Oatly Group Q1 2023 Earnings Call Transcript

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May 9, 2023

There are 11 speakers on the call.

Operator

Good morning, and welcome to the Otley 2023 First Quarter Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there are opportunity to ask questions. Please note that this event is being recorded. I'd now like to turn the conference over to Mr.

Operator

Brian Kearney, Investor Relations, please go ahead.

Speaker 1

Good morning, and thanks for joining us today on Oatly's Q1 2023 earnings conference call. On today's call are Tony Peterson, Chief Executive Officer and Christian Hanka, Chief Financial Officer. Jean Christophe Slatan, Global President and Daniel Ordonez, Chief Operating Officer, will also be available for questions. Before we begin, please review the disclaimer on Slide 3. During today's call, management may make forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our future results of operations and financial position, industry and business trends, business strategy, market growth and anticipated cost savings.

Speaker 1

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 Also, please note on today's call, management will refer to certain non IFRS financial measures, including EBITDA, adjusted EBITDA, adjusted EBITDA margin and constant currency revenue growth. While the company believes these non IFRS Financial measures will provide useful information. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS. Please refer to today's release or the appendix of the earnings presentation for reconciliation to the most comparable IFRS measures.

Speaker 1

With that, I'll now turn the call over to Tony.

Speaker 2

Thanks, Brian. Good morning, everyone. We appreciate you joining us today. Before we get to the results, I would like 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 Oakley since 2012 through both our global expansion and our IPO and I'm extremely proud of the work that we have done as a team over the last 11 years.

Speaker 2

I look forward to taking on a new and exciting challenge as Co Chairman of the Board alongside our current Chairman, Eric Malue. And I have the utmost confidence in the future of this company under our new leadership. We are pleased that Jean Christophe Flatin will become our CEO beginning on June 1. He joined us about a year ago as our Global President and has done a great job implementing significant Value creating transformations throughout the organization. He brings over 30 years of experience leading global high growth Consumer Brands and he has a strong track record of delivering both top and bottom line growth, while also nurturing collaborative cultures.

Speaker 2

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 Q1 and we believe 2023 is off to a good start. We made progress against each of our key 2023 priorities, accelerate top line growth globally, continue to make improvements in the supply chain and drive towards profitability, which we continue to expect to reach in 2024. As I said on our last Call Oakley is starting to play offense in 2023 and each segment is starting to play offense in its own way.

Speaker 2

Given the good progress so 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 a 9 60 basis point acceleration relative to our 4th quarter growth rate. Our gross margin expanded by 150 basis points sequentially and we improved our adjusted EBITDA both year over year and quarter over quarter. Page 8 lays out the EMEA segment's 2023 priorities, which we discussed last call.

Speaker 2

As you will see, we made good progress against each of these priorities. Page 9 shows progress in the first two priorities. The total EMEA category growth remained quite robust With oatmeal continuing to grow double digit rate on a year over year basis and our key markets of Germany, UK and Netherlands Continued to post very strong market shares. We have also continued to sign up new customers in foodservice. You may have seen some of our recent Press releases announcing some exciting partnerships and we continue to sign new and exciting customers like the ones on this page.

Speaker 2

Moving to Slide 10 and our expansion beyond coffee occasions. Our product portfolio is able to replace almost any type of milk, Whether you want an oat based milk for your breakfast cereal, your fruit smoothie, for baking or any other use, we have delicious product for you to enjoy. You can see on this page that retail shelves now stock an enhanced lineup. We are supporting these products We are very excited about this as it increases the number of ways that our consumers can engage with our products. We intend to engage with consumers with an aggressive marketing plan in Q2 and Q3.

Speaker 2

On Slide 11, you can see some of the ways we'll be engaging with consumers. We will be supporting the expansion beyond coffee with a campaign across all our core markets in multiple types of media. In foodservice, we'll also be rolling out soft serve, but introducing it to consumers at a variety of events and festivals across EMEA. Finally for EMEA, Slide 12 gives you an update on our geographical expansion. These new markets are still a small portion of the segment's total volume, But they drove almost a third of the volume growth in the quarter.

