenue guidance of $700 to $720 million, an increase of 9% to 12% compared to fiscal year 2021. Our previous guidance implied accelerated revenue growth in Q3 and Q4, primarily coming from the Americas and Asia. Given the lower than expected revenue in Q3 and our current outlook for Q4, we have reduced our forecast. $53 to $58 million of the reduction is driven by operational challenges in America, which limits our ability to accelerate sales momentum. And $32 to $37 million is driven by COVID-19 pressures negatively impacting sales in Asia. We believe these challenges are transitory. As COVID-19 restrictions ease in Asia and we have more stable production in America, we have significant opportunities for growth. As you know, currency exchange rates are volatile and difficult to predict. Our updated guidance is now based on spot rates as of September 30, 2022. accounting for approximately $50 million of the change versus the previous revenue guidance. Please refer to the last slide in the appendix of the earnings presentation for details on change rates. As I stated a few moments ago, compared to the third quarter of 2022, we expect gross margin improvement and operating expenses as a share of net revenue to improve sequentially in the fourth quarter. Moving to slide 23, we continue to expect capital expenditures to be in the range of 220 to $240 million for fiscal 2022, given the facing of certain projects. We continue to expect run rate production capacity to be approximately 900 million liters of finished goods by the end of fiscal 2022. With the facing of CapEx projects, we believe that our current sources of liquidity and capital will be sufficient to meet our existing business needs through the end of 2023. In terms of our funding plan, first, we are simplifying our organizational structure, which is expected to result in total annual savings of up to $50 million. Second, we have refaced CapEx projects and are working to adjust our supply chain network to a more asset-light model. These measures support our actions to achieve future growth and profitability and will significantly reduce our capital needs. We have lowered the capital raise requirement $200 million and extended the capital raise period until June 30, 2023 in our RCF amendment to reflect these actions. With this refined clarity on our capital needs, we are actively working on multiple financing tracks. Turning to slide 24, we are not in a position to provide 2023 guidance until our fourth quarter earnings call in March. However, we expect higher revenue growth in 2023 than 2022 and to be adjusted EBITDA positive exiting Q4 2023. In order to get there, we plan to expand our distribution footprint with new geographies and within existing channels, improve gross margin and leverage our improved cost structure with the organizational changes Tony outlined. We see a path to improving gross profit margin with the actions I discussed earlier. In regards to our long-term guidance, we are currently evaluating the impact of the strategic actions we are taking, especially as it relates to a more asset-like, less capital-intensive operating model. Now I'll turn the call back to Tony for closing comments.

In conclusion, We are disappointed in the quarterly results, but remain confident in our strategy and the strength and uniqueness of our brand, which have continued to demonstrate the ability to generate demand and grow revenue. At the same time, we have taken decisive action to address the operational issues to prepare for the next phase of growth. With that review, we are now ready to take your questions. Operator?

Thank you. Ladies and gentlemen, at this time we will be conducting a 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. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from the line of Andrew Lazar from Barclays. Please go ahead.

Great. Thanks very much. Maybe to start off, I think your initial target for self-manufacturing was 50% to 60%. do you have a new longer term target for what self-manufacturing would look like given some of the actions you're taking? And is this move around more of an asset light model targeted to a more specific geographic region? And then as part of that, obviously the shift to self-manufacturing was the key factor I think basically in the longer term margin improvement story. So I guess how does this margin improvement come about now? And aren't some of these sort of self-manufacturing facilities already under various states of construction or completion.

Hi, Andrew. This is Tony here. Thanks for your question. Let me just start off with the gross margin. I will let Christian double-click on the rest of the questions here. Now, in terms of gross margin, transitioning into hybrid will potentially have a small concession on margins, but we are not ready at this time to provide any guidance as we are discussing with various parties. The small concession, though, on margins is outweighed by simplifying supply chain operations and execution. So I can't give you any clear updates on the margin. Let us come back to that once we have finalized all the discussions.

I don't think there's anything else more to add there, Tony.

No.

We'll come back. But in terms of maybe Christian, the settlement factor in teeth will obviously have a slightly different share of our total capacity as compared to before, but we'll have to come back on that point.

