Oatly Group AB (OTLY) Q1 2022 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to Oatly's First Quarter 2022 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator instructions] I would now like to turn the conference over to Rachel Ulsh, Investor Relations. Please go ahead.

Good morning and thank you for joining us on Oatly's first quarter 2022 earnings conference call and webcast. On today's call are Toni Petersson, Chief Executive Officer, and Christian Hanke, Chief Financial Officer. Peter Bergh, Chief Operating Officer, will also be available for questions. Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws, including financial projections for future periods and fiscal year 2022. These statements are based on management's current expectations and beliefs and involve the risks and uncertainties that could differ materially from actual events or those described in these forward-looking statements. Please refer to the company's annual report on Form 20-F for this year ended December 31, 2021 filed with the SEC on April 06, 2022 and other reports filed from time to time with the Securities and Exchange Commission for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note, on today's call, management will refer to certain non-IFRS financial measures including EBITDA and adjusted EBITDA. While the company believes these non-IFRS financial measures will provide useful information for investors, 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 for a reconciliation of these non-IFRS financial measures and the most comparable measures prepared in accordance with IFRS. In addition, Oatly has posted a supplemental presentation on its website for reference. I'd now like to turn the call over to Toni Petersson.

Thanks, Rachel. Good morning. We appreciate you're joining us to discuss the first quarter financial results. Today, I will provide an overview of our business and discuss the key reasons we believe Oatly's position to become the number one plant-based drink globally. And Christian will review our financial results and 2022 outlook and Christian, Peter and I will be available for questions. It has been less than two months since the last earnings call in March and our confidence in the business remains as strong as ever. I am pleased to report we'll beat our first quarter guidance revenue growth of 19% to US$166 million. This was despite production challenges in January and February due to COVID-19's Omicron variant. As expected, the month of March we saw significant improvement in EMEA and Americas with record revenue in EMEA and the largest production month ever for the Americas. At the same time, Asia has continued to be impacted by COVID-19 with lockdowns in China that I'm intensified in March, still in effect in certain areas to date. The health and safety of our team members remains our number one priority and we want to support the communities in which we live and operate as much as we can, especially through such a difficult time. That is why we will work with our local team to donate and deliver care packages with Oatly products and other essentials to those most in need. Globally, our team has done an excellent job navigating a very challenging operating environment while executing on our growth strategies across more than 20 countries. We have a vision for a food system that's better for people on the planet. We believe Oatly is once in a generation company, leading transformation of the food industry through nutritional health and sustainability. To support the execution of our strategy in our next phase of our global growth, we have added two new executives with an extensive industry experience to the Oatly team, both effective 1st of June. Jean-Christophe Flatin will join Oatly to serve in the new role of Global President and Daniel Ordonez has been appointed Chief Operating Officer. Together Jean-Christophe and Daniel have a total of over 55 years of experience leading incredible growth and transformation at scale across big multinational brands. These two positions will serve in connecting and bridging integral parts of the organization as we continue to expand our global footprint. Peter Bergh, our current COO will transition to the new role of Chief Strategy Officer, where he will focus on leading our global strategic projects to help further strengthen Oatly's long-term growth. The addition of these two world-class executives with proven track records will be valuable to Oatly while we continue to build production capacity and capabilities to meet the growing demand for our products and we're excited to welcome to our team next month. Turning back to the global opportunity ahead of us. We estimate the global dairy market to be worth approximately US$630 billion in 2021 in the food retail channel alone with plant-based dairy currently only 3% of that at US$20 billion, up from US$18 billion at the end of 2020. Our studies have found that the majority of plant-based milk consumers joined the category in the last two years, which is another reason we are confident in the size of the category opportunity and the future long-term trajectory of our business. We believe Oatly is positioned to become the number one plant-based milk globally. Scanner data continues to show that the oat category is gaining share over other dairy alternatives across our key markets and we're an important driver of this growth. Plant-based is one of the fastest growing segments in CPG and we're still in the early innings of expanding distribution, entering new jobs – as well expanding into adjacent dairy categories. Our strategic multichannel approach, brand and proprietary oat-based production process also differentiate us from our competition. The opportunity in front of us remains massive. So in the near-term, we're continuing to prioritize growth investments over profitability to best position Oatly and serve our customers and consumers as we drive the conversion of dairy users to plant-based products. We are investing heavily in our business to establish the infrastructure necessary for global company on a multi-billion dollar growth trajectory. This includes not all our innovation and digital infrastructure, but also our production capacity, which is a key factor in achieving growth. As we grow, we believe owing and controlling our global operating footprint is important to meeting the significant consumer demand for Oatly's products as well as protecting our IP for our patented oat-based process. Our total production volume was 121 million liters in the first quarter in line with our previous guidance. Broken down by region, EMEA production was in line with expectations, Americas production was impacted by COVID-19, severe weather conditions and logistical constraints, and Asia production ramp up was slowed due to the COVID-19 lockdowns, impacting the food service demand environment. While these setbacks were unfortunate and temporary, we remain focused on what we can't control. I'm pleased to report our Ogden facility remains on track to finish ramping up by the end of second quarter. The Millville's expansion project is on track for the second half of this year, Singapore is expected to reach fully utilized production in the third quarter, and Maanshan is continuing to ramp up throughout the year pending the overall COVID-19 environment and lockdown restrictions in China. Just started earlier, production volumes reached all-time high in March in the Americas. Localized production in Asia with Maanshan and Singapore will enable us to further diversify our product portfolio with new products and performance of future growth in food service, retail and e-commerce. In Q1, 80% of our sales in Asia will derived from the Barista product compared to 85% in Q1 last year. We also expect to begin to gain operating and financial efficiencies and reduce our environmental impact from localized production and will face out shipments from EMEA over the course of this year. I'm also pleased to announce we transitioned both of our North American facilities to 100% renewable energy in 2021. Renewable electricity was generated in part from our oat fiber residue as well as wind and solar. This was significant milestone towards achieving our global sustainability ambitions and limiting our environmental impact in greenhouse gas emissions. In the second quarter, our production volume is projected to rebound and we expect to produce 135 million to 145 million liters of finished goods. We continue to expect ground based capacity of approximately 900 million liters exiting 2022 and an approximately 40% increase to 1.3 billion liters exiting 2023. In the light of the overall macro environment as we discussed last quarter, we're taking a very focused approach to execution of our capacity expansion projects and we're strategically facing the timing of certain smaller oat-based projects such as Ogden and Landskrona. This approach will allow our teams to have all resources focused on the largest expansion projects and to add meaningful production capacity. Over the next few years, we expect to drive profitable growth through increasing our self and hybrid manufacturing models reducing our reliance on co-packers, as well as localizing our production footprint. We expect this to improve our production and supply chain economics, economies of scales and our service levels. In