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.…

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…

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.