Q3 2024 Oatly Group AB Earnings Call
brands we intend to use our competitive momentum to take control and reignite growth.
It starts with our not-so-secret weapon on slide 15. Our family of barista products has been a strong growth driver for us, dominating the growing coffee space.
Our newly expanded lineup, which includes new formats and new concepts like Organic Barista or Lighter Faced Barista, has been helping us to build that momentum.
These products have been showing positive signs of solid velocities, as well as incrementality by recruiting new consumers into the category.
These are terrific executions to make Oatly available to more people, in more places, in different channels, formats, and price points. We expect that these will continue to drive growth going forward.
but we know not everybody drinks coffee. Slide 16 shows the campaign that we're running in the UK.
We all know that Brits love their tea. In fact,
So, we are reminding them that our products are a terrific addition to their daily ritual. This is only an example of how we will continue to surprise consumers to expand how they think about oat milk and the multiple locations they do not consider nowadays in their repertoire.
An example of our single-minded decision to recruit more consumers to the category.
You can also appreciate this is not just an advertising campaign.
but an immersive, engaging experience with our usual disruptive tone. WhatsApp conversations will soon reach six digits, encouraging consumers one by one that only works super well in their cup, short for cup of tea in Britain.
And slide 17 shows another example with a campaign that takes an even bolder approach to recruiting new consumers.
We know that many consumers are reluctant to change and we know the main barrier to category adoption is a preconception on taste.
So, we made it simple the Oatly way. We conducted a blind test, and guess what? More than half of the German consumers we sampled preferred Oatly over cow's milk.
You should expect to see this campaign running across Germany, Austria and Switzerland over the coming months.
Between the UK with tea and Germany with taste, you can see that we are clearly modifying our consumer advertising without modifying the essence of our unique tone of voice.
We will relentlessly provide consumers with the multiple, concrete reasons why they should adopt Oatly, being true to our mission.
When paired with hyper-localized events such as the pop-up stores I brought to you last quarter, as well as provocative in-store displays and strong shelf presence, we believe we have a solid recipe for improving growth trends.
Turning now to our North America segment on slide 18.
This segment's solid results continue to be a direct result of a disciplined execution throughout the entire organization.
We reported a very solid 18% growth in revenue and a strong $11 million year-on-year improvement in adjusted EBITDA.
Slide 19 shows that the sales growth was well balanced between channels, with over 16% growth in retail and nearly 20% growth in food service.
Slide 20 shows the significant retail market share gains we have driven over the past year. In fact, our share of the plant-based milk category is at an all-time high.
Our products are clearly showing up on shelves, and consumers are choosing only over the competition. And customers love our products, since our dollar velocities per point of distribution remain nearly three times higher than our nearest competitor.
Speaking of customers, slide 21 shows that they continue to see the benefits of having our products on their shelves. Our chilled oat milk is the largest part of our retail business, and its retail distribution points are up 45% year-on-year, and the ACB has increased more than 500 basis points to 44%.
This is great progress, and we believe there is room to improve from here.
On the right hand side of this slide you can see some additional distribution we have secured in the upcoming shelf resets that are expected to occur shortly after the new year.
You can see that we continue to expand our relationship with several existing customers, such as Walmart and Costco. Am I also pleased to say that our chilled barista products will return to Kroger after two years hiatus.
Turning to the Greater China segment on slide 22.
I'm pleased to report that the Greater China Segment is reporting its first quarter of profitable growth. We grew sales on a constant currency basis by 12% and we reported adjusted EBITDA of $2 million, which is an $18 million year-on-year improvement.
The business is clearly in a much better position than it was over a year ago, when JC and I started to operate it together with a local team.
Speaker Change: Are the patients to execute a strategic reset as well as separating it from the rate of patients who drive focus, are clearly driving results and have strengthened the
Speaker Change: Slide 23 gives an update on the new oat milk momentum that seems to be building in China, even during the warmer summer months when oat milk has been less popular than in the colder months.
Oatly-based cold drinks are currently being promoted across the segment's largest customers. We expect a good level of activity to continue as we head into the colder months.
While this suggests an improved momentum, we recognize that we're still in the test phase in China's largest coffee chain, and we're mindful of the clearly challenging macro environment in the region.
Overall, our relationship with all customers remains strong, and we remain in a solid competitive position, and the business is moving in the right direction. With that, I will now turn the call over to MJ.
Thank you, Daniel, and good morning, everyone.
Slide 25 shows an overview of the quarterly P&L.
Speaker Change: We reported 10.9% year-over-year revenue growth and constant currency revenue growth of 9.6%.