Speaker 2

This is very good progress so far and we're excited about what to come. Turning to the Americas segment on Slide 13. Here we have laid out the Americas segment's 2023 priorities that we discussed on our last quarter's call. As we noted, we are pleased that this segment has improved 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 Yaya Food is going very well, which has largely been enabled by not only Yaya's deep operational experience, but also Yaya hiring Oakleigh frontline employees.

Speaker 2

We are pleased with the progress and see that our service levels have remained in the mid-90s. The successful transition to Yaya is enabling us to consolidate Our co packer network. In the Q1, we moved quickly to terminate agreements with the impact of co packers. We expect this consolidation to have material benefit on our cost structure as we're moving from a costly inefficient situation We had to search far and wide for partners to a more simple and efficient structure that is lower cost. We expect the complete operational consolidation to be complete by the end of Q3.

Speaker 2

Turning to Page 15. Here you can see that we are executing well on our commercials priorities. Given that our We're 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.

Speaker 2

The promotions are not only intended to drive consumer demand, But they also send an important signal to our retail customers that we're 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 This month, we are launching 2 marketing initiatives that will kick off a series of brand building activations. The first is an unprecedented partnership with the marks Oakley as the first ever plant based food sponsor of a U. S.

Speaker 2

National Sport League. This multi year partnership with the Minor League Baseball Association designates Oatly as the official oat milk and non dairy frozen dessert of all 120 minuteor league baseball teams spanning Albuquerque, New Mexico to Portland, Maine. The sponsorship will include on field branding, stadium concessions, digital media and hundreds of sampling events that bring The plant based revolution to plants 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. On Slide 17, you can see that we are even offering free advertising to any dairy company that dares to share the verified climate footprint of its product and match our standard of climate transparency.

Speaker 2

This is just another example of us starting to play offense in 2023. Turning to Asia on Slide 18. Here we remind you that our priorities for 2023 include expanding distribution, Launching new products and driving efficiency. Asia has continued to see steady gains in foodservice via the coffee and tea channels And it has also seen rapid growth in retail. Slide 19 shows how our retail execution is a great example of 2 of our priorities, expanding distribution and launching new products.

Speaker 2

You can see on the left hand side Of the page that we are continuing to expand distribution in retail with over 200% year over year growth in store count, great progress by the team. You can also see here some recent examples of new product launches in both drinks and ice cream. In Q1, ice already reached approximately 7% of segment revenue driven by new SKU launches and strategic partnering with specific customers with special additions. In Wings, we have several exciting new product launches. In Q1, we launched a Camellia flavored ready to drink latte as well as multiple flavors of oat milk in smaller packaging.

Speaker 2

And we are very excited about the anticipated Q2 launches of our ready to drink lattes that are co branded with Pete's and Team Horton's, Our team's ability to locally develop, design and produce these products to cater to the local consumers' preferences is truly differentiated for us. Turning to Slide 20. The Asia team is making good progress on the efficiency programs. So far, this progress Enabled by the significant year over year increase in both volumes sold and volume produced locally. Now almost All of our Asia volumes is produced locally opposed to a purchase from EMEA.

Speaker 2

As we mentioned on last quarter's Call, the Asia business saw an impact from COVID-nineteen 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 We expect to reduce costs. We look forward to updating you on them in the future. So In summary, we reported a solid Q1.

Speaker 2

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.

Speaker 3

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 Q4. We reported gross margin of 17%, which is an increase of 7.90 basis points compared to the prior year and an improvement of 150 basis points compared to the 4th quarter.

