Oatly Group AB

Good day, and welcome to the Oatley third quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Brian Kearney, Vice President of Investor Relations. Please go ahead.

Good morning, and thanks for joining us today on Oatly's third quarter 2023 earnings conference call. On today's call are our Chief Executive Officer, John Christoph Zlatan, our Chief Operating Officer, Daniel Ordonez, and our new Chief Financial Officer, Marie-José David. Before we begin, please review the disclaimer on slide three. During 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 in 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 documents we have filed with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. please note on today's call, management will refer to certain non-IFRS financial measures, including EBITDA, adjusted EBITDA, constant currency revenue, and free cash flows. While the company believes these non-IFRS financial measures will provide useful information, 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 non-IFRS financial measures to the most comparable measures prepared in accordance with IFRS. In addition, OLE has posted a supplemental presentation on its website for reference. I now look to turn the call over to Jean-Christophe.

Thank you, Brian, and good morning, everyone. Page 5 has the key messages I want you to take away from today's presentation. we had solid third quarter results where adjusted BDA exceeded our expectations and we made solid progress. The results of our bold strategic actions are clearly starting to materialize. Our EMEA segment continued to show its strength and durability. Our America segment gained good momentum in its retail business And the food service business helped improve the bottom line by sacrificing some top line. And the Asia segment is executing its reset plan, which is on track and delivering good results. Today, we are also announcing another bold action where we are doubling down on our asset life production model, which we expect to increase our focus while improving our cash flow outlook and improving our confidence in our longer-term margin targets. Also, we are modifying our 2023 guidance to reflect an acceleration of our strategic actions, in particular, the diversification of our Americas food service business and the strategic reset in Asia. we now expect our constant currency revenue growth to be near the low end of our prior range of 7% to 12%, and our fourth quarter growth margin to be in the mid-20s compared to our higher expectation of high 20s. Finally, we believe we remain on track to achieve profitable growth in 2024. On slide six, you can see that the profitability of the business continued to improve in the third quarter. Our reported gross profit included approximately $6 million of one-off costs related to our Asia strategy reset. This is primarily inventory write-off and co-packer penalties. This created a 320 basis point headwind in the quarter that we believe must the underlying improvement in the business. Our adjusted BDA also improved sequentially in the quarter as each segment showed improvement. The $85 million cost saving program that we announced last quarter is already starting to flow through the PML and we remain on track to achieve our targets. Whilst we still have plenty of work to do, we are clearly making good progress. Slide 7 outlines how we are doubling down on our asset-light production model. As you know, we have been evaluating how to optimize our supply chain. We have been taking a holistic look at the network with the overarching goals of ensuring we have the right amount of capacity when we need it while also being very efficient with our capital. We believe that we have enough capacity available to support our goals over the next few years. We currently have production capacity of approximately 900 million liters compared to approximately 515 million liters sold over the past four quarters. Additionally, for the past 12 months, we have been making material improvements in our manufacturing network utilization, efficiency, and reliability. Both our own out-based processing production and with our strategic co-packers network. This has resulted in significantly higher and more consistent output across our established sites. We have also found new solutions that already enable us to better utilize our existing plants and expand them gradually over time to support the goals in EMEA and the Americas. Therefore, we are discontinuing the construction of new manufacturing plants in EMEA and the Americas. As part of this, we have also started to relocate some equipment that we previously purchased to ensure that we have adequate capacity to service our growing demand. We believe this will help achieve our goals of appropriately timed expansion and capital efficiency. It should also enable us to better focus by simplifying and streamlining the supply chain and reducing the complexity. This increased simplicity and focus also increases our confidence in our longer-term margin targets as we expect to be able to allocate more of our team's time and resources into improving the business. On capital efficiency, we now forecast significantly lower capex than we previously expected. We now expect our 2023 capex to be below $75 million compared to our prior guidance of $110 million to $130 million. We also expect to invest below $75 million in 2024 CapEx. This increased efficiency is a meaningful step on our way forward towards financial self-sufficiency. We are continuing to evaluate our total supply chain. including our assets in Asia, where we currently have two active facilities and a third one that is currently being built. Since we are continuing to evaluate the network in Asia, our updated CAPEX guidance continues to assume that the third facility will be built and be an end-to-end facility. With that, I would now like to turn it over to our Chief Operating Officer, Daniel Ordonez, to give you an update on the segments. Thank you, JC, and good morning, everyone. I begin my discussion on slide nine with EMEA, which is our largest operating segment at 54% of our third quarter revenue. The old drink category in EMEA grew at a very healthy 15% in the quarter, which was more than double the growth of the broader plant-based milk category. I'm pleased to say, though, that our constant currency revenue growth was 16% in the quarter, outspacing the old ring category. Slide 10 shows that the NEA segment has consistently reported volume growth in the mid to high single digits, driven by our established markets growing volume in the mid single digits and the new markets contributing the balance. We believe that this consistency in our established markets is a testament to the strength and durability of our business model in EMEA. And we expect this momentum going forward held by many of our new customer wings, including Coffee Fellows, which we've recently announced. We are pleased with the performance in the established markets, and we're actively working to maintain the momentum. Slide 11 gives an update on our Go Blue strategy, which is our approach to increasing consumer usage by launching margin-accretive innovations that is best used outside of coffee. Recall that our UK business is the furthest