Q3 2022 Oatly Group AB Earnings Call

November 14, 2022

Thank you.

Ladies and gentlemen, greetings and welcome to the old lease 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 <unk> from Investor Relations. Please go ahead.

Good morning, and thank you for joining us on <unk> third quarter 2022 earnings Conference call webcast on today's call are Tony Peterson, Chief Executive Officer, and Christian Hanky, Chief Financial Officer, John Kristoff lot in global President and Daniel <unk>, Chief Operating Officer will also be available for questions before I 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 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 other risks and.

Certainties 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 20-F for the year ended December 31 2021.

The SEC on April six 2022, our report on form 6K for the period ended September 30 of 2022 and other reports filed from time to time, the Securities and Exchange Commission 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 or refer to.

Certain non <unk> financial measures, including EBITDA, adjusted EBITDA and constant currency revenue, while the company believes these non <unk> financial measures will provide useful information for investors presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented herein.

So I for US please refer to today's release for reconciliations of non <unk> financial measures and the most comparable measures prepared in accordance with IRS and Additionally, we have posted a supplemental presentation on what type of 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, we provided an update on our business performance address strategic actions, we have taken as an organization and our future growth opportunities Chris.

Chris Jones will review, our financial results and updated 2022 outlook and John Chrystal, Daniel Kristian, and I will be available for questions.

As a reminder, our new global precedent, John Kristoff, Platten, and Chief operating Officer, Daniel No don't use joined <unk> in June . These two comp just industry leaders have over 60 years of combined experience.

Mobile and fast growing consumer brands. Please join me we are focused on activating multiple growth initiatives and positioning our fleet 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.

Technical issue.

All new facility in the U S S wellness ethics headwinds.

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, you saw year over year sales volume growth of 15% across all regions and continued to see strong category, leading velocities to global demand remains resilient.

Yes, I am disappointed with our ability to translate these third quarter gross profit margin sequential EBITDA improvement due to our operational execution shortcomings.

Well, it's the worsening macro environment, which I will touch on more shortly the two 7% gross margin fell well below our expectations.

Past two years have taught us the hard way that being a high growth company.

Incidentally complex and volatile environment demands, an even sharper allocation of resources and capital.

Just why is shown on slide five we have made strategic decisions with you.

He just action items to achieve three goals.

To prepare for the next phase of continued high growth.

Two pieces simplicity and agility of the organization and third to drive profitability with more asset light strategy.

With these goals and increased focus on balancing growth with profitability, we expect to be adjusted EBITDA positive.

In Q4, 2023 Christian will walk through the path of profitability shortly.

Turning to slide six this reset plan involves two fundamental speeds.

Adjusting our supply chain network strategy simplifying the organizational structure.

Starting with the supply chain network strategy.

One of our company's core strength is our proprietary expertise in oat based technology, which forms the foundation of our product portfolio.

Going forward, we will simplify our supply chain strategy by focusing our investments.

<unk> 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.

Specifically looking at transitioning to Fort worth in 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 of Capex projects, 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 cost base globally for more balanced growth and profitability equation.

To start we are executing on overhead and head count reduction impacting up to 25% of the cost related to the group's corporate functions and regional EMEA up layers.

By doing this we expect annual savings of up to $25 million from the reorganization, we 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 John Kristoff 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 precedent.

We continue to evaluate our global operations are potential opportunities to recalibrate, our global organizational structure for the next phase of growth.

As shown on slide seven growth remains a top priority.

Strategic actions, we're 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.

Client base is growing globally and continues to be the growth driver within plant based beverages.

We're all supply stable, we have a strong position and even where we have not been able to fulfill demand including in the U S. We still have the leading velocities.

<unk> at a higher price point and lower promotional spend.

Turning to slide eight you see significant white space opportunity as we work to convert their users to Oakley consumers globally.

We expect to drive conversion by increasing our brand reach pioneering through new product innovation driving asset light 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 $66 million in the third quarter.

Constant currency revenue increased 16, 7% year over year $299 7 million.

We saw volume growth across regions, and we'll still have the number one selling SKU and highest velocities across key markets. We.

We have also successfully rolled out new product launches across geographies and continued channel expansion.

Turning to the regions, starting with EMEA on slide 11 EMEA.

EMEA third quarter revenue was $82 6 million with strong FX headwinds impacting revenue by $14 5 million in the third quarter.

Austin currency EMEA revenue increased 11% year over year to $97 1 million.

Sales volumes decreased approximately 7% with the steady performance across different markets. In Europe is was in line with our expectations, but also reflects the difficult macro environment.

We saw continued ability to drive category growth.

Proven the resilience of our brand and business model with 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 to disruptive brand event. The unique deployment of out of home activation three focused distribution.

Execution on new product development, with Chill and media Barry as well as the ice cream launch in <unk> and for distribution gains both retail and foodservice.

Going forward, we still have a significant international expansion opportunity in EMEA, It's a currency markets consist only the UK, the nordics and the Netherlands.

This quarter continued macro condition in EMEA slowed new market and channel expansion.

It drove one time charges related to highest scrap and co packer volume adjustments.

Turning to the Americas on slide 13.

Americas third quarter revenue increased 22, 7% year over year to $60 7 million, which was below our expectations.

Demand for the <unk> brand in the U S remained strong with minimal signs of elasticity to our recent pricing actions and number one velocity in the total dairy and plant based milk categories.

ECB still limited by supply in U S at only 36% with significant upside and whilst 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 the disrupted this progress.

Technical issue led to one of the two of them baselines being down for approximately three weeks.

Since been resolved and 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 our guidance update Kristian will touch on shortly.

With all of their production back on track and will be second or baseline expansion ahead of expectations. We expect production volumes to improve in Q4 and into 2023 with more volumes, we expect to close the feel great 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 the zero tolerance co with policy is having a continued impact from changing consumer behavior. A number of instances have shortened business hours consumers are traveling less and preventative health measures have been tightened with resurgence outbreaks.

<unk> not only have an impact on top line performance, but also in profitability, which Christian will expand on later in this presentation.

Our Asia team has been resilient and we continue to adapt the best we can in this restricted environment, including accelerating our expansion into retail and e-commerce.

And E Commerce sales represented 13% and 24% 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 ultra brand across Asia. Oakley has been nominated as the Star pop brand by Emailing people being a lead.