the first quarters, self-manufacturing was 25% of our total volume compared to co-packing at 32% and hybrid at 43%. Our target over the long-term is to have 50% to 60% of our total volumes comes from self-manufacturing, reducing co-packing to 10% to 20% and hybrid manufacturing to 30% to 40%. We believe this manufacturing mix coupled with pricing actions will help to offset inflation and benefit gross margins and our pathway to profitability. I'd like to share a few highlights across our key markets to support why we believe Oatly will continue to win a significant share of the dairy alternatives market globally. Focusing on the EMEA first, according to Nielsen data for the 12 and 13 weeks ended March 2022, Oatly is the number one selling oatmeal brand by market share in the UK, Germany, Sweden, Switzerland and Netherland. We continue to see strong velocity performance with the number one velocity of any non-dairy milk brand in the U.S., UK, Germany, Sweden and the Netherlands. In the UK, Germany and Sweden, a Barista Edition item is the number one selling SKU in plant-based milk and oakmilk. Our brand accomplished this with a limited SKU range and a fraction of the distribution. We have a significant distribution potential for future growth in these markets with the competition having more than 3x the distribution of Oatly today. In EMEA in quarter one, we increased our retail doors year-over-year by 14% to 52,500 and food service location by 21% to 15,000. Retail remains 84% of our business in EMEA and we expect to continue to expand our self-space in new and existing retailers. For example, in the UK, our products can now be found in Holland & Barrett, Amazon Fresh and starting in April we're now in 900 little stores. We're also increasing our facings and expect to have more chilled oatmilk products in major UK retailers this summer. In Germany, our sales reached all time highs in every month in Q1 and our growth rate accelerated compared to fiscal 2021, a 1 liter Oatly Barista has higher grocery sales value than the next top five branded SKUs in the plant-based category combined for the first quarter. We have expanded our distribution and also started to expand our product range. We launched frozen desserts in March and April in major retailers leading to nearly 32,000 additional stocking points across [indiscernible], including 25,000 in Germany. Foodservice, which represented approximately 16% of our business in EMEA, is a core focus for expansion going forward to become a more natural part of our consumers' daily lives and to meet the consumer where they are. Historically, we have not been able to aggressively pursue this channel because of supply constraints. So we just getting started and have a long runway. So far we had great success with the launch in – on Deutsche Bahn trains and recently partnered with Tmall the biggest coffee brand in Germany with over 500 locations. We're also excited to announce a new strategic partnership with Dunkin and Aramark in Germany beginning in June. I'm also excited to announce we have renewed and expanded our partnership with Espresso House, one of the largest coffee chains in the Northern Europe with nearly 500 locations across Sweden, Norway, Finland, Denmark and Germany. As discussed on our last call, we currently only have significant presence in five markets in EMEA. With our expanded capacity we're now in a position to selectively reenter and expand into new EMEA markets. We're currently in the incubation phase of our expansion plan, starting with limited distribution, but we are very excited about this wide space opportunity and driving more conversion globally also given approval success in entering new markets. In the Americas, demand for Oatly products is very strong. According to Nielsen data for the 13 weeks ended March 26, 2022, Oatly remains the number one fastest-turning brand in total dairy, plant-based dairy and oatmilk. In fact, for the 24 week period ending March 26, Oatly has the top two velocity items in plant-based meals with lower ACV and the premium price point. The oatmilk category continues to gain market share in the U.S. calling from 16% in March 2021 to over 21% in March 2022, while almond and soy milks both declined. We have made major progress and development in our frozen business with our pints growing share, distribution and performing well on shelf. We recently launched a frozen novelty bars with great market adoption so far and over 2,500 retail locations confirmed in the first six month of launch. We believe our frozen business has great potential to expand our dairy conversion universe. In 2022, as capacity continues to ramp and we have more supply in the U.S., we are looking to fill the gaps with current customers and we are selectively expanding our distribution with new customers such as CVS and Walgreens. And finally, in China, I'd like to command our team for navigating a very difficult environment, especially in light of these recent lockdowns. Our business has been severely impacted by the lockdown with over 17,000 retail and foodservice location closed in China and foodservice representing 75% of our sales in Asia in the first quarter. We expect continued headwinds in the region until the situation begins to improve given the lockdowns are still in place, including Shanghai, where we have a large portion of our business. However, the team has used the lockdown to sharpen our multi-channel growth strategy to better position us both in near-term and assume as the restriction ease. Recently, we implemented growth purchasing for communities in lockdown, government procurement and online to offline ordering with more business partners. Tier one and two cities are the most impacted by the lockdowns. We have turned our focus to tier three and four cities where we are working to expand distribution. Additionally, we have accelerated our APAC market expansion plans with distributor agreements in neighboring countries such as South Korea, Thailand and the Philippines. In Asia, in Q1, we increased our retail penetration year-over-year by more than 250% to over 21,500 location and foodservice location increased by more than 60% to over 37,000 doors. And just the end of 2021, we've added over 2,500 retail doors and over 11,000 foodservice doors. We continue to maintain our number one position on Tmall with Oatly at 45% market share in the new plant-based category year-to-date and 19% share in the total plant-based category. With our newly opened facilities, we're able to aggressively launch new products that we have tailored to the Asian markets and enable us to successfully enter, expand in new channels. For instance, in the past few weeks, we launched our Tea Master product and a new 250 milliliter program for oakmilk product. Tea Master is the equivalent of our Barista product that's specifically created for the specialty tea channel, which is twice the size of the specialty coffee channel based on our estimates. Prior to the COVID lockdown, our Tea Master launched in approximately 5,000 shoey delicious stores, which is one of the largest specialty tea chains in China. We launched with a special beverage that became one of the top selling drinks within 10 days and sold over 1 million cups. We feel very confident about the success so far with strong interest and orders from additional chains and look forward to expanding this platform in 2022 and beyond. Our new 250 milliliter format for our oakmilk products is specifically tailored for the retail channel and makes it easier for our consumer to enjoy our products on the go. In China, the on the go 200 milliliter to 350 milliliter pack size represent the largest volume segments in the Chinese milk category, which underlines our excitement about being able to offer similar formats for oakmilk products. Overall, we believe we remain well positioned in Asia for accelerated growth once lockdowns begin to ease. While Christian will review our annual guidance and near-term view in more detail, it's important to understand that we believe both its growth opportunities over the next three to five years and beyond remains very strong. Dairy users continue to convert to oakmilk users globally with the long runway ahead of us to increasingly connect with more consumers around the world. We expect the quarter two will continue to be impacted by heightened restrictions and lockdowns in certain countries as well as increased inflationary pressures, but our teams have done a great job navigating the dynamic operating environments and defending and growing our market share in key markets. We are reiterating our revenue guidance of US $880 million to US$920 million for the year. Despite the challenging operating environment with supply chain destruction globally and COVID related lockdowns in Asia, I spoke quite earlier, we're maintaining a responsible and prudent approach to our cost and expenses as we navigate this environment and believe our actions today will benefit margins beginning in the second quarter. In summary, our success in a difficult operating environment across more than 25 different countries demonstrate the resilience of our global team, the strength of our product portfolio across multiple categories and the increasing consumer appetite for Oatly across channels. With that, I would now like to turn the call over to Christian.

