Oatly Group AB Q1 2023 Earnings Call

May 9, 2023

Okay.

Good morning, and welcome.

The ugly.

2023 first quarter earnings conference call.

All participants will be in listen only mode.

If you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there are opportunity to ask questions. Please note that this event is being recorded.

I would like to turn the conference over to Mr. Brian Garden Vascular relations. Please go ahead.

Good morning, and thanks for joining us today on <unk> first quarter 2023 earnings conference call.

On today's call are Tony Peterson, Chief Executive Officer, and Christian Hunker, Chief Financial Officer.

John Kristoff Slide 10, global President and Daniel <unk>, Chief operating Officer will also be available for questions.

Before we begin please review the disclaimer on slide three.

During today's call management may make forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095, including statements regarding our future results of operations and financial position industry and business trends business strategy market growth and anticipated cost savings.

These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could differ materially from actual events or those described in these forward looking statements.

Please refer to the documents we have filed with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today.

Also please note on today's call management will refer to certain non <unk> financial measures, including EBITDA adjusted EBITDA adjusted EBITDA margin and constant currency revenue growth. While the company believes these non <unk> financial measures will provide useful information the presentation of this information.

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 or the appendix of the earnings presentation for a reconciliation to the most comparable measures with that I'll now turn the call over to Tony.

Thanks, Brian and good morning, everyone. We appreciate you joining us today.

Before we get to the results I would like to take a moment to discuss our announcement. This morning that I will be transitioning from CEO to co chairman of the board of directors.

I have led to place in 2012 through both of our global expansion of our IPO and I'm extremely proud of the work that we have done as a team over the last 11 years.

I look forward to taking on a new and exciting challenges co chairman of the board alongside our current chairman Eric Mailloux.

And I have the utmost confidence in the future of this company under a new leadership.

We are pleased that John Kristoff flatten will become our CEO beginning on June 1st.

Joined us about a year ago as our global precedent and has done a great job implementing significant value creating transformation throughout the organization. He brings over 30 years of experience, leading global high growth consumer brands and he has a strong track record of delivering both top and bottom line growth while also nurturing collaborative car.

I have full faith that he will do a wonderful job and look forward to working alongside him as we continue to execute on our growth strategy.

Moving on to our results we delivered solid results in the first quarter and we believe 2023 is off to a good start we.

We made progress against each of our key 2023 priorities accelerate topline growth globally continued to make improvements in the supply chain and drive towards profitability, which we continue to expect to reach in 2024.

As I said on our last call <unk> starting to play offense in 2023 and each segment is starting to play offence in its own weight given the good progress. So far this year, we are reiterating our 2023 guidance.

You can see that we made progress of each of our priorities our constant currency revenue growth of 24% was 960 basis point acceleration relative to our fourth quarter growth rate and gross margin expanded by 150 basis points sequentially and we improved our adjusted EBITDA both.

Over year and quarter over quarter.

Page eight lays out the EMEA segment, 2023 priorities, which we discussed last call as you will see we made good progress against each of these priorities.

Page nine shows progress in the first two priorities. The total EMEA category growth remains quite robust with ultimately continuing to grow double digit rate on a year over year basis.

And our key markets of Germany, U K and Netherlands continued to post very strong market shares.

We are also continuing to sign up new customers and foodservice.

May have seen some of our recent press releases announcing some exciting partnerships and we continue to sign new and exciting customers like the ones on this page.

Moving to slide 10, and our expansion beyond cost locations, our product portfolio is able to replace almost any type of milk, whether you won a note based milk for Ya breakfast cereal fruit smoothie for baking right now the use we have delicious product for you to enjoy.

You can see on this page does retail shelf now stopped and enhanced lineup. We are supporting these products with disruptive in store activation and media that educate the consumers and how they can use our products to replace dairy we are very excited about this as it increases the number of ways that our consumers can engage with our products.

Okay.

We intend to engage with consumers with an aggressive marketing plan in Q2 and Q3.

On slide 11, you can see some of the ways, we'll be engaging with consumers.

We will be supporting the expansion beyond coffee with the campaign across all our core markets in multiple types of media.

In foodservice, we will also be rolling out self serve by introducing it to consumers at a variety of events and festivals across EMEA.

Finally for EMEA on Slide 12 gives you an update on our geographical expansion. These new markets are still a small portion of the segment's total volume, but they drove almost a third of the volume growth in the quarter. This is very good progress so far and we're excited about what's to come.

Turning to the Americas segment on Slide 13 here, we have laid out the Americas segments 2023 priorities that we discussed on our last quarter's call. As we noted we are pleased that this segment has improved its supply chain and is now able to be more aggressive on the commercial side.

Let's start with the supply chain update on slide 14.

The transition to <unk> food is going very well, which is largely be enabled by not only <unk> deep operational experience, but also yeah hiring Oakley frontline employees, we have.

Pleased with the progress and see that our service levels have remained in the mid nineties.

The successful transition to <unk> is enabling us to consolidate our co Packer network in the first quarter, we moved quickly to terminate the agreement the impact of co Packers.

This consolidation to have material benefit on our cost structure as we're moving from costly inefficient situation, where we have to search far and wide for partners to a more simple and efficient structure that is lower cost.

We expect a complete operational consolidation to be complete by the end of the third quarter.

Turning to page 15.

You can see that we are executing well on our commercials priorities given that our supply chain is stable, we have been able to drive good distribution expansion in retail largely driven by an increase in the number of items for distribution point, while also seeing good expansion in the number of stores.

