Oatly Group AB (OTLY) Earnings Call Transcript & Summary

Good morning and welcome to the Oatly 2023 First Quarter Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would like to turn the conference over to Mr. Brian Kearney, investor relations. Please go ahead.

Good morning, and thanks for joining us today on Oatly's First Quarter 2023 Earnings Conference Call. On today's call are Toni Petersson, Chief Executive Officer; and Christian Hanke, Chief Financial Officer. Jean-Christophe Flatin, Global President; and Daniel Ordonez, Chief Operating Officer, will also be available for questions. Before we begin, please review the disclaimer on Slide 3. During today's 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 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. Also please note, on today's call, management will refer to certain non-IFRS financial measures, including EBITDA, adjusted EBITDA, adjusted EBITDA margin and constant currency revenue growth. 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 or the appendix of the earnings presentation for reconciliation to the most comparable IFRS measures. With that, I'll now turn the call over to Toni.

Thanks, Brian. Good morning, everyone. We appreciate you joining us today. Before we get to the results, I would like to take a moment to discuss our announcement this morning that I will be transitioning from CEO to Co-Chairman of the Board of Directors. I have led Oatly since 2012, through both our global expansion and our IPO, and I'm extremely proud of the work that we have done as a team over the last 11 years. I look forward to taking on a new and exciting challenge as Co-Chairman of the Board alongside our current Chairman, Eric Melloul. And I have the utmost confidence in the future of this company under our new leadership. We are pleased that Jean-Christophe Flatin will become our CEO, beginning on June 1. He joined us about a year ago as our Global President and has done a great job implementing significant value-creating transformation throughout the organization. He brings over 30 years of experience leading global high-growth consumer brands. And he has a strong track record of delivering both top and bottom line growth while also nurturing collaborative cultures. I have full faith that he will do a wonderful job and look forward to working alongside him as we continue to execute on our growth strategy. Moving on to our results. We delivered solid results in the first quarter, and we believe 2023 is off to a good start. We made progress against each of our key 2023 priorities: accelerate top line growth globally; continue to make improvements in the supply chain; and drive towards profitability, which we continue to expect to reach in 2024. As I said on our last call, Oatly is starting to play offense in 2023; and each segment is starting to play offense in its own way. Given the good progress so far this year, we are reiterating our 2023 guidance. You can see that we made progress on each of our priorities. Our constant currency revenue growth of 24% was a 960 basis point acceleration relative to our fourth quarter growth rate. Our gross margin expanded by 150 basis points sequentially. And we improved our adjusted EBITDA both year-over-year and quarter-over-quarter. Page 8 lays out the EMEA segment's 2023 priorities which we discussed last call. As you will see, we made good progress against each of these priorities. Page 9 shows progress in the first 2 priorities. The total EMEA category growth remained quite robust with oat milk continuing to grow double-digit rate on a year-over-year basis. And our key markets of Germany, U.K. and Netherlands continued to post very strong market shares. We have also continued to sign up new customers in foodservice. You may have seen some of our recent press releases announcing some exciting partnerships, and we continue to sign new and exciting customers like the ones on this page. Moving to Slide 10 and our expansion beyond coffee occasions. Our product portfolio is able to replace almost any type of milk. Whether you want an oat-based milk for your breakfast cereal, you fruit smoothie, for baking or any other use, we have a delicious product for you to enjoy. We can see on this page that retail shelves now stock an enhanced lineup. We are supporting these products with disruptive in-store activations and media that educate the consumers on how they can use our products to replace dairy. We are very excited about this as it increases the number of ways that our consumers can engage with our products. We intend to engage with consumers with an aggressive marketing plan in Q2 and Q3. On Slide 11, you can see some of the ways we'll be engaging with consumers. We will be supporting the expansion beyond coffee with a campaign across all our core markets in multiple types of media. In foodservice, we'll also be rolling out soft serve but introducing it to consumers at a variety of events and festivals across EMEA. Finally for EMEA, Slide 12 gives you an update on our geographical expansion. These new markets are still a small portion of the segment's total volume, but they drove almost 1/3 of the volume growth in the quarter. This is very good progress, so far, and we're excited about what to come. Turning to the Americas segment on Slide 13. Here we have laid out the Americas segment's 2023 priorities that we discussed on our last quarter's call. As we noted, we are pleased that this segment has improved the supply chain and is now able to be more aggressive on the commercial side. Let's start with a supply chain update on Slide 14. The transition to Ya Ya food is going very well, which has largely been enabled by not only Ya Ya's deep operational experience but also Ya Ya hiring Oatly frontline employees. We are pleased with the progress and see that our service levels have remained in the mid-90s. The successful transition to Ya Ya is enabling us to consolidate our co-packer network. In the first quarter, we moved quickly to terminate agreements that impacted co-packers. We expect this consolidation to have material benefit on our cost structure as we are moving from a costly, inefficient situation where we have to search far and wide for partners to a more simple and efficient structure that is lower cost. We expect a complete operational consolidation to be complete by the end of third quarter. Turning to Page 15. Here you can see that we are executing well on our commercials priorities. Given that our supply chain is stable, we have been able to drive good distribution expansion in retail, largely driven by an increase in the number of items per distribution point while also seeing good expansion in the number of stores. You can also see that we have started to increase our promotional rates in the last few weeks of the quarter. We expect that our promotional rates will continue to increase in the coming months. The promotions are not only intended to drive consumer demand, but they also send an important signal to our retail customers that we are confident in our supply chain stability and ability to service the demand. On the right side of this slide, you can see that our market share has started to improve in the most recent data. It's still early and we still have plenty of work to do, but we are happy with the progress we're making. Slide 16 outlines some of the additional actions we'll be taking to support this segment. This month, we are launching 2 marketing initiatives that will kick off a series of brand-building activations. The first is an unprecedented partnership [ that marks ] Oatly as the first-ever plant-based food sponsor of a U.S. national sport league. This multiyear partnership with the Minor League Baseball association designates Oatly as the official oat milk and nondairy frozen dessert of all 120 Minor League Baseball teams, spanning Albuquerque, New Mexico to Portland, Maine. The sponsorship will include on-field branding, stadium concessions, 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 impacts just like we do on our packaging. We are executing this through 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 their 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 foodservice 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 2 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. We 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 with 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 Peet's and Tim Hortons. Our team's ability to locally develop, design and produce these products to cater to the local consumers' preferences is truly differentiating 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 volumes sold and volume produced locally. Now almost all of our Asia volumes is produced locally, opposed to purchased 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, Toni. 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 3 drivers: the price increase we took in the third quarter of fiscal 2022 across all channels; an additional price increase we took within the foodservice channel; and a positive customer mix benefit, as we had strong retail volume growth and a positive customer mix in foodservice. 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-over-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 Toni 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 say 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 we -- 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. Hillhouse will receive convertible notes with nearly identical economic terms to the convertible notes that we announced on last quarter's call. Hillhouse is also buying 50 million (sic) [ $15 million ] of convertible notes from our shareholder Verlinvest. Hillhouse has a great track record as a global investor with expertise in Asia and an extensive portfolio of leading consumer and foodservice 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 Hillhouse 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 Hillhouse 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 interests while providing us with additional firepower to augment our business plan and achieve our long-term ambitions. Turning to Slide 28. As Toni 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 Toni discussed. We continue to expect sequential quarter-over-quarter improvement in gross margin, even with the increase in Americas 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 million to $200 million. 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 after sequential increase in net sales dollars and the sequential expansion of gross margin are offset by the increase in marketing investments in the U.S. 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?