along the way with this portfolio expansion. In the UK, our new items are some of the fastest-turning plant-based products. The whole and semi-products are the biggest launches in the category in the last 52 weeks, according to NPD. And we have strong repeat rates with already 50% of whole and semi-shoppers repeating purchase since launch. In Germany, which is our second largest market in EMEA segment, the rollout of GoBlue is progressing well. The GoBlue introduction has driven a 24% in volume net of cannibalization. Overall, we're seeing very good progress here. Now turning to slide 12. We continue to make terrific progress in bringing oat milk to new geographies. Here you can see some of our activity in this market. You can see on this slide that we are making good progress establishing an oat milk culture in these new markets. For example, in Belgium, we already have an established presence in Pays. In France, we are already the highest velocity plant-based milk in supermarkets. and we are continuing to engage with customers and consumers on a personal level in the streets. And in Spain, we already have the leading market share in the barista category, and we're growing rapidly by integrating it into the culinary culture. Light 13 shows some of the highlights of our recent unique experience-based brand activities, where summer coffee and soft-serve tours. We showed up at the most important music festivals with food trucks all over Europe, spreading the old magic with its consumer target audience. In fact, we had to extend the soft serve pop-up shop in Amsterdam way after the summer. I encourage you to go to our YouTube channel to see more on how we engage consumers this summer. I closed the EMEA discussion on slide 14. You see, while engaging the consumers and driving top line is important, EMEA is a solid and profitable business throughout the P&L. As you can see on this slide, our EMEA business is generating margins that are already approaching our total company long-term margin target. We believe that EMEA margins still have room to expand as we execute on our growth plans and increase our capacity utilization from the low 70s. As many of you know, we believe we can replicate our EMEA business model in our other segments. Turning to America's segment on slide 15, I am pleased to report that we are back to gaining retail market share in the Americas. While the category growth rates have not been as strong as we would like, we firmly believe that consumers will continue their shift towards milk over time. So, we are focused on controlling the controllables and ensuring that we are building our business to achieve long-term profitable growth. On slide 16, you can see that we continue to post strong distribution gains. In the last 12 weeks period, we have increased our total distribution points by 18%, and our ACV is now at 39%, which is 250 basis points versus this time last year. While this progress is good, there is plenty more to come during the shelf reset this fall and this winter. You have likely seen our recent press release announcing the new Meijer distribution, and we're also launching new distribution at Costco and expanding our distribution at Walmart. I'm also very pleased to announce that we have regained distribution at Stop & Shop, which is a customer that we lost during our historical supply chain hiccups. Turning to slide 17, as part of this shelf reset, we're also getting good acceptance of our new innovation. Here you can see our new product. Similar to the EMEA Go Blue strategy in the Americas, we are expanding our portfolio to increase consumer choice and usage of our products. We are launching two new oat milks, a super basic version that has just four easy-to-pronounce ingredients, and an unsweetened version that has zero sugar and has a calorie count that will directly compete with almond milk. They're also launching a line of delicious coffee creamers with a variety of popular flavors. Be on the lookout for these terrific new products. Turning to food service side of the business on slide 18, 45% of the American settlement's first quarter revenue was in food service, This part of the business revenue declined by 6% in the quarter. While we do not like to see sales decline, we are focused on profitable growth. Excluding our largest customer, food service revenue grew by 10%. By winning new customers, expanding into new doors, and launching new items, we are diversifying our food service business, improving our margins, and giving us access to faster growing areas of the channel. Slide 19 shows that our co-pattern consolidation in America is driving solid results that are flowing through the P&L. This initiative has driven the second cost of goods per liter down by a healthy 10% from quarter one to quarter three, which is enabled by the Yaya Foods transactions that we completed earlier this year And it's as well as our strong ongoing partnership with Innovation Foods at our Millville facility. Both Yaya Foods and Innovation Foods have been terrific partners. As we continue to work with them to become more and more efficient, we believe we can continue to reduce our costs moving forward. Turning to Asia on slide 20. the Asia team has moved quickly to implement the strategy reset plan that we discussed on the last quarter's call. On this slide, you can see the impact of those actions. By refocusing the business and reducing costs, there was a top-line impact and a significant bottom-line benefit. By implementing the reset plan, the Asia business improved adjusted EBITDA by $4 million quarter-over-quarter and $10 million year on year. Slide 21 shows how significant a change the team has executed just in the last quarter. The team has cut over 70% of their SKUs and focused on the ones that are most profitable and can be produced more efficiently. You can see in the middle chart that we are also executing a significant shift in our channel mix by intentionally pulling back on certain SKUs customers, and geographies. We have increased the percentage of revenue sold through the core full-service channel by a full 11 percentage points. And the result of this refocusing is a reduction in cost of goods per liter by 16% year-on-year and 8% quarter-over-quarter. The team has done a good job executing this first phase of the research plan. Now turning to slide 22. While we are pleased with the progress to date, we know that we will still have work to do to get this segment to where it needs to be. And the team is clearly focused on achieving profitable growth. As JC mentioned, our SG&A cost-saving program remains on track, and Asia remains on track to deliver their portion, which is $40 million. The team is continuing to drive efficiencies in the supply chain by focusing on things such as optimizing which facilities we produce, which products in, and maximizing production runs for larger selling SKUs. We expect that they will continue to find ways to drive additional efficiencies. Finally, the sales team remains active and energized. We have been given the direction to continue to build the business with our core channels geographies, and SKUs so that we can build a strong, profitable, and sustainable business. I would now like to turn the call over to our new CFO, MJ Narichose-David.