You can also see that we have started to increase our promotional rates in the last few weeks of the quarter. We expect that our promotional rates will continue to increase in the coming months.

The promotions are not only intended to drive consumer demand, but they also send an important signal to our retail customers. They were confident in our supply chain stability and ability to service the demand.

On the right side of this slide you can see that our market share has started to improve in the most recent data. It's still early and we still have plans to work to do but we are happy with the progress we're making.

Slide 16 outlines some of the additional actions will be taken to support this segment.

This month, we are launching two marketing initiatives that will kick off a series of brand building Activations.

The first is an unprecedented partnership with marks <unk> first ever plant based food sponsor of a used national Sports League.

This multi year partnership with a minor League Baseball Association designates OLED as the official oat milk and non dairy frozen dessert all 120 minor League baseball team spending Albuquerque, New Mexico to Portland, Maine.

Sponsorship will include Armfield branding stadium confessions digital media and hundreds of sampling events that bring the plant based revolution to fans in cities Big and small.

And just this week, we called the dairy industry to action asking you to follow our lead on publishing the climate footprint of its products climate impact just like we do on our packaging. We are executing this through high impact Billboard and center page spreads in the country's biggest markets.

On Slide 17, you can see that we are even offering free advertising to any dairy company the desk to share the verify climate footprint of its product and match our standard of climate transparency. This is just another example of US starting to play offense in 2023.

Turning to Asia on Slide 18 here, we remind you that our priorities for 2023 includes expanding distribution launching new products and driving efficiency.

Asia has continued to see steady gains in foodservice via the coffee and tea channels.

It is also see rapid growth in retail.

Slide 19 shows how our retail execution is a great example of two of our priorities expanding distribution and launching new products.

You can see on the left hand side of the page that we have continued to expand distribution and retail with over 200% year over year growth in store count great progress by the team.

You can also see here. Some recent examples of new product launches in both drinks and ice cream.

In Q1 ice cream already reached approximately 7% of segment revenue driven by new SKU launches and strategic partnering with specific customers with special editions.

In Greece, we have several exciting new product launches in Q1, we launched Camilla flavored ready to drink lots as well as multiple flavors of oat milk and smaller packaging.

And we are very excited about the anticipated Q2 launches of our ready to drink clusters that are co branded repeats and Tim Hortons, our team's ability to locally developed design and produce these products to cater to the local consumers' preferences is truly a differentiator for us.

Turning to slide 20.

The Asia team is making good progress on the efficiency programs. So far this progress enabled by the significant year over year increase in both volume sold and volume produced locally now almost all of our Asia volumes is produced locally as opposed to a purchase from EMEA.

As we mentioned on last quarter's call. The Asia business saw an impact from COVID-19 at the very beginning of the quarter. This temporarily impacted demand our ability to supply it as well as our supporting functions in the office.

The Asia team has recently launched several efficiency programs that we expect to reduce cost we look forward to updating you on them in the future.

So in summary, we reported a solid first quarter, we're making progress on each of our strategic priorities. We will continue to be disciplined in balancing growth driving investments and profitability and we remain on track to deliver on our 2023 guidance with that I will turn it over to Christian.

Thank you Tony Good morning, everyone turning to the financials on slide 23, you can see that we had a solid first quarter with year over year revenue growth of 18%, which was driven by constant currency revenue growth of 24%, which is an acceleration from the fourth quarter.

We reported gross margin of 17%, which is an increase of 790 basis points compared to the prior year and an improvement of 150 basis points compared to the fourth quarter.

Our adjusted EBITDA in the quarter was $50 million loss, which was an improvement of 22 million versus the prior year as well as an improvement of $11 million compared to the fourth quarter of 2022.

On page 24, you can see the total company sales bridge for the first quarter, we increased our revenue by 18% to $195 6 million.

And the 2% to 4% constant currency revenue growth was driven by a 9% increase in volume and a 15% increase in price mix.

Slide 25 shows the sales bridge for each one or borrower segments I will only call out a few notable items.

EMEA showed strong volume growth in the face of the recent price increases.

<unk> remained muted the Americas saw a large price mix benefit reflecting three drivers.

The price increase we took into third quarter of fiscal 2022 across all channels and.

An additional price increase we took within the foodservice channel and a positive customer mix benefit as we had strong retail volume growth and a positive customer mix in foodservice.

Asia continued to show strong volume growth and a 1% increase in price mix was an improvement compared to the fourth quarter's 15% decline as promotional intensity moderated.

Overall, we are pleased with the sales growth across each segment.

Slide 26 shows the sequential quarter over quarter gross margin bridge for the total company, we have grouped the bridging items to be consistent with the margin bridge that we presented alongside our fiscal 'twenty to 'twenty three guidance last quarter, and we have provided a year over year bridge independent.

<unk> of the presentation.

Compared to the fourth quarter, we saw an 80 basis.

<unk> point headwind related to the COVID-19 environment in Asia as Tony mentioned, there was an increase in cases early in the quarter, which led to lower utilization and absorption that headwind was partially offset by the lower promotional spend in Asia.

EMEA of price increases implemented in December of last year and throughout the first quarter contributed a 240 basis point margin improvement. We also saw a 140 basis point benefit primarily related to customer and channel mix in the Americas.

Cost of goods per leader, so a sequential headwind of 200 basis points. This is primarily related to the Americas, which saw a negative impact related to costs from the co Packer network consolidation. We also experienced a slight headwind related to inflation, which was partially offset by supply chain.