Yeah, I just didn't know how significant the magnitude of that change would be. And then any specific geographic region that that's focused on as you make these shifts, or do we not know that yet either?

We're working across all the various regions. I mean, we're specifically looking at one facility in the U.S., Dallas-Fort Worth, and UK.

Got it. And then just a quick clarification. I think you had mentioned 4Q, you expect gross margins to improve sequentially. And then, Christian, earlier in the prepared remarks, you mentioned 4Q, gross margin expansion. So I didn't know if that meant year-over-year expansion or not. I was hoping you could just clarify that. Thank you.

Sequential improvement compared to the third quarter is what we meant by it. Thank you.

Andrew, can I just clarify again? Because you mentioned magnitude, what we see is potentially a small concession of the margins. Got it. Thank you. Thanks.

Thank you. Our next question comes from the line of Ken Goldman from JP Morgan. Please go ahead.

Hi, thank you. I wanted to build on Andrew's line of questioning about the pivot toward a more hybrid strategy. Obviously, to his point and your point, there were better economics that you had laid out for the NTN manufacturing, but you had also talked about some others, some other tailwinds, right, in terms of having more control over the process, I think you had mentioned some flexibility to maybe build some value added processes when you control the entire supply chain. So, you know, I do appreciate the need to conserve cash right now. I do understand that companies can pivot, but I'm just curious how comfortable you are with some of the choices you have to make. I don't want to use the word sacrifices, but choices as you kind of veer away from end to end on a more permanent basis.

No, thanks, Ken. I think that's a great question here. So let me just elaborate a little bit here. So we are continuously adapting to our environment, and this is just one example of that. Fundamentally, we will need more capacity to support growth. This gives us flexibility to add capacity faster. There are a number of reasons why we're taking this course. And if you allow me, just let me bring forward three of them. So first of them is resource allocation decision. Now building, you know, multiple end-to-end factories is just a heavy lift, especially now. Hybrid enabled us to put more focus on our proprietary oat based production and other value driving items such as innovation, branding, sales, etc. So we simplify and remove complexity. Second, the availability of strategic co-packers is easier to find now than before since we have both scale and growth. meaning that we have more qualified partners to work with in terms of food safety, quality, and security of supply. Now, because you are hitting on the finance here, we have the liquidity and are confident in our ability to raise capital going forward. But this does not drive the decision. This is a business strategic decision considering the macro environment. We want to drive innovation and sales aggressively and want to be focused about it. So it was difficult to do everything we did before, and it's even harder now, as you know. So we just want to make things easier on ourselves to simplify execution. So I know it was a long answer, but I just wanted to give the call.

Nope, that's helpful. Thank you. And then I wanted to ask, you know, the departures of the chief supply chain and EMEA heads, can you give us a little more color about the circumstances around that, the choices made by these individuals? Typically, we'll hear a little more color than just they've departed the company.

Well, we are continuously evaluating the skill set. You know, as we grow, we're a high-growth company. The capabilities of both JC, Daniel, and Specially Combined is really, really adding a lot of value to the company. And Jean-Christophe has a very solid background in building other companies rapidly, including the complete supply chain network on a global scale. And that is, of course, something that we want to benefit from. And beside that, John Christoph is also overseeing innovation, food science, supply chain, business sustainability, and people transformation functions. Daniel is focusing on supporting and leading the regional businesses here. But to your point, we are just an organization that is continuously evaluating various skill sets across the organization.

Thank you. Our next question comes from the line of Rupesh Parikh from Oppenheimer. Please go ahead.

Good morning. This is actually Erica Isler on for Rupesh. Thanks for taking our questions. So I guess I just wanted to hit on cost pressures real quickly. Just sort of the latest you're seeing here, you know, curious what remains the biggest pressure point and maybe where you see some things starting to ease. And then, you know, along those lines, you know, some of your CPG peers have given some early reasons in terms of what they're expecting next year. If there's any color you can provide there, that would also be helpful.