Thanks, Toni, and good morning, everyone. It’s nice to speak with you today. As we indicated on our previous earnings call, our first quarter production output decreased sequentially to 120.9 million liters of finished goods product from 142.2 million liters produced in the fourth quarter of 2021. The lower production output was an outcome of a number of COVID-19 related factors impacting our business, primarily in the Americas and Asia. This resulted in the lower sequential revenue reported in the first quarter and increased our cost of production driving a lower gross margin for the first quarter, compared to the fourth quarter of 2021. This performance was in line with our internal expectations. Turning to the financials. Revenue for the first quarter of 2022 was $166.2 million, an increase of $26.1 million or 18.6 percentage points compared to revenue of $140.1 million in the first quarter of 2021. There was a foreign exchange headwind to revenue of approximately $5.1 million in the quarter. The food service channel in EMEA and the Americas increased in the first quarter of 2022 compared to the prior year period with the reopening of on-premise outlets from the relaxation of COVID-19 restrictions in our key markets, partially offset by COVID related food service location closures in Asia. For the first quarter of 2022, the food service channel accounted for 33.8% of revenue compared to 30.1% in the same period last year. On a year-over-year basis, the food service channel was up 32.8% compared to Q1 of last year. The retail channel accounted for 62.9% of first quarter of 2022 revenue compared to 65.7% in the first quarter of 2021. On a year-over-year basis, the retail channel was up 13.6% compared to Q1 of last year. As expected, consolidated net sales per liter was $1.41 in the first quarter of 2022, compared to $1.52 in the first quarter of 2021, mainly driven by customer and channel effects in EMEA and Americas and a foreign exchange headwind in EMEA. As a reminder, our highest regional net sales per liter is in Asia, followed by the Americas and then EMEA. Gross profit in the first quarter was $15.8 million compared to for the $1.9 million in the prior year period. Gross profit margin decreased to 9.5% in line with our expectations compared to 29.9% in the prior year period. Please refer to page 21 of our earnings presentation to show our gross margin bridge year-over-year and the key reasons we believe our gross margin will improve as we progress through 2022. As we have indicated in the past, it takes at least three to four quarters and now longer due to COVID-19 impacts before a new facility reaches steady state utilization of the production lines. During the ramp up phase, we carry the full fixed and variable cost structure, but have not yet reached the steady state levels of production output that fully utilizes the capacity of the facilities. The gross profit margins in the first quarter of 2022 was impacted by a number of factors as communicated during our fourth quarter earnings call, including the under utilization of our three new facilities in Americas and Asia, as well as higher inflationary pressures. The primary reasons for the gross profit margin decline in the first quarter of 2022, as compared to the prior year period were the positive margin impact from higher share of shelf manufacturing of 250 basis points driven by increased output from our new and expanded facilities offset by first short term under utilization of our new facilities due to supply chain challenges of 970 basis points largely driven by COVID-19 related impacts on labor absenteeism in Americas and lockdowns in China and logistical constraints delaying the timely supply of raw materials and spare parts, all of which resulted in the lower production output. Second, higher cost inflation of raw materials, logistics and electricity expenses of 760 basis points primarily due to the inflationary environment. Third, a consolidation action in our EMEA co-packing network resulting in a margin impact of 290 basis points that we incurred in the first quarter, but will enable us to accelerate the shift of production volumes to our higher margin, shelf manufacturing and hybrid facilities for the remainder of 2022. And lastly, 270 net basis points impact of other items. Sequentially, gross profit margin decreased by 640 basis points from the fourth quarter of 2021, primarily related to the short term under utilization of our new facility in Americas, which led to a higher cost of production. We experienced lower production and sales volumes in the first quarter in Americas, mainly driven by COVID-related issues, which included labor absenteeism due to a local spike in cases and supply chain challenges such as the Canada border situation with truckers and inclement weather, which affected the timely supply of raw materials and spare parts. The lower sales volumes impacted both our revenue and sales mix, and also led to a higher cost of production, which jointly led to meaningful reduction to our gross margin. In Asia, strict public health measures remain in effect due to the Omicron variant. Since our Q4 earnings call, the COVID-19 lockdowns have intensified, including a complete shutdown of Shanghai during the later half of March and larger closures of both food service and retail locations. As such, our revenue in Asia reflected a more challenging operating environment, which also negatively impacted our gross profit margin. We continue to expect variability in our gross profit margin quarter-to-quarter, based on the impact of supply chain challenges, inflation timing of new capacity coming online and mix a production models and by sales channel and region. We are monitoring the situation in Ukraine, as well as the worst and expected COVID-19 lockdowns in China is adding another level of uncertainty and the impact it could potentially have on our business. However, we should start to see meaningful, gross profit margin improvement in the second quarter, which we expect to continue in the second half of 2022 through the better utilization of our Ogden and Asian facilities. In our gross margin bridge in the earnings presentation, the positive impact of the higher share of shelf manufacturing is an early proof point of this. The higher production output from our shelf manufacturing facilities will unlock multiple margin accretive benefits at the same time, namely capturing higher production economics and reducing logistics expenses from shifting co-packing volumes to in-house filling as well as the localization of production closer to our customers. Enabling us to increase our sales to higher margin channels and customers and generally leading to higher fixed operating leverage in our new facilities. In addition, as previously communicated, we are executing on broad based price increases in two of