<unk> in the food industry and named as the leading brand by several other outlets.

<unk> continues to have the number one plant based brand on Tmall 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 innovations forming well <unk> are expected to be in 25000 stores by the end of Q4.

We also recently partnered with <unk> food company to jointly develop.

Pre packaged plant based drinks under the lung phones, when an OTC brand, we have two ready to drink co branded products available to date at convenience stores, such as family Mart and e-commerce platforms, including Tmall and JD Dot com.

From a production standpoint in September of facility in Singapore started producing at fully ramped capacity and then Marcia facility is continuing to increase production.

The low cost production will enable us to expand into other international markets across Asia as well.

The Kobe 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.

$101 1 million in 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% constant currency compared to the prior year period.

Tony mentioned third quarter revenue results were below our expectations, primarily due to production challenges in OIBDA and continued market restrictions in Asia due to COVID-19.

However, we experienced growth across retail foodservice and e-commerce channels move.

Moving to slide 19 solar volume for the third quarter of 2022 amounted to 126 million liters compared to 110 million lasers last year, an increase of 14, 5%, we experienced broad based growth with 7% sales volume growth in EMEA.

17% growth in America, and 38% volume growth in Asia.

Consolidated net sales per liter was $1 four to five in the third quarter of 2022 compared to $1 55 in the third quarter of under 21, mainly driven by foreign exchange and promotional activities in Asia.

By the pricing actions in the Americas and EMEA.

As a reminder, our highest net.

Net sales per liter is typically in Asia.

<unk> by the Americas and EMEA.

Gross profit in the third quarter was $5 million or two 7% gross margin compared to $4 to $4 $9 million or 26, 2% margin in the prior year period, well below our expectation.

Compared to the second quarter of 2022 gross profit margin of 16, 8%.

We had a 110 basis point sequential margin decline shown on slide 20, we.

We did not achieve sequential improvement as we had anticipated primarily due to the management production issues in America at our Ogden facility 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 facility higher promotional activity 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 highest scrap and co packer volume adjustments of 630 basis points, most of which are expected to be nonrecurring.

And the other items net of approximately 900 basis points.

We have seen improvement in October gross margin already which is what gives us confidence in our ability to achieve higher growth margin in the fourth quarter.

The gross profit margin improvement in Q4, 2022 and into 2023 is expected to be driven by lapping the transitory largely macro related challenges as well as by a select number of key actions that we are executing on.

First continued pricing action.

Inflation.

Driving steady production progress at all done and our new baseline.

Third optimizing the utilization of our supply chain network driving cost and production efficiency.

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 improvement in utilization are already taking place in Asia, Singapore is now fully ramped capacity and.

In America Midlevel oat baseline expansion have 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 or pricing action.

Worldwide gross profit margin expansion.

Moving to slide 21.

Third quarter of 2022, EBITA loss was $92 2 million compared to an EBITDA loss of $6 5 million in the third quarter of 2021.

Adjusted EBITDA loss for the quarter third quarter of 2022 was $82 $7 million the.

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 consulting spend and positive impact from foreign exchange rates.

In the third quarter total operating expenses as a percentage of revenue increased 2% to nine 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 auction Tony mentioned earlier, however, we will not see the full benefit until 2023.

Now focusing on our balance sheet and cash flow as of September 32022, we had cash and cash equivalents and short term investments of $123 million and total outstanding debt credit institutions up $4 4 million we.

We have not drawn any loans under our revolving credit facility of approximately $320 million, excluding the accordion of an additional $6 million.

Net cash used in operating activities increased by $56 6 million to $215 2 million for the nine months ended September 32022, compared to 148 6 million during the prior year period driven by.

Or higher loss from operation.

Capital expenditures were $178 5 million for the nine months ended September 32022.

Two compared to 190 to $6 7 million in the prior year period, Capex spend was lower than last year due to the facing of our facility investments.

Net cash used in financing activities was $10 million for the nine months ended September 32022, primarily reflecting the repayment of lease liabilities.

Repayment ability is the credit institution.

Turning to the guidance on slide 22.

For fiscal year 2022, we are updating our revenue outlook and now expect revenue of $755 million to $775 million based on 2021 exchange rates or constant currency, an increase of 17% to 20%.

For fiscal year 2021.

At the prevailing FX rates. This implies a revenue guidance of $700 million 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.

Dollars of the reduction is driven by operational challenges in America, which limits our ability to accelerate sales momentum.

<unk> $32 million to $37 million is driven by COVID-19 pressures negatively impacting sales in Asia.

We believe these challenges are trumped transitory.

As COVID-19 restrictions ease in Asia, and we have more stable production in America, we have significant opportunities for growth.

Currency exchange rates are volatile and difficult to predict our updated guidance is now based on spot rates as of September 32022.

Counting for approximately $50 million of the change versus the previous revenue guidance.

Please refer to the last slide independent of the earnings presentation.

Details on exchange rates.

As I stated a few moments ago compared to the third quarter of 2022.

Expected growth 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 million to $240 million for fiscal 2022.

Given the phasing of certain projects.

We continue to expect run rate production capacity to be approximately 900 million leader in finished goods.

Fiscal 'twenty to 'twenty two.

With the phasing 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 repaid Capex project 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.

Will significantly reduce our capital needs.

We have lowered the capital raise requirement $200 million.

And extended the capital raised period until June 32023 in our Rcs Amendment to reflect these actions.

With this refined clarity on our capital needs. We are actively working on multiple financing truck.

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 down 20 to 22 and to be adjusted EBITDA positive.

<unk> Q4 2023.

In order to get there we plan to expand our distribution footprint with new geographies.

Geographies and within existing channels improved 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 and.

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 light 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 I 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 actions to address the operational issues.

To prepare for the next phase of growth.

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 one on your telephone keypad.

Formation tone will indicate your line is in the question queue.

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All 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.

From Barclays. Please go ahead.

Great. Thanks very much.

Maybe to start off.

I think your initial target for self manufacturing.

Is 50% to 60%.

Do you have a new longer term targets 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 a 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 some of these sort of self manufacturing facilities already under various states of kind 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 ask Christian.

Click on the rest of the questions here now in terms of gross margin positioning into hybrid will potentially.

I have a small concession on margins, but we are not ready at this time to provide any guidance.

We are discussing with various parties the small concession though.

<unk>.