Yeah, I mean, in terms of inflationary pressure, what we're expecting in the fourth quarter compared to the third quarter is, in terms of COGS, inflation increase of around 3% to 4%. across direct materials, conversion costs, you know, electricity, labor, so that's what we're seeing. And then going into 2023, it's not at the same levels that we have experienced so far this year, which is in the high double digits. Currently what we're seeing is in the range of 67 percent on a consolidated level in 2023. And I think I also want to add in terms of what we will do is to continuously combat inflation with pricing options.

Okay, great. And then just, you know, given the macro impacts on your business, I mean, you've talked about some of the slow version to plant-based that you've seen in recent quarters. I mean, can you maybe just give us an update on terms of what you're seeing there in terms of consumer behavior and kind of the slower conversion that you've been seeing and kind of how that looks lately?

Thanks, Eric, and this is Tony. So just want to make sure that it's clear that the guiding down has nothing to do with the brand or demand. The underlying demand for our product is still strong. We start to see signs of growth in Europe that Daniel can double-click on. In Asia, we are building our positioning stronger despite COVID-19. in terms of adding doors and partnerships in food service and in retail channels. In the U.S., we still have the highest velocities in the dairy universe. Daniel, maybe you can put some colors to that.

Thank you, Tony, and thank you for the question. Let me acknowledge that this is a pretty extraordinary environment and why we are experiencing it. What we observe is that our velocities remain very strong, and the penetration levels continue to be very stable. So we don't see any, any wavering on that. And we also see specifically related to the last earnings call, that we improved execution in our part. We see that the ability to start changing the dynamics of the category. So we have seen some volume growth restoring in the countries in EMEA, the Netherlands, Germany, where we are growing ahead of private label, and also the U.K. So with improved execution, the path is to converting dairy consumers into plant-based, and we see that intact. As you know very well, better than me, in the U.S., it's all about capacity, supply, meet the service levels, which are improving.

Great. That's very helpful. I'll pass it on.

Thank you. Thank you. Our next question comes from the line of Brian Holland from Coven and Company. Please go ahead.

Yeah, thanks. Good morning. I wanted to follow up on Andrew Lazar's question at the top. I think you mentioned, Tony, during your prepared remarks, you called out Texas in particular when discussing the pivot to a more hybrid production network. I just wanted to try to get a little more color around that. So, you know, is the Texas facility under construction yet? And what could a manufacturing partnership look like? You know, would that be a lease back? I think Andrew was asking about, you know, how this sort of evolves given some of these facilities are under construction. So just trying to get a sense of the capacity situation sort of shifts from Oatley to co-manufacturers. or, in essence, taking capacity out, or if you're still building all these plants and maybe just working with partners from there?

So, hi there. That's a good question. Thank you. First of all, what we do here is to protect growth, and we're balancing and calibrating growth. growth and cost here. And first of all, it will not have an impact on volumes going forward or the growth rate going forward. In terms of taxes, yes, we are building there, but what we are now thinking about is to or very actively pursuing is to turn Fort Worth into a hybrid model, like we have in Lissingham, as we have in Singapore, and that also goes for Peterborough. Now, JC, maybe you want to elaborate a little bit?

Thank you, Tony, and hi, Brian. So scope-wise, of course, Dallas First First in the US and the other one that we are currently building that is also in scope is Peterborough in the UK. In both cases, we are actively working to find the right strategic partners And to answer the second part of your question, Brian, we are looking at what we call our hybrid model, where we really take ownership and full responsibility for proprietary oath-based process. And then we partner with other strategic partners for the filling part. So I think the intent is to follow exactly the same model. It has served us well, and we see that as a great way to nurture future goals.

Great. I appreciate the color there. And then I wanted to talk about the U.S. Total distribution points in the tract channels appear to decelerate meaningfully, commensurate with the recent shelf resets. Several of your oat milk competitors accelerated simultaneously. How much of that dynamic that we're seeing is just your inability to supply at this point versus customers now opting to give space to peers who maybe today are in a better position to fill that shelf space? Maybe said another way, is it fair to say you are getting punished by customers at this point, for lack of a better term?