our regions to offset a portion of the inflation we are experiencing for raw materials, logistics, energy, and labor globally. In EMEA, mid single digit price increases have been and will be rolling out from March through May. In the U.S., we are planning double digit price increases that will be reflected this summer across all channels. We have great relationships with our raw material suppliers that puts us in a position to mitigate raw material shortages particularly in note and we are also expanding our sourcing options. We have raw material contracts and supply in place to grow revenue at the rate we expect for 2022 and beyond. We expect to see year-over-year improvement in our gross profit margin starting in the second half of 2022 and sequential improvement in gross margin starting in the second quarter. We continue to expect that the localization and expansion of our production capacity within the regions should improve our production economics over time and we are watching inflation closely. We are also continuing to monitor the war in Ukraine and any impact it may have more broadly on our business. Both Russia and Ukraine are large exporters of grains such as wheat, as well as vegetable oils, which could impact global pricing for these items and indirectly impact other grains ingredients and energy prices. In addition, Russia is a significant exporter of fertilizer. Again, as already noted, the recent more severe COVID-19 lockdowns in China could have a meaningful short-term impact on our business if restrictions do not ease in the beginning of the third quarter. First quarter of 2022 EBITDA loss was $81.4 million compared to an EBITDA loss of $24.7 million in the first quarter of 2021. Adjusted EBITDA loss for the first quarter of 2022 was $71.4 million in line with our internal expectations. The adjusted EBITDA loss was primarily related to the lower gross profit, and we balanced the need for investments in our scalable infrastructure to support growth across the three continents while managing and reducing our operating expenses on a quarter-over-quarter basis. Beginning in the second quarter, we expect operating expenses as a share of net revenue to improve. We will continue to manage our operating expense growth rate very closely given the more uncertain operating environment today. Now focusing on our balance sheet and cash flow. As of March 31, 2022, we had cash, cash equivalents and short-term investments of $411 million and total outstanding debt to credit institutions of $5.3 million. We also have a fully unutilized revolving credit facility of approximately $475 million, including an accordion. Net cash used in operating activities was $68.9 million for the three months ended March 31, 2022, compared to $29.2 million during the prior year period. Capital expenditures were $53.3 million for the three months ended March 31, 2022, compared to $45.5 million in the prior year period. CapEx spend was lower than expected in the first quarter of 2022 after COVID-19 restrictions in China have impacted the facing of our investments. Cash flow used in financing activities was $4.2 million for the three months ended March 31, 2022, compared to cash flow from financing activities of $62.4 million in the prior year period. Turning to the guidance. In the second quarter, we expect an acceleration in our revenue growth rate compared to Q1 driven by higher production output. As Toni mentioned, we expect production volume in the range of 135 million to 145 million liters, which is a leading indicator of our revenue expectation and reflects that our growth is a function of our production output. Note, there is a lag in turning production volumes into sales volumes and the fourth quarter of 2021 is a good representation of what that ratio typically looks like. We expect a sequential improvement on net sales per liter compared to Q1 and expected to reach the same level as the fourth quarter of 2021. As I stated a few moments ago, compared to the first quarter of 2022, we also expect meaningful gross margin improvement and operating expenses as a share of net revenue to improve. For fiscal year 2022, we are reiterating our outlook and continue to expect revenue of $880 million to $920 million, an increase of 37% to 43% compared to fiscal year 2021 with strong growth across regions. Importantly, our guidance reflects a mid single digit appreciation of the U.S. dollar versus our major European currencies on a percentage basis. And our earnings presentation shows the ethics assumptions in our full year guidance. We expect revenue to be back half weighted this year with approximately 60% in the second half of the year, as the scale our production given a number of factors primarily related to COVID-19. Broken down by region, in EMEA, we have built supply ahead of expansion into the food service channel and new markets later this year. We continue to see variability in the timing of some retailer resets, but are very excited about the discussions we are having with our retail partners in EMEA and we expect to have a better share of the shelf once resets are complete. We are also reentering and expanding to new European markets throughout 2022 as Toni stated earlier. That being said, given Ukraine, we are cautiously managing our international expansion plans. In the Americas, we are pleased with recent production output improvements, particularly in our Ogden, Utah facility. We expect accelerated growth in the back half of the year once Ogden is fully ramped and the Millville oat base expansion is completed. And finally in Asia, we are closely monitoring the strict public health measures for Omicron and remain focused on the health and safety of our team. Given the ongoing restrictions, particularly in China with a zero COVID policy and foodservice representing over 70% of our sales in the region, we see near-term risk to our second quarter sales projections, depending on how long the lockdowns last. We remain bullish overall for this region in the long term, as we see significant opportunity to grow, but short term, the level of risk has increased. We still expect to see strong growth for the full year assuming lockdowns ease because as new production comes online, we will be able to broaden our product portfolio and introduce more products and formats that are tailored for the Chinese consumers and the retail and e-commerce channels. We expect capital expenditures to be between $400 million and $500 million likely at the low end of the range after COVID restrictions in China will impact the facing of our investments. We expect run rate production capacity to be approximately 900 million liters of finished by the end of fiscal 2022. With that review, we are now ready to take your questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Andrew Lazar of Barclays. Please go ahead.