Is outweighed by simplifying our supply chain operations and execution.

So I can't give you any clear updates on the margin less come back to that point once we have finalized all of the discussions.

Does anything more to add there to them it will come back but in terms of maybe question.

The settlement the Doctor and Pete will obviously have a slightly different.

The share of our total capacity as compared to before and we will have to come back on that point.

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.

Yeah.

We are working across all of the various region I mean, we're specifically looking at one facility and.

The Dallas Fort worth.

And.

Yes.

Okay.

And over last year.

Got it and then just a quick clarification.

You had mentioned <unk>, you expect gross margins to improve sequentially and then Christian earlier in the prepared remarks, you mentioned <unk> 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.

Thank you Andrew can I just.

To clarify again, because you mentioned magnitude what we see is potentially a small concession on the margins.

Got it thank you.

Thanks.

Thank you.

Our next question comes from the line of Ken Goldman from Jpmorgan. Please go ahead.

Hi, Thank you I wanted to build on Andrew's line of questioning about the pivot towards a more hybrid strategy.

Obviously to his point and to your point there were better economics that you had laid out for the NTN manufacturing, but you'd also talked about some others. Some other tailwind right in terms of having more control over the process, but I think you had mentioned some flexibility to maybe build some value added processes. When you control the entire supply chain.

So 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 Thats great.

<unk> here so.

Let me just elaborate a little bit here. So we are continually adapting our.

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.

Yes.

There are a number of reasons why we're taking this course and if you allow me just just let me bring forward three of them. So first event is resource allocation decision now building.

Multiple Amgen factory.

He is just heavily especially now high rates enabled us to put more focus on our proprietary production and other value driving items, such as innovation branding sales et cetera. So we simplify and remove complexity second this availability of strategic cope.

Factors.

ECM to find now than before since we have both scale and growth so 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.

T and our confidence in our ability to raise capital going forward.

That's not the decision. This is a business the key decision considering the macro environment, we want to drive innovation and sales aggressively and we want to be focused about it so.

It was difficult to do haven't seen 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 it was I know it was a long answer but I just wanted to give you color.

No. That's helpful. Thank you and then I wanted to ask.

The departures of the chief supply chain and EMEA ahead can you give us a little more color about.

The circumstances around that versus made by these individuals' typically we'll hear a little more color than just <unk>, it's part of the company.

Well, we are continuously evaluating the skill set and as we grow we high growth company.

The capabilities of both JC, Daniel essentially combine is.

It's really really adding a lot of value to the company and John Kristoff has a very solid background in building other companies' rapidly including the <unk>.

Complete supply chain network on a global scale and that is of course, something that we want to benefit from.

And besides that jump yourself. It's also we're seeing innovation food science supply chain. This tech sustainability.

And the people in transformation functions, Daniel is focusing on the on supporting and even the reagent businesses here.

To your point, we are just the organization that is continuously evaluating various skill sets across the organization.

Okay.

Thank you.

Our next question comes from the line of refresh product from Oppenheimer. Please go ahead.

Good morning, this is actually Erica eiler on for Pat Thanks for taking our question.

So I guess I just wanted to hit on cost pressures real quickly.

Just sort of the latest you're seeing here curious what remains the biggest pressure.

<unk>.

And maybe where you see some things starting to ease and then along those lines some of your.

On CPG peers have given some early results.

In terms of what they are expecting next year.

Any color you can provide there that would also be helpful.

Yes, and 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%.

Direct material and conversion costs.

Electricity labor does that what we're seeing and then going into 2023.

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 6% to 7% on a consolidated level and plan to penetrate.

And I think I also want to add in terms of what we will do is to continuously.

Ambac inflation with pricing actions.

Okay, Great and then just.

Given the macro impact on your business I mean, you've talked about some desktop version to plant based that you've seen in recent quarters, but can you maybe just give us an update on kind of that youre seeing there in terms of consumer behavior and kind of that the slower conversion.

That you've been seeing and kind of how that how about.

Let's lately.

Okay.

Thanks, Eric This is Tony.

So just want to make sure that it's clear that the getting down has nothing to do with the brand for demand.

Demand for our product is still strong we start to see signs of growth in Europe that Daniel will Kent Doubleclick Com in Asia, We are building our precision stronger.

Despite COVID-19.

Terms of adding doors and partnerships in foodservice and retail channels in the U S. We still have the highest velocities.

The daily Universe, and Daniel maybe you can put some color to that attributed thank you Tony and thank you for the question.

<unk>, let me acknowledge that this is pretty extraordinary environment and why we are we are experiencing however, 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.

With 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 than that.

<unk>, Germany, where we are growing ahead of private label and also the U K, so with improved execution.

The path is to converting their consumers into plant based and we see that impact as you know very well better than me in the U S and solar both capacity supply meet the service levels, which are improving.

Yeah.

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

Yes.

Thank you.

Our next question comes from the line of Brian Holland from Cowen and company. Please go ahead.

Yes, thanks, good morning.

I wanted to follow up on Andrew <unk> 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 if the Texas facility under construction, yet and what could a manufacturing partnership look like would that be a lease back I think Andrew was asking about.

How this sort of evolves given some of these facilities are under construction. So I'm just trying to get a sense of the capacity situation sort of shifts from <unk> to co manufacturers or.

Taking capacity out or if youre still building all these plants that maybe just working with partners from there.

So.

Hi, there.

Thats a good question. Thank you.

First of all what we do here is to protect growth and we're balancing and calibrating.

Growth and cost here.

First of all it will not have an impact on volumes going forward or the growth rate going forward in terms of Texas, Yes. We are building there, but we are now thinking about is to or.

<unk> very actively.

Pursuing.

If the churn.

We're into hybrid model like we have in Michigan.

Yes.

We had in Singapore and that also go for it goes for Peterborough, Jason maybe you wanted.

Yes, maybe a little bit thank you, Italy, and hi, Brian . So it's cooked clients of course that I suppose for us in the U S and the other one that we don't currently building that is also in Scoop is people both in the U K 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 can.

Our hybrid model, where we really think ownership and pull a responsibility for pulp wood based process and then we partner with other companies.

<unk> for the feeding pumps. So I think the intent is to do exactly the same model.

Served us well and we see that.

As a great way to make sure Portugal's.

Great I appreciate the color there.