I take that, Brian, Daniel, here again. Let me add some of the details that you're asking rightfully. Demand and velocities remain very resilient in the U.S., and we don't see any effect, any impact on that. And the best proof of that is the recent market share development, where we see in the last 12 and four weeks, we see we're gaining share despite the service levels issues. So that's exactly, as you said, that's exactly what you're seeing there. the impact on some of the TDPs have to do with the service levels, which we see are improving already. And we look forward to sharing more with you in the next earnings call.

Brian, just to be very, very clear. No, it is related to supply. And also remember that we are still balancing supply between retail and food service channel.

Understood. Appreciate it. I'll leave it there. Thank you. Thank you.

Thank you. Our next question comes from the line of Rob Dickerson from Jefferies. Please go ahead.

Great. Thanks so much. Just a question for you, Christian. I thought I heard you say in the prepared remarks kind of briefly, you know, also kind of looking into other or let's say multiple financing tracks, you know, if needed. over time for incremental capital? Maybe if you could just expound on that, whatever you're willing to actually say would be helpful.

No, I mean, I think we are actively working on multiple financing tracks, and we will provide more clarity when we have more to share. I mean, one example is which I didn't say in our prepared remarks, is that we just recently signed a local credit facility in Asia for $25 million, providing more flexibility there. But we're actively working on it. We're very confident. We also have the support from our shareholders as well.

Okay. Fair enough. And then just in terms of, I mean, it sounds like it's really the two facilities that are shifting more to hybrid versus the end-to-end. When we think about the capital needs kind of previously that sounded required kind of for the full development of the prior plan, I think at some point you had thrown out a number, you know, approximately, let's say, $400 million or so to complete all the projects in CapEx. Now I look at all the facilities, I know the two that would be shifting, and then I hear you talk about, you know, the savings coming kind of more from, you know, the P&L side. In terms of that capital savings piece, is this somewhat of a material savings piece on the CapEx side, or would you argue it's probably a little bit more P&L related with obviously some reduction in longer-term CapEx? And that's it.

Thanks. No, in terms of the lower capital requirement, a big part of that is related to the strategic direction that we laid out in the call in terms of turning into a more asset-light model. We also talked about the CAPEX spacing actually in our previous earnings call when we reduced our annual CAPEX by $200 million in 2022. That combined sort of reduced the capital funding that we have by $200 million.

Right, okay. But, I mean, this next phase that we're discussing today, it doesn't sound like that was the lion's share. The lion's share was kind of what we were talking about on the reduction in the Q2 call. Is that fair?

Yeah, but also looking ahead, if you're looking more moving towards an asset-like model, that will also drive a lower capital need going forward as well. Okay, okay. All right, all right. Thank you so much.

Thank you.

Thank you. Our next question comes from the line of Brian Spillin from Bank of America. Please go ahead.

Thanks, operator. Good morning, everyone. Just two questions on my end. The first one, in Ogden, you described some technical issues. Can you provide more color on what the technical issues are? Is it the equipment doesn't work? Is it a lack of training? trying to understand what actually isn't working.

Thank you, Brian. Jean-Christophe, I will take this one. So, in Ogden, we need to delineate two different things. One is the continued ramp-up of the factory. I think we said last quarter we were in the last mile improvements to ramp-up production, and the reality is that we are still improving and stabilizing production. So Daniel and myself, we've been three times to the site. We have now a very clear root cause analysis of what's driving this long ramp-up, and we have now a clear action plan. I'm happy to report that over the last six to eight weeks now, we have seen stable production there. On the other side, what Tony referred to is we had a one-time incident, technical incident in the line at the end of the third week of August that kept one of our two old baselines still up to mid-September. And because you asked for specificity, what happened is we had an incident with one of our fire suppression systems which is a safety device that is connected in the pipe between the oats, where we receive oats from our oat tank into the process. It's a safety device that didn't work anymore, and it took us a lot of time to get it replaced, simply because it has an anti-explosive device into that, which means we cannot air freight it, and it has to go through the hole. So that's exactly what happened. But the main topic is we continue the ramp up of our production. and we see good stability in the past weeks.