Great. Thanks very much. I guess to start off in thinking about gross margins and the meaningful sequential improvement that you're looking for in 2Q, you broke out a bunch of the buckets in terms of the gross margin bridge in the first quarter year-over-year. I guess, what portion of those buckets do you think are now sort of essentially completely behind you, such that they don't or are not expected to impact 2Q as a starting point?

Yes. So hi, Andrew. It's Christian here. It's a great question. So in terms of the ones that are completely behind us is the EMEA co-packer consolidation charge that we took in the first quarter. We continue to expect inflationary impact throughout the year as we have indicated during our fourth quarter earnings call. But as you know, we are implementing price increases in EMEA through March and May across all markets and regions, which will help to offset some of that. And then we have the Americas taking the effect in the second half of the year. And also the ramp up of production improvement, the sequential improvement that we expect to see in the second quarter, both in Americas as well as Asia will start to see an improvement in terms of underutilization and the challenges that we face there. So the first quarter is the worst margin quarter and from here on we should start to see a sequential improvement throughout the year.

Great. Thank you for that. And then Toni, just in looking at U.S. Nielsen data, it does show that as distribution improves so to typically does market share. Are you seeing that that similar trend in many of your other key countries? And is there – are there – is there markets where you don't see that? And if so, what would be the reason for that? Thank you.

Hi, Andrew. Good question. And what – just to be clear on the question, do you – did you ask for distribution gains on market share?

That's right. So we see a nice correlation certainly in the Nielsen data that we can track in the U.S. And I'm curious if you see that type of relationship in your other key markets, and if there are markets where you don't, why that might be.

Yes. No – but we are starting to see great progress in EMEA. We have solid market share. And with increased self space and distribution as well as launching new SKUs, we are expanding on multiple levels. And as expressed earlier, we're facing a lag as we're implementing the shelf space increasement and distribution expansion. But the underlying health factor is the velocity performance. So that together with expansion that we're doing on multiple levels, we are seeing great progress, especially at the end of Q2 here. On top of that, Andrew, I just want to add that the experiential marketing that that we haven't been able to do for two years, we expect to boost the brand and sales in Europe. We previously did around 200 different events a year. We haven't been able to do that for the last couple of years and now we are really, really accelerating that and we're going to see output from that. That's what we expect.

Great. Thanks very much.

Thank you.

Our next question comes from Ken Goldman of J.P. Morgan. Please go ahead.

Hi. This may be some faulty math, but I just did back of the envelope here. If we sort of take the ratios that you were talking about in the fourth quarter of last year and apply it to maybe your expected production of 140 million for 2Q. It implies sales pretty far below where The Street might be forecasting. So I'm just wondering if you can sort of give a little bit more color on what you expect that production in terms of millions of liters to turn into in terms of revenues, just given some of the puts and takes that might be unclear to us.