And then I wanted to talk about the U S. Total distribution points in the tracked channels appeared to decelerate meaningfully.

Commensurate with the recent shelf resets several of your competitors.

Accelerated simultaneously.

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. So maybe said another way is it fair to say you are getting punished by customers at this point that you have for lack of a better term.

I'll take that Brian Daniels here again.

Let me, let me add some of the details that you're asking rightfully.

Demand and velocity has remained very resilient in the U S and we don't see any effect any impact on that in there.

The best proof of that is the recent market share development, what we see in the last 12 months and four weeks, we see we're gaining share.

Despite the service level issues, so thats exactly.

You said, that's exactly what you're seeing there.

The impact on some of the TD piece has 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 a bit earlier, a clearer no it is.

Related to supply and also remember that we're still balancing supply between retail and foodservice channels.

Understood appreciate it I'll leave it there 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.

Thought I heard you say.

Prepared remarks kind of briefly also kind of looking into other.

Or let's say multiple financing tracks.

If if needed.

Overtime for incremental capital, maybe if you could just expound on that whatever you are willing to actually say what would be helpful.

No I mean, I think we we are actively working on multiple financing products and we will provide more clarity when we have more to share. One example is.

Which I didn't say in our prepared remarks is that we just recently signed a credit local credit facility.

In the Asia.

A quick $1 million to $5 million provide.

Providing more flexibility there.

But we're actively working on and we're very confident.

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's out of required kind of for the full development of the prior plan I think at some point you had thrown out a number approximately let's say $400 million or so to complete all the projects in Capex now I look at all of the facilities I know the two that would be shifting.

And then I hear you talk about the savings coming kind of more from the P&L side in terms of that capital savings piece.

Is this like somewhat of a material.

<unk> piece on the Capex side or would you argue it's probably a little bit more P&L related.

Basically some.

Some reduction in longer term capex and that's it thanks.

Yeah.

No in terms of the tap 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.

So we've reduced the capital funding needs that we have.

By $200 million.

Right, Okay, but I mean.

This this this next phase that we're discussing today.

It doesn't sound like that was the lion's share of the lion's share was kind of what we were talking about on a reduction in the Q2 call is that does that fair.

Yes, but also looking ahead, if you're looking more moving towards an asset light model that will also drive lower capital needs going forward as well, okay. Okay, Alright, alright. Thank you so much.

Thank you. Thank you.

Our next question comes from the line of Bryan Spillane 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 technical some technical issues can you provide more color on what what the technical issues or is it the equipment doesn't work is it a lack of training just really trying to understand.

What actually isn't working.

Thank you Brian .

I will take this one so one of them lead to billions of two different things. One is the continued event.

Frankly, I think we said last quarter, we were in the last mile improvements to the prediction and the reality is is that we are still improving and stabilizing production. So daniela myself, we've been three things to the sites, we have no very clear root cause analysis of.

What's driving this long ramp up and we have no action plan and I'm happy to report that.

Over the last six to eight weeks now we are seeing stable production there on the other side with Tony referred to easily have a one time incident technical incidents in the line at the end of the <unk> focused that's kept one of two old baseline steel up to mid September and because you asked for specificity Whatsapp.

We had an incident with wonderful fire suppression system, which is.

Safety device that is connecting in the pipe between the <unk>.

We received both from our old think into the province, it's a safety device.

That didn't work anymore and it took us a lot of things to get the pre place simply because it is an empty explosive device into that which means we cannot predict when it has to go through the whole. So that's exactly what happened, but the main therapies, we continue to ramp up to full 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 on the.

Earlier question around <unk>.

Multiple financing tracks Tony have you.

Thought it all of you has only at all explored the potential of just merging with someone who's larger has more scale I mean, theres a little bit of like the Dol caught the car here like you've got that you've got the growth.

But really having a difficult time scaling up to sort of service that growth. So.

In the range of possibilities.

Is that is that something you've considered.

If not why.

No. It's a good question and the answer is no we're not exploring that path.

And why.

Okay.

Well.

Why is that we have a runway 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.

There's so much more to do and we have so much confidence in this very decisive strategic actions that we're taking now to prepare this organization of the company for growth and again, we have this underlying demand again no demand issues.

See the opposite we see velocity strength, we see market share gains.

Us expanding across regions. So.

Confidence level is high. This is this has been a very much an execution exercise that we need to improve and we are taking decisive action. So that is the reason okay. Great. Thanks Tony.

Thanks.

Thank you.

Our next question comes from the line of John Baumgartner from Mizuho. Please go ahead.

Good morning, Thanks for the question.

Wanted to come back to reorganization and reductions for operating expenses relative to sales of Opex as 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 overtime with sales so given the business a second look.

Here, what costs have become more discretionary in your view relative towards maybe previously viewed as more structural in nature and how do we think about the risk that you are reducing costs excessively or at least prematurely. Thank you.

Yeah.

So first of all John jump is not speaking.

Technically we didn't know SG&A costs.

Distribution costs, so I think that the.

An important factor when you benchmark compare which I know is of the hump of she'll jump. So then to your mix question, which was.

As we reset our cost base.

Taking any risk there I think we have the very very bottom up approach we have done the entire analysis also.

Liberating the guide people that at least in the Bay as teams and we have really done the exercise in the.

With the <unk>.

Tony at least initially so the question. We ask was when do we need comparability wise to propel us into the next step to go. So we've been really looking for scalable model. The second thing that the Venus is simplicity and clarity of any fast growth company.

Very fast and so some bumps of organization and therefore, we really needed to bring simplicity and clarity and finally the expected outcome of that is by diminishing the feed cost culture is to accelerate the path to profitability, which both Tony MTT and Lisa.

The specific intersection we have looked at first back to your regional resources was the intersection of the complaints in the global layer with the European leader and Daniela nine coming in June we have the opportunity to see some opportunities there and this is what we have done.

So I want to leave you, we think thats really the main priority. The main focus for us has been to position ourselves to invest in growth because not even really remains our number one priority.

Okay. Thanks for that and just a follow up on the European environment. It looks like from the slide deck that velocity.

In the UK and Germany was down about high single digit sequentially versus Q2, which was better than the category I'm just curious how much of that was due to the.

The seasonality relative to just the overall macro environment and what's your confidence level foreseeing velocities and demand sort of bottoming given the given the macro uncertainty in Europe . Thank you.