In EMEA.

Finally, we saw a 40 basis point benefit primarily related to segment mix and FX, We don't expect segment mix or FX to be a meaningful margin driver for the full year.

Turning to slide 27.

We are pleased to see that our EBITDA continues to improve sequentially. In total EMEA continued to report positive EBITDA and the Americas made progress absent the noise caused by the co Packer consolidation.

Asia continued to make progress as they transition to a post COVID-19 world and the corporate expense line has settled into what we expect to be a normal quarterly level.

We also closed on the previously announced fundraising in mid April we raised a total of $430 million, which is $5 million more than we what we announced on last quarters call with the difference being a slightly larger term loan.

We're also excited to share that hillhouse, a global investment firm will invest $35 million in <unk> convertible notes pending shareholder approval and receipt of certain lender consents.

Hillhouse will received convertible notes with nearly identical economic terms to the convertible notes that we announced on last quarter's call.

Hillhouse is also buying $50 million of convertible notes from our shareholder Berlin best.

<unk> has a great track record as a global investor with expertise in Asia, and an extensive portfolio of leading consumer and foodservice brands. They have successfully helped companies accelerate Asia growth and navigate regional complexities through capital investments.

Customer and partner introductions and support on strategic decision, making.

OLED hillhouse have known each other for years and I can confidently say there is a mutual respect and admiration we see enormous potential and our relationship with hillhouse not only financially, but also strategically by leveraging their track record expertise and relationships to continue to scale our opera.

<unk> across China.

While our business plan was already fully funded with the $430 million. We believe this investment aligns interests, while providing us with additional firepower to augment our business plan and achieve our long term ambitions.

Turning to slide 28, as Tony mentioned, we are reiterating our 'twenty to 'twenty three guidance, we continue to expect constant currency revenue growth in the range of 23% to 28% with the acceleration driven by the initiatives that Tony discussed we continue to expect sequential.

Quarter over quarter improvement in gross margin, even with the increase in Americas promotional support in the second quarter and to reach the high Twenty's in the fourth quarter.

We also expect capital expenditures to be in the range of $180 million to $200 million.

Finally.

We continue to believe that our actions will enable us to improve adjusted EBITDA profitability and reach positive adjusted EBITDA in 2024, as we move through this fiscal year, we expect second quarter adjusted EBITDA to be close to the first quarter's level.

After a sequential increase in net sales dollars and the sequential expansion of gross margin are offset by the increase in marketing investments in the U S. As.

<unk> in EMEA.

And then we expect the second half to see a more material inflection in dollar profitability. This cadence is consistent with our original budget with that we are now ready to take your questions operator.

Thank you now begin the question answer session.

That's a good question you May press Star then one on your Touchtone phone users speakerphone. Please pick up your handset before pressing the keys.

Withdraw your question. Please press Star then two.

We will pause momentarily to assemble the roster.

First question comes from Michael Lavery Piper Sandler. Please go ahead.

Good morning, Thank you and congrats on your new roles.

Thank you thank you Michael.

Just was wondering if you could give us a little bit of a peak further ahead you mentioned.

Again, how do you expect EBITDA positive in fiscal 'twenty four do you have a little better line of sight on how that unfolds, what would that be a run rate at the beginning of the year or how do you think about just.

Modeling a little bit further out I know you don't want to be too specific and it's still a ways off but just given that you've got some seem to have some plans. There just any color you could add would be helpful.

So Mike It's Christian I can start and then one Alex and the team feel free to chime in and as we have said.

In our previous earnings call.

We expect to.

Close to a year.

Enabling us to achieve a positive adjusted EBITDA on a full year basis.

Four we are not at this point in time, giving any quarterly guidance in terms of how that will unfold in 2024, that's on a full year basis.

Okay. That's helpful.

Just on the.

European foodservice opportunities and specifically.

The announcement with Mcdonald's can you give a sense of how much more doors that could open or any sense of how that Scott, let's start that's gotten off to or maybe just.

An update on how that can unfold.

Thanks, Michael This is Daniel here, yes.

Yes.

Early early days early weeks.

Is going really really well and what we can say at this stage is that there are many there are some more in the making in the same in the same profile of <unk> and foodservice customers, but we're very excited about these mcdonald arrangements and partnership.

In Austria.

Okay, great. Thanks, so much.

Sure.

Thank you and the next question will be from Rob Dickerson of Jefferies. Please go ahead.

Great. Thanks, so much.

Just a question two quick questions one on America pricing Americas pricing.

Clearly up almost 30% in Q1, but then there's the commentary around it.

Kind of leaning in a little bit more on promotional activity.

So I'm just curious kind of we get through the year.

Sounds like <unk>.

Because of the increased promotional activity.

We should see kind of a.

Let's see a deceleration.

In a year over year pricing growth as we get through.

Through Q2, and the back half of the year.

But at the same time it does seem like it was a little bit higher rate in Q1 than expected I think you were kind of pointing to more high teens. So if you think about the full year are you seeing your Americas pricing come up lets say mid teens.

And then I also ask.

Just because supply is more beneficial.

We saw revenues on an absolute basis kind of flat sequentially relative to Q4 and Q1.

Is the expectation here that we start to see actual better volumes with also higher pricing such that we would see a material acceleration in absolute revenue dollars.

And then I have a quick follow up.

As Christian I can start out and then I think Daniel sort of.

Add to it in terms of the price mix it will decelerate throughout this year.