I think, I mean, I – when we obviously have sort of tried to give you some factors that you should use in terms of getting to a reasonable revenue range for the quarter. And based on the production volume range of the 135 million to 145 million liters, using that ratio of sales volumes versus production volumes in the fourth quarter should get you there. It's a production led revenue growth for the second quarter and also considering that the net sales per liter should improve as well versus the first quarter. I mean, those are the key components, Ken, and you should be able to get there. And the other factor in terms of revenue on a full year basis is that 60% of what we guided to the market will happen in the second half of the year. So, I think, those pieces together you should be able to sort of get there.

Yes, we can. It's just because you're not giving the number. It makes, I think, some people feel like it's a little bit hidden so to speak. And so I just wanted to make sure we weren't missing anything and it sounds like we're not. So I guess my second question is last quarter you said that – while you have sufficient liquidity and you still do your monitoring in capital markets for some favorable opportunities. So I'm just curious, Christian, do you have any additional thoughts of the attractiveness of potential capital raise opportunities at this time? I think it's something that we get a lot of questions on and I'm sure most of our peers do as well.

Yes. That's a fair question, Ken. I mean first I want to reiterate that we ended Q1 with plenty of cash on our books, US$411 million in cash and short-term investments. And we also have the unutilized RCF. I'm sure you guys are aware of that, US$475 million, including in accordion. So we believe we have sufficient liquidity to fund our business through 2022, but we're also confident that we have multiple options to access capital to fund our growth at the right time. That was it.

Our next question comes from Rupesh Parikh of Oppenheimer. Please go ahead.

Good morning. Thanks for taking my question. So I had two questions on the pricing front. So first have your competitor started to take price in other plant-based categories? And then secondly, I think your commentary imply that the pricing actions you're taking will help to offset some cost pressures. So is it fair to assume that there could be more pricing even after the rounds that you're expected to do in EMEA and the Americas coming up?

Hi. It's Toni. A great question. I will let Christian to add if you want Christian. We are still monitoring the price increases. We do see competition take price, not all of them. The smaller ones are waiting a little bit, but all the bigger competition we see are implementing price, but we haven't seen and can't track anything from a behaviors perspective. So we just have to wait and see. The price – the price increasement in the U.S. going to take place for the second half of this year, so we just have to wait that out.

Okay, great. Am I correct that the pricing that you're taking is only going to partially offset the cost pressure so there could be additional pricing required down the road? Or do you anticipate this route of health to offset all the cost pressures you're currently seeing?

No. I mean, I think, that's – we're certainly monitoring the inflationary environment very closely driven by a bunch of different factors that we have stated during the earnings call. So if the inflationary rate continues to expand beyond what we guided in our fourth quarter earnings call of 8% to 9%, as you might recall, on a consolidated level, we clearly have to consider potential additional actions to offset these inflationary pressures, including additional pricing actions.

Okay, great. Thank you.

Thank you.

Our next question comes from Michael Lavery of Piper Sandler. Please go ahead.

Thank you. Good morning.

Good morning.

Good morning.

Can you just give – you've mentioned that 75% of your sales in Asia were from foodservice, but you also have the lockdown pressure there skewed primarily to March in the quarter if I'm not mistaken. I guess one, did you confirm – I mean, did you – can you confirm – I think you said there's 17,000 of your outlets out of your 37 there – 37,000 that are closed. What did that ratio look like in March? And trying to just understand how it may look in the second quarter, obviously,

In terms of closed retail doors, including foodservice, it's still 17,000. I'm sorry. Michael, can you repeat that question just so I get it right?

Yes. So I guess what I'm trying to understand is if you had 75% of your sales from foodservice in the quarter, how did that look in March when the lockdowns started to take effect because that feels more like how second quarter might look? What was that ratio later in the quarter?

Right. No. Okay, no – now I understand. That's a great question. No. That probably – that had – didn't change during March. Okay. It got more severe in March, the lockdowns, then it was prior to our earnings call. But also that said the team have pivoted because I think that's the core of the question, how can we sell when everything is closed, basically, but the team has done a great job to really pivoting our business model. And as I stated in my prepared remarks, we're doing a lot of activities to sell in different ways including entering new cities for retail, procurement – government procurement and community sales and as well as entering the tea shop channel. So, yes, we are monitoring it very closely. It is a severe lockdown, but also given the activities that we have done – we actually strengthened our position during the lockdown, meaning that our customer base is higher than plants and that the acceleration once lockdown is ease will potentially happen faster.

Okay. That's helpful. And maybe just a follow up on that, you talked about converting some of the production to retail products. How much of an increase in the retail or online sales have you been able to see even with or in part because of the lockdowns?

In – Mike, you mean in Asia specifically?

Yes, right, or, yes. China in particular, right.

China in particular. And it's still early innings I would say in terms of the retail strategy considering the lockdowns that we've had experienced in Asia, but we are preparing ourselves from a production point of view having the right format to enter into the retail space with the smaller format, the small pack. And that is something that would progress throughout the year.

Okay, great. Thanks so much.

Thank you.

Our next question comes from Laurent Grandet of Guggenheim. Please go ahead.