Thanks for the question Daniel taking it here and I think youre, referring very well to what Tony was mentioning in the previous earnings call.

That means these 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.

Two or three months of stable volume growth across the markets in Europe , and we have seen now reflected 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.

Yeah.

John any.

Further questions for the management.

Management.

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 Conor.

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

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Ladies and gentlemen, greetings and welcome to the <unk> 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 Us from Investor Relations. Please go ahead.

Good morning, and thank you for joining us on <unk> third quarter 2022 earnings Conference call webcast on today's call are Tony <unk>, Chief Executive Officer, and Christian <unk>, Chief Financial Officer, John Kristoff, flattened global President and Daniel <unk> Chief operating.

There 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 <unk> 995, 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.

Patients and beliefs and involve.

The 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 20-F for the year ended December 31, 2021 with the SEC on April six 2000, and trying to our report on form 6K for the period ended September 30 of 2020 and other reports filed from time to time this year.

Thanks, James Commission 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 or refer to certain non <unk> financial measures, including EBITDA adjusted EBITDA and constant currency revenue, while the company believes these non <unk> financial measures will provide you used.

All information for investors presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with <unk>. Please refer to today's release for reconciliations of non <unk> financial measures and the most comparable measures prepared in accordance with IRS and.

In addition, we have posted a couple.

Rental presentation, let's take a reference I'd now 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 updated 2022 outlook and Jean Christophe Daniel Kristian, and I will be available for questions.

As a reminder, our new global precedent, John Kristoff flattened and Chief operating Officer, Daniel Autonomous joint openings. In these two accomplished industry leaders have over 60 years of combined experience at global and fast growing consumer brands since joining they are focused on activating multiple growth initiatives and positioning out.

At least 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.

Ramp up next year.

Technical issue.

All of this facility in the U S as well as FX headwinds.

Third quarter results fell short of 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 continued to see strong category, leading velocities to global demand remains resilient.

Yet I am disappointed with our ability to translate these third quarter gross profit margin sequential EBITDA improvement due to our operational execution shortcomings.

Well, it's the worsening macro environment, which I'll touch on more shortly.

Two 7% gross margin fell well below our expectations.

Past two years have taught us the hard way that being a high growth company.

Unprecedented complex and volatile environment demands, an even sharper allocation of resources and capital.

Why is 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 sector.

Two please the simplicity and agility of the organization and third to drive profitability with more asset light strategy.

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.

Two fundamental speeds adjusting our supply chain network strategy and simplifying the organizational structure.

<unk> with the supply chain network strategy.

One of our company's core strength is our proprietary expertise in oat based technology, which forms the foundation of our product portfolio.

Going forward, we will simplify our supply chain strategy by focusing our investments.

<unk> 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 fourth growth in Peterborough plans to hybrid facilities versus end to end.

This move towards a more hybrid network is expected to significantly reduce our future capital expenditures and has 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 of Capex projects, 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 just our fixed cost base globally for more balanced growth and profitability equation.

To start we are executing and overhead and head count reductions impacting up to 25% of the cost related to the group corporate functions and regional EMEA up layers.

By doing this we expect annual savings of up to $25 million from the reorganization, we 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 John Kristoff has assumed oversight of the global supply chain network. Following the departure of our chief supply chain officer, while Daniel has assumed oversight of EMEA markets. Following the departure of our EMEA precedent.

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.

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 continues to be the growth driver within plant based beverages.

We're all supply is stable, we have a strong position and even where we have not been able to fulfill demand including in the U S.

Still have the leading velocities.

<unk>, a higher price point and lower promotional spend.

Turning to slide eight we see significant white space opportunity as we work to convert users to consumers globally.

We expect to drive conversion by increasing our brand reach.

And through new product innovation, driving asset light 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.

<unk> was a significant headwind.

Evaluation 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.

Volume growth across regions, and we still have the number one selling SKU and highest velocities across key markets.

We have also successfully rolled out new product launches across geographies and continued channel expansion.

Turning to the regions, 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.

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 is was in line with our expectations, but also reflects the difficult macro environment.

We saw a continued ability to drive category growth.

Proven the resilience of our brand and business model with improving velocities and market shares across the board.

Turning to slide 12, just a result of driving growth in our existing markets through one the synchronization of our brand portfolio and in store Activations to disruptive brand event, the unique deployment of out of home activation.

<unk> focus distribution and execution of new product development with chilled and media as well as the ice cream launch in <unk>.

And for distribution gains both retail and foodservice.

Going forward, we still have a significant international expansion opportunity in EMEA. It's a current key markets consists only the UK the nordics and the Netherlands.

This quarter continued macro condition in EMEA have slowed new market and channel expansion.

We incurred one time charges relates to highest scrap and co packer volume adjustments.

Turning to the Americas on slide 13.

And then just third quarter revenue increased 22, 7% year over year to $60 7 million, which was below our expectations.

Demand for the <unk> brand in the U S remains strong with minimal signs of elasticity to our recent pricing actions and number one velocity in the total dairy and plant based milk categories.

Our ACB still limited supply in U S at only 36% with significant upside and whilst 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 often at the end of August and into September the disrupted this progress.

Technical issues led to one of the two of them baselines being down for approximately three weeks.

Since the result of production is stabilizing so we can start rebuilding inventory and 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 our guidance update Kristian will touch on shortly.

With all of that production back on track in the second out baseline expansion ahead of expectations. We expect production volumes to improve in Q4 and into 2020, a fleet with more volumes, we expect to close to feel great 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 16, 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.

Continued impact from changing consumer behavior, a number of instances have shortened business hours consumers are traveling less and preventative health measures have been tightened with resurgence outbreaks.

Restrictions.

<unk> had an impact on top line performance, but also in 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.

And E Commerce sales represented 13% and 24% of total Asia sales this quarter, respectively and continues to be an important growth driver going forward.

Turning to slide 16, we continue to see the power of the <unk> brand across Asia. Oakley has been nominated as the Star pop brand by E <unk> to being a leader in the food industry and named as a leading brand by several other outlets.

Continue to have the number one plant based brand on Tmall 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 innovations coming well take them as expected to be in 25000 stores by the end of Q4.

We also recently partnered with <unk> food company to jointly develop.

The pre packaged plant based drinks under the Longhorn brand and <unk> brand, we have two ready to drink co branded products available to date at convenience stores, such as family Mart and e-commerce platforms, including Tmall and JD Dot com.