Quarter by quarter. So I just wanted to give you that context.

Anything else that.

No.

Just to add some color to Christiane yet.

We will see in the second part of the year that deceleration coming in net sales per liter as we lap our price increases and as you said, we are improving even the availability and consistency of supply and fill rates. We are improving on adjusting months after months the promotional levels and we start seeing.

Some early good signals of that base. If you look at this data of the month of April we start seeing not only net sales cigna.

Significant improvement some unit sales volume growth.

But we haven't seen for some time so yes, we see we expect these continuous sequential improvement as we move forward.

Okay Super and then just a quick question on the supply chain. It sounds like you know transition going well so far with your <unk>.

Is there anything else potentially in the pipeline.

That could be.

Benefit from a similar transaction or do you feel as if at this point.

Sure.

You are you fairly comfortable with what you have.

That's it thanks.

Thank you Jean Christophe speaking I think we are fairly comfortable with what we have we have no further update today, because we are still evaluating options as we have said in previous calls both some <unk> in there.

The UK is where those in Asia Pac three.

Effectively in Asia.

Because we are evaluating options as we speak so the only build I would say is.

Our long term margin targets that we shared with you guys in the last previous earnings calls.

Absolutely in line and achievable no matter, which supply model, we choose for them.

Yeah.

Fair enough. Thank you so much.

Okay.

Thank you next question will be from Peter Galbo Bank of America. Please go ahead.

Hey, guys. Good morning, Thanks for taking the question.

Thanks.

<unk> here.

Thanks, Tony just maybe maybe we could start off just on Americas now that and maybe this is a good follow up to Rob's question, but just like now that the supply chain is obviously back on solid footing.

Have you gone back and kind of reevaluated just your priorities between between foodservice and retail on a go forward basis. I know you have a slide that kind of shows a 50 50 kind of revenue mix split.

In Americas, but just again now that you are kind of back in in more normal setting.

Kind of how youre thinking about the split maybe more on the volume side between those two channels going forward.

I will take that Peter is Daniel here again.

Indeed.

Supply becomes stable, we have ambitious plans on both channels, that's the reality right to us.

You will remember in retail we have ambitious plans in tdp's existing and new doors to accomplish this year.

We expect some robust results as we move forward, especially quarter two onwards, and we also are moving ambitiously ahead in foodservice. So we expect big.

Cost of recent past the retail footprint to enhance versus foodservice and with that of course will come but big part of the improved margins that we expect this year, but.

I'd say headline Peter I would say, we have ambitious plans in both in both channels.

Okay.

And then maybe just going back to the EBITDA profitability targets for 'twenty four I know you don't want to get into quarterly guidance or phasing or timing on that but just is there any way you can kind of help us bucket.

Reaching that that target of EBITDA profitability, how much of that is supply chain change how much of that is mix improvement how much of that is inflation getting better just what are kind of the big buckets.

Any kind of I don't know percentage you could assign to them. Thanks very much guys.

Yes, I mean I can start it's Christian here.

The big driver is to continue to improve the utilization of our facilities as we grow our business.

And then you will see the leverage on the operating expense side.

Okay. Thank you.

Okay.

Thank you next question will be from John Bumgarner Mizuno, who go ahead.

Good morning, Thanks for the question.

Good morning, I wanted to come back good morning, I wanted to come back to North America, and your promotional plans and the increased promotion there how should we think about the balance between price based promos relative to investments in display feature more sort of a quality approach just given where the category is right now the broader consumer and how youre thinking about.

Managing the promotional approach.

Thank you John Daniel again here you saw.

We're doing both things.

<unk> consistently improved.

And maintain fill rates.

And the execution, we are improving promotions ended that is exactly the two things you have mentioned first we have to enhance our promo pressure given the competitive context, and we see some very good early results of that in the last scan data both March and April .

And in store.

Ability and visibility is key.

Let me let me tell you that's exactly what we do very well in Europe consistently in Europe , which is.

Our velocity significant improved when we have promotional displays and not just price promo. So we expect to do that as we move along so.

The strengths again, we're planning to do both now that we have consistent of AWD.

Okay. Thanks for that and then in Asia.

We're finally past Covid overhang here.

Could you talk a bit about your operating plans for the next six to nine months and you seem to be in a position to leverage a lot of new distribution points built since COVID-19 youre working through some efficiency projects, but how is the environment or the opportunity change since COVID-19 and how do you plan to reinvest as this market reopens now thank you.

Again, like we said last.

Last earnings call, we are ready to play offense, China being a very dynamic very different market from a consumer respective perspective, we are as we are stating in our deck here.

Increasing significantly the number of stores in retail we're going to continue to expand also.

We have a lot to do in <unk>.

In rolling out our expansion in key shop channels. All we said we are going to execute on.

And investing in the brand continues to be important for us, but again, we have a very strong brand position in China, especially when it comes to coffee shop channel Teashop channel <unk> and building our way into retail now, but also very very excited about.

The expansion that we see in innovation Nan Shan facility now allows us to bring a number of new innovation to two really really.

Hit the consumer market directly and that we think will benefit us greatly as an example, 7% of our total shares in China, China counts from ice cream, so very happy with the development. The Marshawn facility is instrumental to our success there together with our brand position.

Thanks, Tony.

Thanks.

Thank you and again if you have a question. Please press Star then one.

Next question will be from Matt jumper of BNP proper. Please go ahead.

Hey, Thanks for the question and congrats on the new roles.