Speaker 3

Our adjusted EBITDA in the quarter was a $50,000,000 loss, which was an improvement of $22,000,000 versus the prior year, as well as For the Q1, we increased our revenue by 18% to $195,600,000 And the 24% constant currency revenue growth was driven by a 9% increase in volume and a 15% increase in price mix. Slide 25 shows the sales bridge for each one of our segments. I will only call out a few notable items. EMEA showed strong volume growth in the face of the recent price increases as elasticities remained muted. The Americas saw a large price mix benefit reflecting 3 drivers: the price increase we took in the Q3 of fiscal 2022 across all channels, an additional price increase we took within the foodservice channel and a positive Asia continued to show strong volume growth and the 1% increase in price mix was an improvement compared to the 4th quarter's 15% decline as promotional intensity moderated.

Speaker 3

Overall, we are pleased with the sales growth across each segment. Slide 26 shows the sequential quarter over quarter gross margin bridge for the total company. We have grouped the bridging items to be consistent with the margin bridge that we presented alongside our fiscal 2023 guidance last quarter, and we have provided a year over year bridge in the appendix of the presentation. Compared to the 4th quarter, We saw an 80 basis point headwind related to the COVID-nineteen environment in Asia. As Tony mentioned, There was an increase in cases early in the quarter, which led to lower utilization and absorption.

Speaker 3

That Headwind was partially offset by the lower promotional spend in Asia. EMEA price increases implemented in December of last year and throughout the Q1 contributed a 240 basis point margin improvement. We also saw 140 basis point benefit primarily related to customer and channel mix in the Americas. Cost of goods per liter saw a sequential headwind of 200 basis points. This is primarily related to the Americas, which saw a negative impact related to costs from the co packer network consolidation.

Speaker 3

We also experienced a slight headwind related to inflation, which was partially offset by supply chain improvements in EMEA. Finally, we saw a 40 basis point benefit primarily related to segment mix and FX. We don't expect Segment mix or FX to be a meaningful margin driver for the full year. Turning to Slide 27. We are pleased to see that our EBITDA continues to improve sequentially in total.

Speaker 3

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 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 $430,000,000 which is $5,000,000 more than what we announced on last quarter's call, with the difference being a slightly larger term loan. We are also excited to share that Hill House, a global investment firm, will invest $35,000,000 in Oat lease convertible notes, pending shareholder approval and receipt of certain lender consents.

Speaker 3

Hill House will receive convertible notes with nearly identical economic terms to the convertible notes that we announced on last quarter's call. Hill House is also buying $50,000,000 of convertible notes from our shareholder, Verlin Vest. Hill House has a great track record as a global investor with expertise in Asia and an extensive portfolio of leading consumer and food They have successfully helped companies accelerate Asian growth and navigate regional complexities through capital investments, customer and partner introductions and support on strategic decision making. Otley and Hillhouse have known each other for years, and I can confidently say there is a mutual respect and admiration. We see enormous potential in our relationship with Hillaus not only financially, but also strategically by leveraging their track record, expertise and relationships to continue to scale our operations across China.

Speaker 3

While our business plan was already fully funded with the $430,000,000 we believe this investment aligns interest 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 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 2nd quarter and to reach the high 20s in the 4th quarter.

Speaker 3

We also expect capital expenditures to be in the range of $180,000,000 to $200,000,000 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 2nd quarter adjusted EBITDA to be close to the 1st quarter's level After sequential increase in net sales dollars and the sequential expansion of gross margin are set 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.

Speaker 3

This cadence is consistent with our original budget. With that, we are now ready to take your questions. Operator?

Speaker 4

Thank

Operator

you. This time, we'll pause momentarily to assemble the rosters. First question comes from Michael Lavery of Piper Sandler. Please go ahead.

Speaker 4

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

Speaker 5

Thank you. Thank you, Michael.

Speaker 4

Just was wondering if you could give us a little bit of a peek further ahead. You mentioned, again how you expect EBITDA positive in Fiscal 'twenty four, do you have a little better line of sight on how that unfolds? Would that be A run rate at the beginning of the year or how 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.

