Oatly Group AB

designates Oatly as the official oat milk and non-dairy frozen dessert of all 120 minor league baseball teams spanning Albuquerque, New Mexico, to Portland, Maine. The sponsorship will include on-field branding, stadium confessions, digital media, and hundreds of sampling events that bring the plant-based revolution to fans in cities big and small. And just this week, we called the dairy industry to action. asking it to follow our lead on publishing the climate footprint of its products climate impact, just like we do on our packaging. We are executing this through a high impact billboard and center page spreads in the country's biggest markets. On slide 17, you can see that we are even offering free advertising to any dairy company that dares to share the verified climate footprint of its product and match our standard of climate transparency. This is just another example of us starting to play offense in 2023. Turning to Asia on slide 18. Here we remind you that our priorities for 2023 include expanding distribution, launching new products, and driving efficiency. Asia has continued to see steady gains in food service via the coffee and tea channels, and it has also seen rapid growth in retail. Slide 19 shows how our retail execution is a great example of two of our priorities, expanding distribution and launching new products. You can see on the left-hand side of the page that we are continuing to expand distribution in retail with over 200% year-over-year growth in store count, great progress by the team. You can also see here some recent examples of new product launches in both drinks and ice cream. In Q1, ice cream already reached approximately 7% of segment revenue driven by new SKU launches and strategic partnering with specific customers for its special editions. In drinks, we have several exciting new product launches. In Q1, we launched a camellia-flavored ready-to-drink latte as well as multiple flavors of oat milk in smaller packaging. And we are very excited about the anticipated Q2 launches of our ready-to-drink lattes that are co-branded with Pete's and Tim Hortons. Our team's ability to locally develop, design, and produce these products to cater to the local consumer's preferences is truly differentiated for us. Turning to slide 20, the Asia team is making good progress on the efficiency programs. So far, this progress enabled by the significant year-over-year increase in both volume sold and volume produced locally. Now, almost all of our Asia volumes is produced locally, opposed to a purchase from EMEA. As we mentioned on last quarter's call, the Asia business saw an impact from COVID-19 at the very beginning of the quarter. This temporarily impacted demand, our ability to supply, as well as our supporting functions in the office. The Asia team has recently launched several efficiency programs that we expect to reduce costs. We look forward to updating you on them in the future. So, in summary, we reported a solid first quarter. We're making progress on each of our strategic priorities. We will continue to be disciplined in balancing growth, driving investments and profitability, and we remain on track to deliver on our 2023 guidance. With that, I will turn it over to Christian.

Thank you, Tony. Good morning, everyone. Turning to the financials on slide 23. You can see that we had a solid first quarter with year over year revenue growth of 18%, which was driven by constant currency revenue growth of 24%, which is an acceleration from the fourth quarter. We reported gross margin of 17%, which is an increase of 790 basis points compared to the prior year and an improvement of 150 basis points compared to the fourth quarter. Our adjusted EBITDA in the quarter was a $50 million loss, which was an improvement of $22 million versus the prior year, as well as an improvement of $11 million compared to the fourth quarter of 2022. On page 24, you can see the total company sales bridge for the first quarter. We increased our revenue by 18% to $195.6 million, and the 24% constant currency revenue growth was driven by a 9% increase in volume and a 15% increase in price mix. Slide 25 shows the sales bridge for each one of our segments. I will only call out a few notable items. EMEA showed strong volume growth in the face of the recent price increases as elasticities remained muted. The Americas saw a large price mix benefit reflecting three drivers. The price increase we took in the third quarter of fiscal 2022 across all channels. An additional price increase we took within the food service channel and a positive customer mix benefit as we had strong retail volume growth and a positive customer mix in food service. Asia continued to show strong volume growth and the 1% increase in price mix was an improvement compared to the fourth quarter's 15% decline as promotional intensity moderated. Overall, we are pleased with the sales growth across each segment. Slide 26 shows the sequential quarter of a quarter gross margin bridge for the total company. We have grouped the bridging items to be consistent with the margin bridge that we presented alongside our fiscal 2023 guidance last quarter. and we have provided a year-over-year bridge in the appendix of the presentation. Compared to the fourth quarter, we saw an 80 basis point headwind related to the COVID-19 environment in Asia. As Tony mentioned, there was an increase in cases early in the quarter, which led to lower utilization and absorption. That headwind was partially offset by the lower promotional spend in Asia. EMEA price increases implemented in December of last year and throughout the first quarter contributed a 240 basis point margin improvement. We also saw a 140 basis point benefit primarily related to customer and channel mix in the Americas. Cost of goods per liter saw a sequential headwind of 200 basis points. This is primarily related to the Americas. which saw a negative impact related to costs from the co-packer network consolidation. We also experienced a slight headwind related to inflation, which was partially offset by supply chain improvements in EMEA. Finally, we saw a 40 basis point benefit primarily related to segment mix and FX. We don't expect segment mix or FX to be a meaningful margin driver for the full year. Turning to slide 27. We are pleased to see that our EBITDA continues to improve sequentially in total. EMEA continued to report positive EBITDA, and the Americas made progress absent the noise caused by the co-packer consolidation. Asia continued to make progress as they transitioned to a post-COVID world, and the corporate expense line has settled into what we expect to be a normal quarterly level. We also closed on the previously announced fundraising in mid-April. We raised a total of $430 million, which is $5 million more than what we announced on last quarter's call, with the difference being a slightly larger term loan. We are also excited to share that Hillhouse, a global investment firm, will invest $35 million in Oatly's convertible notes, pending shareholder approval and receipt of certain lender consents. Hill House will receive convertible notes with nearly identical economic terms to the convertible notes that we announced on last quarter's call. Hill House is also buying $50 million of convertible notes from our shareholder, Verlin Best. Hill House has a great track record as a global investor with expertise in Asia and an extensive portfolio of leading consumer and food service brands. They have successfully helped companies accelerate Asian growth and navigate regional complexities through capital investments, customer and partner introductions, and support on strategic decision making. Oatly and Hill House have known each other for years and I can confidently say there is a mutual respect and admiration. We see enormous potential in our relationship with Hill House, not only financially, but also strategically, by leveraging their track record, expertise, and relationships to continue to scale our operations across China. While our business plan was already fully funded with the $430 million, we believe this investment aligns interest while providing us with additional firepower to augment our business plan and achieve our long-term ambitions. Turning to slide 28, as Tony mentioned, we are reiterating our 2023 guidance. We continue to expect constant currency revenue growth in the range of 23% to 28% with the acceleration driven by the initiatives that Tony discussed. We continue to expect sequential quarter over quarter improvement in gross margin, even with the increase in America's promotional support in the second quarter and to reach the high 20s in the fourth quarter. We also expect capital expenditures to be in the range of 180 to 200 million dollars. Finally, we continue to believe that our actions will enable us to improve adjusted EBITDA profitability and reach positive adjusted EBITDA in 2024. As we move through this fiscal year, we expect second quarter adjusted EBITDA to be close to the first quarter's level as the sequential increase in net sales dollars and the sequential expansion of gross margin are offset by the increase in marketing investments in the US as well as in EMEA. And then we expect the second half to see a more material inflection in dollar profitability. This cadence is consistent with our original budget. With that, we are now ready to take your questions. Operator.

Thank you. Now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. This time we'll pause momentarily to assemble the rosters. First question comes from Michael Lavery, Piper Sandler. Please go ahead.