Question is on gross margin. So it's nice to see that sequential improvement you posted this quarter from what I understand that was roughly.

In line with your expectations and I was hoping we could get a bit more color on the cadence do you expect to deliver as you move towards that high 20% target for <unk> 23.

Yeah in terms of how much expansion, we may expect in <unk> versus <unk> versus <unk> that there is any one quarter that will drive most of that improvement.

And what the key drivers are thank you.

Thank you for that question.

Don't really give specific guidance on the quarter other than we are.

We will sequentially improve each quarter this year.

Until we reach the high <unk> and the.

The fourth quarter.

I think we have particularly did a few things we expect a sequential improvement in the second quarter, but we have higher promotional levels in the U S. As well so I just want to highlight that piece.

Thanks, and then on capacity could you give us an update on where you are in 2023 target stand and also how you would expect here.

Your utilization of your capacity to to end up as you get towards the end of 2023. Thank you.

There's no change in terms of the capacity that we have on hand, and what we have communicated before so we would expect to.

To continuously improve in the utilization of our assets as we are expanding our business.

Plenty of capacity to grow this for next year.

Yeah.

Thanks very much.

Thank you. This concludes our question and answer session I would like to turn the conference back over to Tony Peterson for closing remarks.

Thank you so much this marks my final earnings call as the CEO of Oakley before I transition to my new role as co chairman when I joined <unk> in late 2012, we set out to transform the company and create a meaningful mission and over the past decade, we took a small Swedish company to build a global brand phenomenon, that's making a real impact on the food industry in the world.

I want to thank our investors partners customers consumers and most importantly, all employees past and present for the partnership trustee contributions I couldnt be more proud, although we have accomplished and I'm eager to witness the incredible accomplishment that lie ahead for Oakley.

Thank you for your time and have a great day everybody.

Thank you <unk> Conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Good morning, and welcome.

The ugly.

2023 first quarter.

Earnings Conference call.

All participants will be in listen only mode.

You need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation there the opportunity to ask questions. Please note that this event is being recorded.

I would like to turn the conference over one of Mr. Brian Garden Vascular relations. Please go ahead.

Good morning, and thanks for joining us today on <unk> first quarter 2023 earnings conference call.

On today's call are Tony Peterson, Chief Executive Officer, and Christian Hunker, Chief Financial Officer John .

John Kristoff slots on global President and Daniel or don't Yes, Chief operating officer will also be available for questions.

Before we begin please review the disclaimer on slide three.

During today's call management may make forward looking statements within the meaning of the private Securities Litigation Reform Act of 995, including statements regarding our future results of operations and financial position industry and business trends business strategy market growth and anticipated cost savings.

Not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IRS.

Please refer to today's release or the appendix of the earnings presentation for a reconciliation to the most comparable measures with that I'll now turn the call over to Tony.

Thanks, Brian Good morning, everyone. We appreciate you joining us today.

Before we get to the results I would like to take a moment to discuss our announcement. This morning that I will be transitioning from CEO to co chairman of the board of directors.

I have led us, placing 2012 through both of our global expansion of our IPO and I am extremely proud of the work that we have done as a team over the last 11 years.

I look forward to taking on a new and exciting challenge as co chairman of the board alongside our current chairman Eric <unk>.

And I have the utmost confidence in the future of this company under a new leadership.

We are pleased that John Kristoff flatten will become our CEO beginning on June <unk>.

A levering both top and bottom line growth, while also nurturing collaborative cultures I have full faith that he will do a wonderful job and look forward to working alongside him as we continue to execute on our growth strategy.

Moving onto our results we delivered solid results in the first quarter and we believe 2023 is off to a good start we.

As I said on our last call only starting to play offense in 2023 and each segment is starting to play offence in its own way given the good progress. So far this year, we are reiterating our 2023 guidance.

Year over year and quarter over quarter.

Page eight lays out the EMEA segment, 2023 priorities, which we discussed last call as you will see we made good progress against each of these priorities.

Page nine shows progress in the first two priorities. The total EMEA category growth remains quite robust with ultimately continuing to grow with double digit rate on a year over year basis.

And our key markets of Germany, U K and Netherlands continued to post very strong market shares.

We have also continued to sign up new customers and foodservice you may have seen some of our recent press releases announcing some exciting partnerships and we continue to sign new and exciting customers like the ones on this page.

Moving to slide 10, and our expansion beyond cost locations.

Our product portfolio is able to replace almost any type of milk, whether you won a note based milk for Ya breakfast cereal and fruit smoothie for baking or and now the use we have delicious product for you to enjoy.

You can see on this page is retail shelf now stock an enhanced lineup.

We are supporting these products with disruptive in store Activations and media that educate the consumers and how they can use our products to replace dairy we are very excited about this as it increases the number of ways that our consumers can engage with our products.

Okay.

We intend to engage with consumers with an aggressive marketing plan in Q2 and Q3 on.

On slide 11, you can see some of the ways, we will be engaging with consumers.

We will be supporting the expansion beyond coffee with the campaign across all our core markets in multiple types of media.

In foodservice, we will also be rolling out self serve but introducing it to consumers at a variety of events and festivals across EMEA.

Finally for EMEA Slide 12 gives you an update on our geographical expansion. These new markets are still a small portion of the segment's total volume, but they drove almost a third of the volume growth in the quarter. This is very good progress so far and we're excited about what's to come.