Speaker Change: Gross margin for the quarter was 29.8%, which is 1,240 business points higher than a year ago.
It was also 60 business points higher than the second quarter.
And this is the first time we have reported a sequential improvement in first quarter gross margin since well before our IPO, which we believe demonstrates an increased level of operational and financial decision.
Speaker Change: Adjusted EBDA was a loss of $5 million, which is a $31 million improvement compared to last year's fourth quarter.
As a percent of revenue, our adjusted EBITDA loss was approximately 2%.
Speaker Change: Comparing that 2% to our branding and advertising investment in the need to hide single digits as a percentage of revenue highlights that we are continuing to invest for the long term while also improving profitability in the short term.
In summary, we had solid performance in the quarter.
Slide 26 shows the briefing items of our Total Company Quarterly Revenue Group.
Volume grew 13%.
Price mix was a 3.4% headwind for a 9.6% constant currency revenue growth.
Speaker Change: For an exchange, was a sell win of 1.3%, resulting in 10.9% total revenue growth for the quarter.
Slide 27 shows the revenue bridge by segment.
Speaker Change: Jean-Cristophe and Danielle's presentation outlined everything we are doing in each region to drive solid growth.
The takeaway of this slide is that each region grows solid volume growth as our strategic initiatives and growth plans continue to work.
North America's revenue growth of 18.1% was driven mainly by the strong 17.6% volume growth.
Greater China's 12.4% constant currency growth was driven largely by the test with China's largest coffee chain.
As we mentioned last quarter, this customer mix has a clear impact on the segment bridge, with a large volume increase and an impact on price mix.
Since we are continuing to run the LTO with this large customer, we expect this bridging item to continue to be impacted at least through Q4.
Slide 28 shows the driver of our 12.4%
Points Year-over-Year Gross Margin Expansion
This penis item is a 10.9 percentage point increase driven by absorption and subduction improvement.
Of these, 10.9%, 3.2% of them are related to last year's margin being impacted by costs related to the Worker China segment strategic reset.
Speaker Change: The remaining portion was primarily driven by increased efficiencies in our supply chain.
Speaker Change: This is the impact of our strategy to consolidate the co-factors in North America, as well as improve inventory management, leading to fewer supplier penalties and inventory write-offs across our segments.
Speaker Change: It also includes better absorption benefits by optimizing our production between different facilities.
Our supply chain team has been doing a very good job on driving efficiencies while supporting growth.
Speaker Change: But we do not expect efficiencies to drive this level of market improvement going forward.
Speaker Change: Our net pricing and product mix improved margin by 100 basis points.
Speaker Change: Primarily driven by a mixing problem in Western China as part of its Strategic Reset.
Speaker Change: For an exchange increase our margin by 50 basis points and inflation was roughly neutral to margin.
Speaker Change: Plan 29 shows the year-over-year improvement in our adjusted EBITDA was driven primarily by a 29.5 million improvement in gross profit.
Our SG&A training program is now largely complete.
As we move forward, while we remain disciplined on SG&A cost control, and will always be searching for efficiencies, we expect gross profit to be the main driver of profit improvement.
Slide 30 shows our adjusted editor by segment.
Speaker Change: Each segment continues to report a significant improvement compared to the prior year.
For the fourth quarter in a row, the sum total of the adjusted EBITDA for the three segments was positive.
Speaker Change: On top of that, each of the three operating segments reported positive adjusted EBITDA in the quarter.
Corporate expenses, increased by $2.4 million at savings in personal costs, were more than offset by a foreign exchange headwind, as well as the increased global advertising spend that is recorded in corporate, that we discussed on our last Social School.
Speaker Change: As you can see, the strategic actions we have been taking are driving strong results.
Speaker Change: Turning to our balance sheet and cash flow on slide 31.
First, we remain fully funded.
Speaker Change: We ended the quarter with a strong liquidity position of $322 million.
Speaker Change: which is comprised of $119 million of cash and $203 million of our Andron Credit Facilities which are denominated in Credits Chrono.
Speaker Change: Next, our total cash flow remains on track with our plans.
Speaker Change: Our profitability continues to improve. We continue to optimize our capital expenditures and working capital, and our exits of UK and US plants remain on track.
Specific to the plant exists.
Speaker Change: We had a net 3 million cash inflow in the quarter, which brings the cumulative impact to a 10 million cash outflow. We are on track to have no more than 20 million of total net cash outflow for the exit.
Speaker Change: Finally, as you know, I have repeatedly said that improving our cash flow is a priority for me and I'm pleased that this quarter free cash flow is the company's best quarterly performance since our IPO.