[Operator Instructions] First question comes from Michael Lavery of Piper Sandler.

Congrats on your new roles.

Thank you.

Thank you, Michael.

Just was wondering if you could give us a little bit of a peek further ahead. You mentioned again how you expect EBITDA positive in fiscal '24. Do you have a little better line of sight on how that unfolds? Would that be a run rate at the beginning of the year? Or how would we think about just modeling a little bit further out? I know you don't want to be too specific and it's still a ways off, but just given that you've got some -- seem to have some plans there, just any color you could add would be helpful.

So Mike, it's Christian. I can start. And then anyone else in the team, feel free to chime in. And as we have said in our previous earnings call, we expect to close the year enabling us to achieve a positive adjusted EBITDA on a full year basis in 2024. We are not at this point in time giving any quarterly guidance in terms of how that will unfold in 2024. So it's on a full year basis.

Okay, that's helpful. And just on the European foodservice opportunities and specifically the announcement with McDonald's, can you give a sense of how much more doors that could open or any sense of how that's -- a start that's gotten off to or maybe just an update on how that can unfold?

Thanks, Michael. It's Daniel here. Yes, it's early days, early weeks; is going really, really well. And what I, what we can say at this stage is that there are many -- there are some more in the making in the same profile of QSR and foodservice customers, but we are very excited about this McDonald's arrangement and partnership in Austria.

And the next question will be from Rob Dickerson of Jefferies.

Just a question -- 2 quick questions; 1 on America pricing -- Americas pricing, clearly up almost 30% in Q1, but then there's the commentary around kind of leaning in a little bit more on promotional activity, so I'm just curious. As kind of we get through the year, it sounds like, because of the increased promotional activity, we should see kind of a -- let's say, a deceleration in the year-over-year pricing growth as we get through Q2 and the back half of the year, but at the same time, it does seem like it was a little bit higher, right, in Q1 than expected. I think you were kind of pointing to more high teens, so if you think about the full year, are you thinking Americas pricing kind of up, let's say, mid-teens? And then I also ask just because supply is more beneficial. We saw revenues on an absolute basis kind of flat sequentially relative to Q4 and Q1. Is the expectation here that we start to see actual better volumes with also higher pricing such that we would see a material acceleration in absolute revenue dollars? And then I have a quick follow-up.

It's Christian. I can start out. And then I'll -- I think Daniel will sort of add to it. In terms of the price/mix, it will decelerate throughout this year, quarter by quarter. So I just wanted to give you that context. Daniel, anything else to add? No...

Just as to add some color to Christian. Yes, we will see in the second part of the year that deceleration coming in net sales per liter as we lap our price increases. And as you said, we are improving. Given the availability and consistency of supply and fill rates, we are improving and adjusting month after month the promotional levels. And we start seeing some early good signals of that based -- if you look at the [ scan data ] of the month of April: We started seeing not only net sales significant improvement but some units sales volume growth that we haven't seen for some time, so yes, we see -- we expect these continued sequential improvement as we move forward.

Okay, super. And then just a quick question on the supply chain. It sounds like transition going well, so far, with Ya Ya. Was -- is there anything else potentially in the pipeline that could benefit from a similar transaction? Or do you feel as if at this point you're fairly comfortable with what you have? That's it.

Thank you. Jean-Christophe speaking. I think we are fairly comfortable with what we have. We have no further updates today because we are still evaluating options, as we have said in previous calls, both on Peterborough in the U.K.; as well as on Asia Pac III, our third factory in Asia, and simply because we are evaluating options as we speak. So the only [ build ] I would say is our long-term margin targets that we shared with you guys in the last, previous earnings calls are absolutely in-line and achievable no matter which supply model we choose for them.