Production standpoint in September a facility in Singapore started producing at fully ramped capacity and then Marcia facility is continuing to increase production.

The low class production will enable us to expand into other international markets across Asia as well.

<unk> 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 100, and the $1 1 million in the third quarter of 2002.

101.

Excluding a significant foreign currency exchange headwind.

$16 6 million revenue for the third quarter would have been $199 $7 million or an increase of 16, 7% 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 OIBDA and continued market restrictions in Asia due to COVID-19. However.

However, we experienced growth across retail foodservice 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 lasers last year, an increase of 14, 5%.

We experienced broad based growth with 7% sales volume growth in EMEA.

7% growth in America, and 38% volume growth in Asia.

Consolidated net sales per liter was $1 four to five cents 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.

By the pricing actions in the Americas and EMEA.

As a reminder, our highest net.

Net sales per liter is typically in Asia, followed by the Americas.

EMEA.

Gross profit in the third quarter was $5 million or two 7% gross margin compared to $4 to $4 $9 million or 26, 2% margin in the prior year period, well below our expectation.

Compared to the second quarter of 2022 gross profit margin of 16, 8%.

We had a 30 110 basis point sequential margin decline 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 Ogden facility.

And continued COVID-19 restrictions in Asia.

The decline was mainly driven by continued pricing actions to be 190 basis points to offset the higher cost inflation of 380 basis points.

Continued COVID-19 restrictions in Asia resulted in short term underutilization of our Asia facilities.

Higher promotional activities co packer and inventory positions of 490 basis points.

Expected 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 highest scrap and co packer volume adjustments of 630 basis points, most of which are expected to be nonrecurring.

And the other items net of approximately 900 basis points.

We have seen improvement in October gross margin already which is what gives us confidence in our ability to achieve higher growth margin in the fourth quarter.

Continued pricing actions to combat inflation.

Driving steady production progress at <unk>, and our new build hotel.

At baseline.

Third optimizing the utilization of our supply chain network driving cost and production efficiencies.

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 fully ramped capacity and in America Millar bills or baseline expansion have commenced commercial wrong in November .

We expect that continued and improved ramp up of our production facilities in the fourth quarter of 2022 should result in improved fixed cost absorption.

Well, that's a better sales mix and the implementation of pricing actions will drive gross profit margin expansion.

Moving to slide 21.

Third quarter of 2022, EBITA loss was $92 2 million compared to an EBITDA loss of $6 5 million in the third quarter of 2020 demand adjust.

Adjusted EBITDA loss for the quarter third quarter of 2022 was $82 $7 million.

In the third quarter total operating expenses as a 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, where the auction Tony mentioned earlier. However, we will not see the full benefit until 2023.

Now focusing on our balance sheet and cash flow.

September 30, 'twenty to 'twenty, two we had cash and cash equivalents and short term investments of $123 million.

Total outstanding debt credit institutions up $4 4 million.

Have not drawn any loans under our revolving credit facility of approximately $320 million, excluding the core of an additional $76 million.

Net cash used in operating activities increased by $56 6 million to $215 2 million for the nine months ended September 32022, compared to 104 to eight 6 million during the prior year period driven by.

Our higher loss from operation.

Capital expenditures were $178 5 million for the nine months ended September 32022, compared to 190 to $6 7 million in the prior year period, Capex spend was lower than last year due to the facing of our facility investments.

Net cash used in financing activities was $10 million for the nine months ended September 32022, primarily reflecting the repayment of lease liabilities and repayment of liabilities to credit institution.

Turning to the guidance on slide 22.

For fiscal year 2022, we are updating our revenue outlook and now expect revenue of $755 million to $775 million based on 2021 exchange rates or constant currency, an increase of 17% to 20%.

For fiscal year 2021.

At the prevailing FX rates. This implies a revenue guidance of $700 million to $720 million, an increase of 9% to 12% compared to fiscal year 'twenty to 'twenty one.

Dollars of the reduction is driven by operational challenges in America, which limits our ability to accelerate sales momentum.

And third is $2 $37 million is driven by COVID-19 pressures negatively impacting sales in Asia.

We believe these challenges are trusted transitory.

As COVID-19 restrictions ease in Asia, and we have more stable production in America, we have.

Significant opportunities for growth.

Currency exchange rates are volatile and difficult to predict our updated guidance is now based on spot rates as of September 32022.

Two accounting for approximately $15 million of the change versus the previous revenue guidance.

Please refer to the last slide in appendix of the earnings presentation for details on exchange rates.

As I stated a few moments ago compared to the third quarter of 2022.

Gross margin improvement and operating expense 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 million to $240 million for fiscal 'twenty to 'twenty two given the phasing of certain projects.

We continue to expect to run rate production capacity to be approximately 900 million liters of finished goods.

In fiscal 'twenty to 'twenty two.

With the phasing 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 repaid Capex project 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 we will significantly reduce our capital needs.

We have lowered the capital raise requirement $200 million and extended the capital raised period until June 32% to 23 in our Rcs Amendment to reflect these actions.

With this refined clarity on our capital needs. We are actively working on multiple financing truck.

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.

<unk> 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 improved gross margin and leverage our improved cost structure create the organizational changes Tony outlined we see a path to improving gross profit margin with the actions I discussed earlier and.

In regards to our long term guidance.

Currently evaluating the impact of the strategic actions, we are taking especially as it relates to a more asset light 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 I 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've taken decisive action to address the operational issues.

To prepare for the next phase of growth.

That's the view, 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 one on your telephone keypad.

Information tone will indicate your line is in the question queue you May press star two.

If you would like to remove your question from the queue.

All 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.

From Barclays. Please go ahead.

Great. Thanks very much.

Maybe just maybe to start off.

I think your initial target for self manufacturing.

Is $50 to 60%.

Do you have a new longer term targets 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 some of these sort of self manufacturing facilities already under various states of kind of construction or completion.

Hi, Andrew This is Tony here. Thanks for your question and just let me just start off with the gross margin I will ask Christian.

Click on the rest of the questions here now in terms of gross margin transitioning to hybrid will potentially.

I have a small concession on margins, but we are not ready at this time to provide any guidance.

We are discussing with various parties the small concession though.

Just will is outweighed by simplifying our supply chain operations and execution.