Speaker 3

Mike, it's Christian. I can start and then anyone else in the team feel free to chime in. And as we have said in our previous earnings call, We expect to close the year, enabling us to achieve a positive adjusted EBITDA on a full year basis in 2020 We are not, at this point in time, giving any quarterly guidance in terms of how that will unfold in 2024. So it's on a full year basis.

Speaker 4

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

Speaker 6

Thanks, Michael. It's Daniel here. Yes, it's early days, early weeks. It's 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 profile of QSR and foodservice customers.

Speaker 6

But we are very excited about this McDonald's arrangement and partnership in Austria.

Speaker 4

Okay, great. Thanks so much.

Operator

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

Speaker 7

Great. Thanks so much. Just a question, two quick questions. 1 on America pricing, America's pricing, Clearly, up almost 30% in Q1, but then there's the commentary around kind of leaning in a little bit more on promotional activity. So I'm just curious, as kind of we get through the year, it sounds like because of the Increased promotional activity, we should see kind of a, let's say, a deceleration In the year over year pricing growth as we get through Q2 in the back half of the year.

Speaker 7

But at the same time, it does seem like it was a little bit higher, Right, in Q1 than expected, I think you were kind of pointing to more high teens. So if you think about the full year, are you thinking Americas pricing kind of, let's say, mid teens? And then I also ask, just because supply is more beneficial, We saw revenues on an absolute basis kind of flat sequentially relative to Q4 and Q1. Is the expectation here that we start to see 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.

Speaker 3

It's Christian. I can start out and then I think Daniel will sort of add to it. In terms of the price mix, it will decelerate throughout this year, quarter by quarter. So I just wanted to give you that context. Daniel, anything else to add?

Speaker 3

No.

Speaker 6

Just to add some color to Christian, yes, we will see in the 2nd part of the year that deceleration coming In net sales per liter as we lap our price increases. And as you said, we are improving given the availability and consistency of client fill rates, we are improving and adjusting months after months the promotional levels, and we start seeing some early Good signals of that based if you look at the scan data of the month of April, we start seeing not only Net sales, significant improvement, but some unit sales volume growth that we haven't seen for some time. So yes, we see We expect this continuous sequential improvement as we move forward.

Speaker 7

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

Speaker 7

That's it. Thanks.

Speaker 5

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 on Peterborough in the U.

Speaker 5

K. As well as in Asia PAC-three, our 3rd factory in Asia, simply because we are evaluating options as we speak. So the only build I would say is our long term margin targets that we shared with you guys in the last previous earnings calls Absolutely in line and achievable, no matter which supply model we choose for them.

Speaker 7

Fair enough. Thank you so

Operator

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

Speaker 8

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

Speaker 4

Thanks, of course.

Speaker 1

Happy to

Speaker 2

have you here.

Speaker 8

Thanks, Tony. Just maybe we could start off just on Americas. Now that and maybe this is a good follow-up to Rob's question, but just Look, now that the supply chain is obviously back on solid footing, have you gone back and kind of reevaluated just your priorities Between Foodservice and Retail on a go forward basis, I know you have a slide that kind of shows a fifty-fifty kind of revenues mix split in Americas. But just again, now that you're kind of back in more normal setting, just kind of how you're thinking about the split, maybe more on the volume side between those two channels going forward?

Speaker 6

I will take that, Peter. It's Daniel here again. Indeed, as supply becomes stable, We have ambitious plans on both channels. That's the reality, right? So as you will remember in Retail, we have ambitious plans in TDPs, existing and new doors to accomplish this year.

Speaker 6

We expect some robust results as we Move forward, especially quarter 2 onwards, and we also are moving ambitiously ahead in foodservice. So we expect, Because of our recent past, the retail footprint to enhance versus foodservice. And with that, of course, will come big part of the improve on margins that we expect this year. But in as a headline, Peter, I would say, We have ambitious plans in both channels.

Speaker 8

Okay. And then maybe just Going back to the EBITDA profitability targets for 2024, 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 target of EBITDA profitability? How much of that is supply chain change? How much of that Mix improvement, how much of that is inflation getting better? Just what are kind of the big buckets?