Turning to the Americas segment on Slide 13 here, we have laid out the America segment 2023 priorities that we discussed on our last quarter's call. As we noted we are pleased that this segment has improved its supply chain and is now able to be more aggressive on the commercial side.

Let's start with the supply chain update on slide 14.

The transition to <unk> food is going very well, which is largely be enabled by not only <unk> deep operational experience, but also youre hiring ultra frontline employees. We are pleased with the progress and see that our service levels have remained in the mid nineties.

The successful transition to <unk> is enabling us to consolidate our co Packer network in the first quarter, we moved quickly to terminate the agreement the impact of co Packers we.

This consolidation to have material benefit on our cost structure as we're moving from a costly inefficient situation, where we have to search far and wide for partners to a more simple and efficient structure that is lower cost.

We expect a complete operational consolidation to be complete by the end of the third quarter.

Turning to page 15.

You can also see that we have started to increase our promotional rates in the last few weeks of the quarter. We expect that our promotional rates will continue to increase in the coming months.

The promotions are not only intended to drive consumer demand, but they also a center an important signal to our retail customers. They were confident in our supply chain stability and ability to service the demand.

Slide 16 outlines some of the additional actions will be taken to support this segment.

This month, we are launching two marketing initiatives that will kick off a series of brand building Activations.

The first is an unprecedented partnership with marks <unk> first ever plant based foods sponsor of a used national Sports League.

This multiyear partnership with a minor League Baseball Association designates <unk> official oat milk and non dairy frozen dessert all 120 minor league baseball teams spanning Albuquerque, New Mexico to Portland, Maine.

The ship will include Armfield branding stadium concessions digital media and hundreds of sampling events that bring the plant based resolution to plans in cities Big and small.

On Slide 17, you can see that we are.

Even offering free advertising to any dairy company the guests to share their verify climate footprint of its product and match our standard of climate transparency. This is just another example of US starting to play offense in 2023.

Turning to Asia on Slide 18 here, we remind you that our priorities for 2023 includes expanded distribution launching new products and driving efficiency.

Asia has continued to see steady gains in foodservice via the coffee and tea channels.

And it is also the rapid growth in retail.

Slide 19 shows how our retail execution is a great example of two of our priorities expanding distribution and launching new products.

You can see on the left hand side of the page that we have continued to expand distribution and retail with over 200% year over year growth in store count great progress by the team.

You can also see here. Some recent examples of new product launches in both drinks and ice cream.

In Q1 ice cream already reached approximately 7% of segment revenue driven by new SKU launches and strategic partnering with specific customers with special editions.

In Greece, we have several exciting new product launches in Q1, we launched Camilla flavored ready to drink lots as well as multiple flavors of oat milk and smaller packaging.

Turning to slide 20.

As we mentioned on last quarter's call. The Asia business saw an impact from COVID-19 at the very beginning of the quarter. This temporarily impacted demand our ability to supply as well as our supporting functions in the office.

The Asia team has recently launched several efficiency programs that we expect to reduce cost we look forward to updating you on them in future.

Yes.

We reported gross margin of 17%, which is an increase of 790 basis points compared to the prior year and an improvement of 150 basis points compared to the fourth quarter.

Our adjusted EBITDA in the quarter was $50 million loss, which was an improvement of 22 million versus the prior year as well as an improvement of $11 million compared to the fourth quarter of 'twenty to 'twenty two.

On page 24, you can see the total company sales bridge for the first quarter, we increased our revenue by 18% to $195 $6 million and the 2% to 4% constant currency revenue growth was driven by a 9% increase in volume and a 15% increase in price.

Mix.

Slide 25 shows the sales bridge for each one or borrower segments I will only call out a few notable items EMEA.

EMEA showed strong volume growth in the face of the recent price increases App elasticities remained muted the Americas saw a large price mix benefit reflecting three drivers.

The price increase we took into third quarter of fiscal 2022 across all channels.

An additional price increase we took within the foodservice channel and a positive customer mix benefit as we had strong retail volume growth and a positive customer mix in foodservice.

Asia continued to show strong volume growth and a 1% increase in price mix was an improvement compared to the fourth quarter's 15% decline at promotional intensity moderated.

Overall, we are pleased with the sales growth across each segments.

Slide 26 shows the sequential quarter over quarter gross margin bridge for the total company.

We have grouped the bridging items to be consistent with the margin bridge that we presented alongside our fiscal 'twenty to 'twenty three guidance last quarter, and we have provided a year over year bridge and the appendix of the presentation.

Compared to the fourth quarter, we saw an 80 basis.

Basis point headwind related to the COVID-19 environment in Asia as Tony mentioned, there was an increase in cases early in the quarter, which led to lower utilization and absorption that headwind was partially offset by the lower promotional spend in Asia.

EMEA of price increases implemented in December of last year and throughout the first quarter contributed a 240 basis point margin improvement. We also sold 140 basis point benefit primarily related to customer and channel mix in the Americas.

Cost of goods per leader saw a sequential headwind of 200 basis points. This is primarily related to the Americas, which saw a negative impact related to costs from the co Packer network consolidation. We also experienced a slight headwind related to inflation, which was partially offset by supply chain.

<unk> in EMEA.

Finally, we saw a 40 basis point benefit primarily related to segment mix and FX, We don't expect segment mix or FX to be a meaningful margin driver for the full year.

Turning to slide 27.

Asia continued to make progress as they transition to a post COVID-19 world and the corporate expense line has settled into what we expect to be a normal quarterly level.