So I can't give you any clear uptake on the margin less come back to that point once we have finalized all the discussions.

Does anything more to add there to them it will come back but in terms of maybe question.

The settlement document will obviously have a slightly different.

Share of our total capacity as compared to before although we will have to come back on that point.

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 are working across all of the various region. We're specifically looking at the one facility in.

Dallas Fort worth.

<unk>.

Okay.

And then last.

Got it and then just a quick clarification I.

I think you had mentioned <unk> you expect gross margins to improve sequentially and then Christian earlier in the prepared remarks, you mentioned <unk> 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.

Thank you Andrew can I just.

To clarify again, because you mentioned magnitude.

We see potentially a small concession on the margins.

Got it.

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 towards a more hybrid strategy.

Obviously to his point and to your point there were better economics that you had laid out for the NTN manufacturing, but you'd also talked about some others.

Other tailwind right in terms of having more control over the process and I think you had mentioned some flexibility to maybe build some value added processes. When you control the entire supply chain. So 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 me I don't want to use.

The words sacrifices, but choices as you kind of veer away.

From end to end on a more permanent basis.

No.

Thanks, Ken I think Thats a great.

<unk> here so.

Let me just elaborate a little bit here. So we are continually adapting our.

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.

Yes.

There are a number of reasons why we're taking this course and if you allow me just just let it bleed forward three of them. So first of all that is resource allocation decision now building.

Multiple Amgen factory.

He is just heavily especially now high rate enabled us to put more focus on our.

Proprietary production and other value driving items, such as innovation brand and sales et cetera, So we simplify and remove complexity second.

And the ability of strategic co Packers.

Easier to find now than before since we have both scale and growth so meaning that we have more qualified partners to work with in terms of food safety quality and security of supply.

Because you are hitting on the finance here, we have the liquidity and our confidence in our ability to raise capital going forward.

That's not the decision. This is a business that can you just give patients 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 haven't seen 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 you color.

No. That's helpful. Thank you and then I wanted to ask you.

The departures of the chief supply chain and EMEA ahead can you give us a little more color about.

The circumstances around that versus made by these individuals typically we'll hear a little more color than just <unk>, it's part of the company.

Well, we are continuously evaluating the skill set as we grow we high growth company.

The capabilities of both JC, Daniel essentially combined is.

It's really really adding a lot of value to the company and John Kristoff had a very solid background in building other companies' rapidly including that.

Complete supply chain network on a global scale and that is of course, something that we want to benefit from.

And besides that jump yourself is also we're seeing innovation to science supply chain. This extensibility.

And people transformation functions, Daniel is focusing on the on supporting and leaving the region businesses here.

To your point, we are just the organization that is continuously evaluating various skill sets across the organization.

Thank you.

Our next question comes from the line of refresh product from Oppenheimer. Please go ahead.

Good morning, this is actually Erica eiler on for <unk>. Thanks for taking our question.

I guess I just wanted to hit on cost pressures real quickly.

Just sort of the latest you're seeing here.

Curious what remains the biggest pressure.

<unk>.

And maybe where you see some things starting to ease and then along those lines some of your.

CPG peers have given some early results in terms of what they are expecting next year.

If theres any color you can provide there that would also be helpful.

Yes, and then in terms of.

Inflationary pressure.

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 cost.

Electricity Labor does Thats, what were seeing and then going into 2023.

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 6% to 7% on a consolidated level and plan to penetrate.

And I think I also want to add in terms of what we will do is to continuously.

Some of that inflation with pricing actions.

Okay, Great and then just.

Given the macro impacts on your business I mean, you've talked about some of the slower version to plant based that you've seen in recent quarters, but can you maybe just give us an update on Canada youre seeing there in terms of consumer behavior and kind of that the.

The slower conversion.

That you've been seeing and kind of how that how that.

It looks lately.

Okay.

Thanks, Derrick this is Tony.

So just want to make sure that it's clear that the getting down has nothing to do with the brand or demand.

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.

Terms of adding doors and partnerships in foodservice and retail channels in the U S. We still have the highest velocities.

The daily Universe, and Daniel maybe you can put some color to that.

Thank you Tony and thank you for the question.

<unk>, let me acknowledge that this is pretty extraordinary environment and why we are we are experiencing however.

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.

With 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 than that.

<unk>, Germany, where we are growing ahead of private label and also the U K, so with improved execution.

The path is to converting the re consumers into plant based and we see that impact as you know very well better than me in the U S until about capacity supply meet the service levels, which are improving.

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

Thank you.

Our next question comes from the line of Brian Holland from Cowen and company. Please go ahead.

Yes, thanks, good morning.

I just wanted to follow up on Andrew <unk> 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.

Just wanted to try to get a little more color around that so if the Texas facility under construction yet.

What could a manufacturing partnership look like would that be a lease back I think Andrew was asking about.

How this sort of evolves given some of these facilities are under construction. So just trying to get a sense of that.

Capacity situation sort of shifts from <unk> to co manufacturers or.

Taking capacity out or if youre still building all these plants and maybe just working with partners from there.

So.

Hi, Hi, there.

That's a good question. Thank you.

First of all what we do here is to protect growth.

Balancing and calibrating.

Growth and cost here.

And first of all it will not have an impact on volumes going forward or the growth rate going forward.

Texas, Yes, we are building there, but we are now thinking about it.

Or.

Actively.

Pursuing.

If the churn.

It's a hybrid model like we hadn't listing in SaaS as we had in Singapore and that also go for it goes for Peterborough.

Jason maybe you want to.

Maybe a little bit thank you, Tony and Hi, Mike.

Cook clients of course that our first one in the U S and the other one.

We are currently building that is also in scoop is feasible in the U K in both cases, we are actively working to find the right strategic partners and to answer the second part of your question by him and we are looking at plus we pulled our hybrid model, where we take ownership and responsibility for appropriate to the <unk> process and then.

We partner with others.

And as for the feeding pumps. So I think the intent is to do exactly the same model.

This well and we see that.

Great way to make sure put tools.

Great I appreciate the color there.

And then I wanted to talk about the U S. Total distribution points in the tracked channels appeared to decelerate meaningfully.

Commensurate with the recent shelf resets several of your competitors.

The accelerated simultaneously.

Does 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 or maybe said another way is it fair to say you are getting punished by customers. At this point that you have for lack of a better term.