Speaker 8

And any kind of, I don't know, percentage you could assign to them? Thanks very much, guys.

Speaker 3

Yes. I mean, I can start. It's Christian here. I mean, it's the big driver is to continue to improve the utilization of our As we grow our business, I mean that's and then you will see the leverage on the operating expense side.

Operator

Okay. Thank you.

Speaker 1

Thank you.

Operator

Next question will be from John Baumgartner of Mizuho. Please go ahead.

Speaker 4

Good morning. Thanks for the question.

Speaker 9

Good morning. I wanted to come back to North America and your promotional plans and the increase in promotion there. How should we think about the balance between price based promos relative to investments in display feature, more sort of the quality approach? Just given what the category is right now, the broader consumer and how you're thinking about managing the promotional approach?

Speaker 6

Thank you, John. It's Daniel again here. So we're doing both things as That is exactly the 2 things you have mentioned. First, we have to enhance our promo pressure given the And we see some very good early results of that in the last scan data, both March April, And in store availability and visibility is key. Let me tell you that's exactly what we do very well in Europe, Consistently in Europe, which is our velocities significantly improve when we have promotional displays And not just price promo.

Speaker 6

So we expect to do that as we move along. So just to stress again, we're planning to do both Now that we have consistent availability.

Speaker 9

Okay. Thanks for that. And then in Asia, Assuming we're finally past the COVID overhang here, could you talk a bit about your operating plans for

Speaker 4

the next 6 to 9 months?

Speaker 6

You seem to be in

Speaker 9

a position to leverage a lot of new distribution points built since COVID. You're working through some efficiency projects. But how has the environment or the opportunity changed since COVID and how do you plan to reinvest as this market reopens now? Thank you.

Speaker 2

Again, like we said Last earnings call, we were ready to play offense. China being a very dynamic, very different market from a consumer Perspective, we are as we are stating in our deck here, increasing significantly number of Stores in retail, we're going to continue to expand. Also, we have a lot to do In rolling out our expansion in Tea Shop channels, all of what 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, tea shop channel, the QSRs and building our way into retail now, but also very, very excited about the expansion that we see in innovation.

Speaker 2

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

Speaker 3

Thanks, Tony. Thanks.

Operator

Thank you. Next question will be from Matt Gumpert of BNP Paribas. Please go ahead.

Speaker 10

Hey, thanks for the question and congrats First question is on gross margins. It's nice to see the 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 you expect to deliver as you move towards that high 20% target for 4Q 'twenty three, in terms of How much expansion we might expect in 2Q versus 3Q versus 4Q? If there's any 1 quarter that will drive most of that improvement and what the key drivers are? Thank you.

Speaker 3

Thank you for that question. We don't really give Specific guidance on the quarter other than that we are we will sequentially improve each quarter this year until we reach the high 20s in the 4th quarter. I mean, I think we have articulated a few things. We expect sequential improvement in the 2nd quarter, but we have higher promotional levels in the U. S.

Speaker 3

As well. So I just want to highlight that piece.

Speaker 10

Thanks. And then on capacity, could you give us an update on where your 2023 target Stan, can you also how you would expect your utilization of your capacity to end up as you get towards the end of 2023? Thank you.

Speaker 3

There's no change in terms of the capacity that we have on hand and what we have communicated before. So we expect To continuously improve the utilization of our assets as we are expanding our business, we have plenty of capacity to grow this next year.

Speaker 10

Thanks very much.

Operator

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

Speaker 2

Thank you so much. This marks my final earnings call as CEO of Oakley before I transition into my new role as Co Chairman. When I joined Oakley in late 2012, we set out to transform the company and create a meaningful mission. 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 I couldn't be more proud of what we have accomplished and I'm eager to witness the incredible accomplishment that lie ahead for Oakleigh.

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Oatly Group Q1 2023
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