We're also excited to share that hillhouse, a global investment firm will invest $35 million and <unk> convertible notes pending shareholder approval and receipt of certain lender consents.

Hillhouse Bill received convertible notes with nearly identical economic terms to the convertible notes that we announced on last quarter's call.

<unk> is also buying $50 million of convertible notes from our shareholder Berlin best.

He'll also has a great track record as a global investor with expertise in Asia, and an extensive portfolio of leading consumer and foodservice brands. They have successfully helped companies accelerate Asia growth and navigate regional complexities through capital investments.

Customer and partner introductions and support on strategic decision, making.

Hotelier and hillhouse have known each other for years and I can confidently say there is a mutual respect and admiration we see enormous potential and our relationship with hillhouse not only financially, but also strategically by leveraging their track record expertise and relationships to continue to scale our opera.

<unk> across China.

Turning to slide 28, as Tony mentioned, we are reiterating our 2023 guidance. We continue to expect constant currency revenue growth in the range of 23% to 28% with the acceleration driven by the initiatives that Tony discussed we continue to expect sequential.

Quarter over quarter improvement in gross margin, even with the increase in Americas promotional support in the second quarter and to reach the high <unk> in the fourth quarter.

We also expect capital expenditures to be in the range of $180 million to $200 million.

Finally.

We continue to believe that our actions will enable us to improve adjusted EBITDA profitability and reach positive adjusted EBITDA in 2024. After we move through this fiscal year, we expect second quarter adjusted EBITDA to be close to the first quarter's level.

After the sequential increase in net sales dollars and the sequential expansion of gross margin are offset by the increase in marketing investments in the U S as well as in EMEA and then we expect the second half to see a more material inflection in dollar profitability.

This cadence is consistent with our original budget with that we are now ready to take your questions operator.

Thank you now begin the question and answer session.

That's a good question you May Press Star then one on your Touchtone phone.

We use it as a speaker phone please pickup your handset before pressing the keys.

Withdraw your question. Please press Star then two this time, we'll pause momentarily to assemble the roster.

First question comes from Michael Lavery Piper Sandler. Please go ahead.

Good morning, Thank you and congrats on your new roles.

Thank you thank you Michael.

Just was wondering if you could give us a little bit of a peak further ahead you mentioned.

Again, how do you expect EBITDA positive in fiscal 'twenty four do you have a little better line of sight on how that unfolds.

It would be a run rate at the beginning of the year or how do you think about just.

So Mike It's Christian I can start and then no one else in the team feel free to chime in and as we have said.

In our previous earnings call, we expect to.

Close to a year.

Enabling us to achieve a positive adjusted EBITDA on a full year basis in 2020.

Four we are not at this point in time, giving any quarterly guidance in terms of all of that.

Fold in 2024, that's on a full year basis.

Okay. That's helpful.

Just on the.

European foodservice opportunities and specifically.

The announcement with Mcdonald's can you give a sense of how much more.

Doors that could open or any sense of how that Scott, let's start that's gotten off to or maybe just.

An update on how that could unfold.

Thanks, Michael This is Daniel here, yes.

Yes.

It's early early days early weeks is going really really well and what we can say at this stage is that there are many there are some more in the making in the same in the same profile of <unk> and foodservice customers, but we're very excited about these mcdonald arrangements and partners.

<unk>.

In Austria.

Okay, great. Thanks, so much.

Sure.

Thank you and our next question will be from Rob Dickerson of Jefferies. Please go ahead.

Great. Thanks, so much.

Just a question two quick questions one on America pricing Americas pricing.

Clearly up almost 30% in Q1, but then there is the commentary around.

Kind of leaning in a little bit more on promotional activity.

So I'm just curious as kind of we get through the year it sounds like.

Because of the increased promotional activity.

We should see kind of a.

Let's say a deceleration.

In a year over year pricing growth as we get through.

Through Q2, and the back half of the year.

And then I also ask.

Just because supply is more beneficial we solve revenues on an absolute basis kind of flat sequentially relative to Q4 and Q1.

Is the expectation here that we start to see actual better volumes with also higher pricing such that we would see a material acceleration in absolute revenue dollars.

And then I have a quick follow up.

As Christian I can start out and then I think Daniel sort of.

Add to it in terms of the price mix it will decelerate throughout this year.

Quarter by quarter. So just wanted to give you that context.

Anything else that.

No.

Okay.

Just to add some color to Christiane yet.

We will see in the second part of the year that deceleration coming in Netflix per liter as we lap our price increases and as you said, we are improving even the availability and consistency of supply and fill rates. We are improving on adjusting months after months the promotional levels and we start seeing.

Some early good signals of that based if you look at this data of the month of April we started seeing not only net sales cigna.

Significant improvement some unit sales volume growth.

But we haven't seen for some time so yes, we see we expect this continued sequential improvement as we move forward.

Okay Super and then just a quick question on the supply chain it sounds like transition going well so far with your <unk>.

Is there anything else potentially in the pipeline.

That could be.

Benefit from a similar transaction or do you feel as if at this point.

Sure.

You are you fairly comfortable with what you have.

That's it thanks.

The UK is where those in Asia Pac three.

Effectively in Asia.

Because we are evaluating options as we speak so the only build I would say is.

Our long term margin targets that we shared with you guys in the last previous earnings calls.

Absolutely in line and achievable no matter, which supply model, we choose for them.

Fair enough. Thank you so much.

Thank you next question will be from Peter Galbo of Bank of America. Please go ahead.