I'll take that Brian Daniels here again.

Let me, let me add some of the details that you're asking likely.

Demand in velocity has remained very resilient in the U S and we don't see any effect any impact on that then.

The best proof of that is the recent market share development, what we see in the last 12 months and full weeks, we see we're gaining share.

Despite the service level issues, so thats exactly.

You said, that's exactly what you're seeing there the.

The impact on some of the Tdp's have to do with the service levels, which we see are improving already.

We look forward to sharing more with you in the next earnings call.

Brian just to make it clearer no it is.

Related to supply and also remember that we're still balancing supply between retail and foodservice channels.

Understood appreciate it I'll leave it there 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.

So kind of looking into other.

Or let's say multiple financing tracks.

If if needed.

Overtime for incremental capital and maybe if you could just expound on that whatever you are willing to actually say it would be helpful.

No I mean, I think we we are actively working on multiple financing products and we will provide more clarity when we have more to share. One example is.

Which I didn't say in the prepared remarks is that we just recently signed a credit local credit facility.

Asia.

A quick $1 million to $5 million.

Providing more flexibility there.

But we're actively working on and we're very confident we also have the support from our shareholders as well.

Okay Fair.

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's out of required kind of further the full development of the prior plan I think at some point you had thrown out a number approximately let's say $400 million or so to complete all the projects in Capex now I looked at all the facilities I know the two that would be shifting.

And then I hear you talk about the savings coming kind of more from the P&L side in terms of that capital savings piece.

Is this like somewhat of a material.

Savings piece on the Capex side or would you argue it's probably a little bit more P&L related.

Obviously some.

Some reduction in longer term capex and that's it thanks.

Okay.

No in terms of the tap of the lower capital requirement, a big part of that is related to.

That combined.

So we've reduced the capital funding needs that we have by by $200 million.

Right, Okay, but I mean this this this next phase that we're discussing today.

It doesn't sound like that was the lion's share of the lion's share was kind of what we were talking about on the reduction in the Q2 call is that does that fair.

Yes, but also looking ahead, if you're looking more moving towards an asset light model that will also drive.

Lower capital needs going forward as well, okay. Okay, alright, alright. Thank you so much.

Thank you. Thank you.

Our next question comes from the line of Bryan Spillane from Bank of America. Please go ahead.

Thanks, operator, good morning, everyone.

Just just two questions on my end the first one in.

What actually isn't working.

Thank you Brian .

I will take this one so all of them lead to billions of two different things. One is the continued event.

Frankly, I think we said last quarter, we were in the last mile improvements towards the prediction and the reality is is that we are still improving and stabilizing production. So daniela myself, we've been three things to the site.

Any clear root cause analysis of.

What's driving this long ramp up and we have no action plan and I'm happy to report that over the last six to eight weeks now we are seeing stable production there on the other side, but Tony referred to easily have a one time incident technical incidents in the line at the end of the <unk> focused that's kept one of two old baseline.

Steel up to mid September and because you asked specifically see what's happened is we had an incident with wonderful fire suppression system, which is.

Safety device that is connecting in the pipe between the <unk>.

We received both from our old think into the province, it's a safety device.

That didn't work anymore and it took us a lot of things to get the pre place simply because it is an empty explosive device into that which means we cannot <unk>. Let me first go through the whole. So that's exactly what happened, but the main therapies, we continue to ramp up to full 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 on the.

Earlier question around <unk>.

Multiple financing tracks Tony have you.

Thought it all of you has only at all explored the potential of just merging with someone who is larger has more scale I mean, theres a little bit of like the Dol caught the car here like you've caught us you've got the growth.

But really having a difficult time scaling up to sort of service that growth. So.

In the range of possibilities.

Is that is that something you've considered.

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 a runway absolutely massive and remember one thing the hurdles that we have experienced are very much making sure the macro combined with supporting the high growth that we have.

So more so much more to do and there is still much competency in this very decisive strategic actions that we're taking now to prepare this organization of the company for growth and again, we have this underlying demand again no demand issues.

See the opposite we see velocity strength, we see market share gains we see.

Us expanding across regions. So.

Confidence level is high. This is this has been a very much an execution exercise that we need to improve and we are taking decisive action. So that is the reason okay. Great. Thanks Tony.

Thanks.

Thank you.

Our next question comes from the line of John Baumgartner from Mizuho. Please go ahead.

Good morning, Thanks for the question.

Wanted to come back to reorganization and reductions for operating expenses relative to sales or opex as 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 overtime with sales so given the business a second look.

Yeah.

So first of all John jump is not speaking.

Technically we didn't know SG&A costs.

System of distribution costs, So I think thats.

An important factor when you benchmark compare which I.

I know you've got the hump of you'll drill it so.

Then to your next question, which was as we reset our cost base.

Are we taking any risk there I think we have we amend the very very bottom up approach we have done the entire analysis ourself.

Liberating the guide people that at least in the Bay as teams and we have really done the exercise in the set with the <unk>.

At least initially so the question was what do we need capability wise.

Propel us into the next step to go so we've been really looking for scalable muddle. The second thing that is leaving us ease simplicity and clarity.

Any fast growth company, we are growing very fast and so some bumps of organization and therefore, we really need to bring simplicity and clarity and finally, the expected outcome of that is diminishing our fixed cost structure is to accelerate the path to profitability, which was Tony.

Lisa.

The specific intersection we have looked at first back to your regional resources was deemed that section of the Coke life in the global layer with the European leader and Daniela nine coming in June we had the opportunity to see some opportunities there and this is what we have done so.

So I want to leave you we think that.

The main priority the main focus for us has been to position ourselves to investing goals because not even really remains our number one priority.

Okay. Thanks for that and just a follow up on the European environment. It looks like from 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 the.

Seasonality relative to just the overall macro environment and what's your confidence level for seeing velocities and demand sort of bottoming given the given the macro uncertainty in Europe . Thank you.

Thanks for the question Danielle taking it here and I think youre, referring very well to what Tony was mentioning in the previous earnings call.

That means these 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.

Two or three months of stable volume growth across the markets in Europe , and we have seen now reflected Doug 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 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.

Nathan Happy holiday season, Thank you everybody.

Thank you.

Conference has now concluded. Thank you for your participation you may now disconnect your lines.

Q3 2022 Oatly Group AB Earnings Call

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