Hi, good morning everyone. Actually, I've got two questions related the U.S. retail distribution. So in the U.S. retail in the quarter, you lost market share leadership to plant food despite higher velocity as your ACV still pretty low, I mean, you mentioned 34%. So two questions. The first one is what is the rational and to get into the frozen category rather than securing more distribution in dairy alternative mix first?

Yes, that was a decision made prior to the supply disruption in January and February. Also it takes a way lower amount of base to create the frozen items. So those are the components for that decision. And you're right, we lost market share for the first quarter, but more – that was really purely due to the production destruction that we had and how we need to strategically allocate the volumes that were on hands for us [ph].

Appreciate that. The second question, I'm now ready this as well is I like not to discuss I mean just Starbucks business and partnership in the U.S. I appreciate why you are focusing on Starbucks. But at this point, I mean, at Oatly your visibility is still very limited I mean to sell the list. So as part of the reason to be in Starbucks is to build a brand as you are not opening in that visibility yet would even not be better to expand distribution in retails [indiscernible] gain market share and probably also, I mean, increase profitability. Like to understand basically – I appreciate it's not an easy answer and this type of relationship is probably more longer term nature, but really if you don't get, I mean – but you should from them and probably better to get some of these in that retail?

No, that – but that is a very valid question, Laurent. And I just want to say that this – we have a long-term strategic vision for that partnership. And for – in the short-run, yes, obviously if we would have allocated the volumes differently, the profitability would have been different. However, we do believe that this is strategically the right thing to do to drive conversion, brand awareness and the long-term opportunities for the company. And I just want to point out that the multichannel strategy is so important for us and how that creates halo. And even if we don't have like menu board visibility in the U.S., we have to remove it from the app once we launched at Starbucks because of the success and related to the – to then the supply we had. It still gives the brand a lot to be at Starbucks and the partnership that we have with them. We really value, it’s a very collaborative and open partnership that we have. And we share the views of plant based vision going to the future here. So strategically, we truly believe it’s the right thing to do short term. Yes, you could have done, you can take different decisions. But we here for the long term, as we said, right from the start. So, that’s what we’re pursuing right now.

Thank you. Good luck guys.

Thank you.

Yes.

Our next question comes from Rob Dickerson of Jefferies. Please go ahead.

Great. Thank you. So Toni, just a couple questions in terms of this, the expected ramp in the back half on the revenue side, I know you’ve said, you plan to enter a new – a few new European markets, but kind of have to watch maybe the timing just given the situation in the Ukraine. And then also, I heard you say, there’s clear potential to ramp SKUs in Asia as you get through the back half. But again, kind of assuming things start to ease a bit in Asia. So, I’m just curious like, as you sit here now, we’re already in May and we’re talking back half, right, which starts July. Are you already in those conversations with those retailers and saying, hey, if the Ukraine kind of eases and supply chain gets better, like we’re ready to go here? Are our products in the same thing in Asia, or has it been a little bit more complicated just given the operating backdrop? That’s my first question.

So, if you’re so [indiscernible] hi, Rob, by the way. Good question. Just is, are you referring to EMEA or all the different regions?

Really all the different regions, but I just kind of more specifically EMEA and Asia.

Yes. Okay, got it. In – as we express so many times, this is all about – in the U.S., it’s all about getting all the national running and we see really good progress there. So we feel confident about the ramp up from the second half of this year. We can also start to allocate the volumes the way we want to that is probably more favorable for us in terms of from a margin perspective as well. Europe, we are really stepping up with fantastic progressing in retail. We increased shelf space, I mean, 50% increase of facings in one of the major retailers in U.K., just one action food service. We are having really interesting discussion and we are confident that we will announce more excitement in the opportunities for food service in Europe. So we have – we see really good progress there that we’ll see the benefit of coming into H2 this year. In Asia, we actually, like we said, fantastic proof points when we launched the tea master, [ph] for instance, which is, and I just want to say the magnitude of that product is massive. It is a tailored product for food service segment that is twice as big as coffee shop and with great proof result. And we have key accounts lined up also already received the orders from the majority of them. And we see great proof of retailers. So we are just waiting in China and Asia is just about waiting it out, we think the platform for our growth actually expanded massively during the lockdown because of the work the team has done there. Was that sufficient, Rob?

Yes. No, that’s great. I appreciate it. And then second question is kind of back to the margin piece as we get to the year. I just want to clarify, I know, you had said expect sequential improvement in the second quarter and then gross margins should be better on a year-over-year basis as we get to the second half. Obviously, Q4 is not extremely difficult comparison. So maybe it could help everyone on the call just to kind of understand, is it really kind of expected sequential improvement, quarters you get through the year? So let’s say I’m speaking kind of more so to Q3. Q3 should be better than Q2, but it doesn’t necessarily mean Q3 would be better year-over-year, given a lot of the cost headwinds. It’s more the average of the back half versus the back half of last year. And that’s it. Thanks.

Hi, Rob, it’s Christian here. Yes. So I think you sort of laid it out the way you should look at it. It will be a quarter-over-quarter sequential improvement as we are improving our production output from our three new facilities around the world that will offset some of the under utilization headwinds that we have experienced here in the first quarter. Again, the first quarter is like the lowest point of gross margin from here on it will improve.

Got it.

The fourth quarter being the highest margin quarter, yes.

Okay. Helpful. Helpful. All right. Super, thank you so much.

Thank you.

Our next question comes from Jon Andersen of William Blair. Please go ahead.