Hey, guys. Good morning, Thanks for taking the question.

Thanks.

<unk> here.

Thanks, Thanks, Tony just maybe maybe we could start off just on Americas now and maybe this is a good follow up to Rob's question, but just like now that the supply chain is obviously back on solid footing.

Have you gone back and kind of reevaluated just your priorities between between foodservice and retail on a go forward basis. I know you have a slide that kind of shows.

A 50 50 kind of revenue mix split.

In Americas, but just again now that you are kind of back and more normal setting.

Kind of how youre thinking about the split maybe more on the volume side between those two channels going forward.

I will take that Daniel here again.

Indeed.

Supply becomes stable, we have ambitious plans on both channels, that's the reality right to us.

You will remember in retail we have ambitious plans in tdp's existing and new doors to accomplish this year.

We expect some robust results as we move forward, especially quarter two onwards, and we also are moving ambitiously ahead in foodservice. So we expect because of our recent past the retail footprint.

Enhanced versus foodservice and with that of course will come but big part of the improve on margins that we expect this year, but.

I'd say headline Peter I would say, we have ambitious plans in both in both channels.

Okay.

And then maybe just going back to the EBITDA profitability targets for 'twenty four.

I know you don't want to get into quarterly guidance or phasing or timing on that but just is there any way you can kind of help us bucket, reaching that that target of EBITDA profitability. How much of that is supply chain change how much of that is mix improvement how much of that is inflation getting better just what are kind of the big buckets.

Any kind of I don't know a percentage you could assigned to them. Thanks very much guys.

Yes, I mean I can start it's Christian here.

The big driver is to continue to improve the utilization of our facilities as we grow our business.

And then you will see the leverage on the operating expense side.

Okay. Thank you.

Okay.

Thank you next question will be from John Baumgartner Mizuho. Please go ahead.

Good morning, Thanks for the question.

Good morning wanted to come back good morning, I wanted to come back to North America, and your promotional plans and the increased promotion there how should we think about the balance between price based promos relative to investments in display feature more sort of a quality approach just given where the category is right now the broader consumer and how youre thinking about.

Managing the promotional approach.

Thank you John Daniel again here you saw.

We're doing both things.

<unk> consistently improved.

And maintain fill rates.

And the execution, we are improving promotion Sunday that is exactly the two things you have mentioned first we have to enhance.

Promo pressure given the competitive context, and we see some very.

Good early results of that in the last scan data both March and April .

<unk> store.

<unk> is key.

Let me let me tell you there is exactly what we do very well in Europe consistently in Europe , which is.

Our velocities significantly improved when we have promotional displays and not just price promo. So we expect to do that as we move alone. So.

Just to stress again, we're planning to do both now that we have consistent availability.

Okay. Thanks for that and then in Asia.

We're finally past the Covid overhang here.

Could you talk a bit about your operating plans for the next six to nine months I mean, you seem to be in a position to leverage a lot of new distribution points built since COVID-19 youre working through some efficiency projects, but how is the environment or the opportunity change since COVID-19 and how do you plan to reinvest as this market reopened now thank you.

Again, like we said last.

Last earnings call, we are ready to play offense, China being a very dynamic very different market from a consumer respective perspective, we are as we are stating in our deck here.

Increasing significantly the number of stores in retail we're going to continue to expand also.

We have a lot to do in <unk>.

In rolling out our expansion in key shop channels. All we said we are going to execute on.

The expansion that we see in innovation Cheyenne facility now allows us to bring a number of new innovation to really really.

Hit the consumer market directly and that we think will benefit us greatly as an example, 7% of our total shares in China, China accounts from ice cream, so very happy with the development. The Marshawn facility is instrumental to our success there together with our brand position.

Okay. Thanks, Tony.

Thanks.

Thank you and again if you have a question. Please press Star then one.

Next question will be from my jumper of BNP proper. Please go ahead.

Hey, Thanks for the question and congrats on the new role.

Question is on gross margin. So it's nice to see that sequential improvement you posted this quarter from what I understand that was roughly.

In line with your expectations and that was hoping we could get a bit more color on the cadence you expect to deliver as you move towards that high 20% target for <unk> 23.

Yeah in terms of how much expansion.

<unk> and <unk> versus <unk> versus <unk>. If there is any one quarter that will drive most of that improvement.

And what the key drivers are thank you.

Thank you for that question.

We don't really give specific guidance on the quarter other than we are.

Will sequentially improve each quarter this year.

Until we reach the high <unk> and the.

<unk> fourth quarter.

I don't think we have particularly did a few things we expect a sequential improvement in the second quarter, but we have higher promotional levels in the U S. As well so just wanted to highlight that piece.

Thanks, and then on capacity.

An update on where you are in 2023 target stands and also how you would expect here.

Your utilization of your capacity to to end up as you get towards the end of 2023. Thank you.

There is no change in terms of the capacity that we have on hand, and what we have communicated before so we would expect to.

To continuously improve in the utilization of our assets as we are expanding our business.

Plenty of capacity to grow this and next year.

Thanks very much.

Okay.

Thank you. This concludes our question and answer session I would like to turn the conference back over to Tony Peterson for closing remarks.

I want to thank our investors partners customers consumers and most importantly, all employees past and present for the partnership trustee contributions I couldn't be more proud what we have accomplished and I'm eager to witness the incredible accomplishment that lie ahead for Oakley.

Thank you for your time and have a great day everybody.

Thank you conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Oatly Group AB Q1 2023 Earnings Call

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