Okay, no, that's very helpful. Thank you for the detail. And then I guess maybe to follow up on the earlier question around multiple financing tracks, Tony, have you thought at all, has Oatly at all explored the potential of just merging with someone who's larger, has more scale? I mean, there's a little bit of like the dog caught the car here, like you've got the growth here, But really, you know, having a difficult time scaling up to sort of service that growth. So, you know, in the range of possibilities, you know, is that something you've considered? And, you know, if not, why?

No, it's a good question. And the answer is no, we're not exploring that path.

And why? Okay.

Well, the why is that we have our runway is absolutely massive. And remember one thing, the hurdles that we have experienced are very much related to the macro combined with supporting the high growth that we have. So there's so much more to do, and we have so much confidence in the very decisive strategic actions that we're taking now to prepare this organization and company for growth. And again, we have this underlying demand, again, no demand issues. We see the opposite. We see velocity strength. We see market share gains. We see us expanding across regions. So the confidence level is high. This has been very much an executional exercise that we need to improve, and we are taking decisive action. So that is the reason.

Okay, great. Thanks, Tony.

Thanks.

Thank you. Thank you. Our next question comes from the line of John Bowgartner from Missoula. Please go ahead.

Good morning. Thanks for the question. I wanted to come back to reorganization and your reductions for operating expenses. Relative to sales, your OpEx is a multiple of your peers with similar levels of revenue. And I guess a big part of that gap can be explained by the infrastructure to support your geographic breadth, and that gets leveraged over time with sales. So as you've given the business a second look here, what costs have become more discretionary in your view relative to what was maybe previously viewed as more structural in nature? And how do we think about the risk that you're reducing costs excessively or at least prematurely? Thank you.

So first of all, John, Jean-Christophe speaking. I think technically within our SG&A costs, you have our customer distribution costs. So I think that's an important factor when you benchmark or compare, which I know is at the heart of your job, rightly so. Then to your next question, which was, As we reset our cost base, are we taking any risk there? I think we have had a very, very bottom-up approach. We have done the entire analysis ourselves, leveraging the guide people that exist in the various teams, and we have really done the exercise in a reset with the three intents that Tony has listed initially. So the question we asked was, what do we need capability-wise in order to propel us into the next chapter of goals? So we were really looking for a scalable model. The second thing that has driven us is simplicity and clarity. As any fast-growing company, we have grown very fast, and so have some parts of our organization, and therefore we really needed to bring simplicity and clarity. And finally, the expected outcome of that is, by diminishing our fixed cost structure, is to accelerate the path to profitability, which both Tony and Christian have referred to. The specific intersection we have looked at first, back to your regional resources, was the intersection of the corporate, i.e. the global layer, with the European layer. And Daniel and I, coming in in June, We had the opportunity to see some opportunities there, and this is what we have done. So I want to leave you with the thing that really the main priority, the main focus for us has been to position ourselves to invest in goals, because that is and will remain our number one priority.

Okay. Thanks for that. And just a follow-up on the European environment. It looks like in the slide deck that velocity – in the UK and Germany was down about high single digits sequentially versus Q2, which was better than the category. I'm just curious, how much of that was due to seasonality relative to just the overall macro environment? And what's your confidence level for seeing velocities and demand sort of bottoming, given the macro uncertainty in Europe? Thank you.

Thanks for the question. Daniel taking it here. And I think you're referring very well to what Tony was mentioning in the previous earnings call. And that means is with the following. We have seen with improved execution, better synchronization and resource allocation on our innovation and distribution points, we see the early signs of restoration of growth. It's early days, but we have seen two, three months of stable volume growth across the markets in Europe. And we have seen now that reflected in market share gains. As I said to one of your colleagues before, we're even growing ahead of private labels in Germany. So we are starting to connect the dots. Thank you.

John, any further questions for the management? No, no, I'm good. Thank you. Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. And now I would like to turn the conference to Tony Peterson, CEO for Closing Comments.

So thanks, everybody, for joining us today. We look forward to speaking with many of you over the coming weeks and on our next earnings call in March. Have a safe and happy holiday season. Thank you, everybody.

Thank you. The conference has now concluded. Thank you for your participation. You may now disconnect your lines.