Well, hi, everybody. Thanks for the question. I wanted to revisit Laurent’s question on U.S. distribution with the progress that you’re making in Ogden. And I guess later in the year with the enhancement to Millville, what – how should we be thinking about your both ability to service, let’s say a Starbucks and food service, but perhaps on the retail side to get your distribution up from, let’s say 40% to something more like the leading brand at 80%, what kind of timeframe is associated with that in kind of your own internal plan at this point?

Hi, Jon. Yes. I mean, that’s a very good question. Our ability, as you said, will definitely increase in terms of food service. We will continue to consider and together with the, in discussions with Starbucks to see how much of their demand we’re going to continue to serve. In retail, mainly it’s about filling the fill rate gaps. Again, velocity is increasing for us. And if you look at the dollar per store per week actually increased from 80 to 84 this quarter. So, we still see a strong performance on velocity side. So we need to that’s going to be a catch up game for us to fill that gap. In terms of expanding, we are taking very cautious and mindful approach to expanding. We are in continuous discussions with all the retailers, the major retailers in the U.S. to be able to expand further into the network and other brands that they have. So I guess we just have to balance that, and it’s going to be decisions made by the local teams mainly who are very close to the action here in the U.S. But we are monitoring, we are – if there’s an opportunity, we’re going to go for it. But we’re going to do it in a very mindful manner. I can’t give you timeframe, Jon. It also depends on the development, special velocity development which we are extremely excited about, of course. So we just have to wait and see and balance that thoroughly. Yes.

Do you just a quick follow up on that, Toni. When you think about the U.S. and the retail opportunity, do you envision, or see a placement of the Oatly brand at those higher levels of ACV, 80% plus, or do you anticipate more selective distribution where the brand may sit at 50% ACV, because you’re going to be selective choosing your locations and locations that serve a target customer?

We’re going to for the next period of time. We’re going to continue to have a mindful approach and be selective. And we’re also going to balance because we do believe the multi-channel strategy is very important for us. And I think 43% of the sales today comes from retail, somewhere around 50% maybe is retail sale and that balance going to be maintained as we go forward, because we think that is a good balance for us. In terms of getting up to 80, yes, but it, again, it will be related to supply, how much supply we have at the moment. So we are very excited about the Ogden progress and the Millville expansion. We’re going to have Dallas-Fort Worth coming up, and then we can go really, really wide, I hope.

Okay. That’s super helpful. One more quick one, with the lockdowns in China, wanted to try and understand how that may be affecting the construction or ramp in the Maanshan facility, has that pushed out kind of your timeframe to kind of hit run rate production within that facility, because that’s an important facility to your point to expanding the product range that you can offer in that part of the world in expanding distribution. Thank you.

Yes. And to that, this is Peter here. We are producing volume in both Maanshan and Singapore facilities. But as you said, due to the COVID lockdown on the demand environment in China and our ability to receive input materials in Maanshan. We are very deliberately managing our timeline to ramping up production. And as Toni mentioned, we see significant growth opportunities in Asia and have strong confidence in the potential of that region. So we are positioning us in both facility to quickly ramp up as soon as the lockdown restriction are listed. So our current expectation is that Singapore will reach steady state utilization in the third quarter, and that Maanshan will continue to ramp up during the course of this year. And remember Maanshan just started in November. So it is still in a ramp up phase and it hasn’t material impact our plans at this stage.

Great. Thank you so much. Good luck.

Thank you.

Thank Jon.

Thank you.

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

Good morning. Thanks for the question. Maybe for Toni, just returning to the pricing discussion, retail in the U.S., you’ve seen many categories where elasticities have been either minimal or at least better than expected up to this point, but plant beverages you have seen some volume pressure. So if you could, I’m just in the context of your commentary pertaining to the future price increases, what are your thoughts on the categories existing elasticity. And I guess, how do you think about value? I mean, do you look at the categories pricing relative to milk? I mean, is there a pricing threshold either on a relative basis or an absolute price point where you think elasticity may accelerate? I understand the limited visibility, but I’m just curious in terms of just historical case studies, anything you’ve seen around thresholds or consumer pushback. Thank you.

Yes, we don’t take, we just, yes, because we are premium price. It’s a good question. Hi, John. It’s a good correct [ph] question. And we are premium priced brand with fantastic performance. In terms of elasticity, like we don’t take that likely we have done our work thorough analysis in multiple angles. And we believe that the pricing that we are going to take is going to benefit the company and our position. And we also relatively to other brands, we do see that the competition also is taking price. So relatively the gap is going to either maintain or be if it’s going to be a change, going to be very, very low. In terms of absolute pricing, it’s really hard to say. We also see that some dairy across some markets, we do see dairy also take price. So, overall the inflationary pressure is going to like we’re going to see impact across the whole food industry and other industries which is very evident for us today. So I do believe one thing that is important is that to understand is the milk industry is subsidized. So it’s not a healthy industry for anybody really, what is this industry. Well, very few or no one is really making any money that is not the benchmark of this category is going. So, either those subsidized – are going to be listed or they’re going to maintain that remains to be seen, but the category is not going, it’s not going to hit bottom in terms of that type of pricing. We do recognize going forward, say mid term, long term, that pricing could like potentially be a hurdle to reach other demographies and geographies. That is something that we are strategically working on the supply chain side to optimize our production. So with the new facilities that we have, we have great opportunities to lower our costs over time when we can get more focused on really launching those initiatives at depth.

Okay. Thank you. Thanks for the detail.

Thanks, John.

This concludes the question-and-answer session in today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.