We have work to do, but we're clearly improving.
Thanks.
Slide 32 shows our 2024 guidance.
Speaker Change: With just one quarter remaining in the year, we are refining our 2024 guidance.
Speaker Change: We expect constant currency revenue growth near or slightly below the low end of our prior range of 6% to 10%.
Speaker Change: and we continue to expect for an exchange to have a minimal impact.
Speaker Change: Finally, we expect CapEx to be below $55 million for 2024.
This concludes our quick word remarks.
Operator, we are now prepared to take questions.
Thank you.
We will now begin the question-and-answer session.
Speaker Change: To ask a question, you may press star then 1 on your touchtone telephone.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.
Speaker Change: The first question comes from Max Devenport with BNP Paribas. Please go ahead.
Bye-bye. Bye-bye.
Speaker Change: Hi, this is Alex Hilsenrath on for Max. Thanks for the question.
Speaker Change: So guidance implies a slowdown in revenue growth to around 7% in 4Q24. What is driving the deceleration and how should we think about the exit rate going into 2025?
Speaker Change: Hi Alex, Jean-Christophe, thank you so much for the question. First, let me give you the context. As you know, we always try to deliver on our commitments, but we think it's important to be open about the reality of the situation.
Speaker Change: The main element that has changed over the past three months since we last guided is the category growth dynamics in Europe that Daniel mentioned in his prepared remarks and most notably the recent category sluggishness in the UK.
Speaker Change: The most thoughtful and deliberate approach to consumer engagement and advertising that Daniel has discussed. So that's the way we look at it.
Speaker Change: Got it. Makes sense. And then just one more follow-up. So given the progress on EBITDA with all three segments earning positive, are there any factors to consider that would prevent the company from achieving positive adjusted EBITDA in 2025?
Speaker Change: Thank you again, Alex, and I'm sure there will be plenty of your colleagues that also have questions.
They want to ask about 2025.
Speaker Change: Let's discover that now and tell you what we can tell you at this stage I propose that we start but then hand over to MJ if she wants to add on anything First of all, let me remind achieving profitable goals is, has been and remains our unique North Star I am and we are fully committed to it
Speaker Change: We are really pleased to see the significant structural progress we have made so far. You can see it in the gross margin, significant increase. You can see that in the SG&A recalibration that we highlighted in our prepared remarks.
Speaker Change: We are clearly moving in the right direction, and we expect to continue making progress as we move forward. The way we do that is by making the right decision day by day, one after the other, to bring this business to profitable growth as quickly as possible.
Speaker Change: Obviously we are not going to give you any 2025 guidance today, but you should expect that our teams will continue to drive distribution gains, market share improvements, as well as category creation in expansion markets.
Speaker Change: At the same time, we will also remain super disciplined on our costs and capital to ensure that all the great things we are doing to drive demand flow through to improvement in the P&L and ultimately improvement in the cash flow. MJ, Marie-José, anything you want to add?
Marie-José: No, maybe just to build, we are still going through our budget process, we will give you for sure a full outlook in our next call, however, here are some high level thoughts on how we are looking at 2025.
Speaker Change: On top line, Daniel spoke about the momentum we have in building and we will look to build on that.
Speaker Change: From a modelling perspective, I would point out that Greater China will anniversary the first large LTO starting in Q2.
Speaker Change: Our super-efficient teams will continue to drive efficiency, whether for absorption or over-productivity improvement.
Speaker Change: We will continue to support our strategy to stimulate demand through healthy branding and advertising investments.
Speaker Change: We will, of course, continue to stay diligent and disciplined on SG&A, and finally, as we look forward, we will continue to embrace a rigorous fact-based analysis of our CAPEX.
Speaker Change: So hope that helps, but again we are sharing as much as we can at this stage Alex, but hope that helps.
Great. Thanks so much. I'll pass it on.
Thank you.
Speaker Change: Again, ladies and gentlemen, if you have a question, please press star, then 1.
[inaudible]
Thank you.
We have no further questions, ladies and gentlemen.
Speaker Change: I would like to turn the conference back over to Brian Kearney for any closing remarks.
We'll see you.
Brian Kearney: Great, seeing as there are no more questions in the queue, we will end the call here. Thank you everybody for joining us. Feel free to reach out to me if you have any questions and we can set up some time to chat. Thanks everybody and have a great day.
Thank you. The conference has now concluded.
Thank you for attending today's presentation. You may now disconnect.
MR. MICHAEL KENNEY Mr. I have a the
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