Greetings and welcome to the Oatly Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rachel Ulsh. Please go ahead.

Good morning and thank you for joining us on Oatly's second 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 Strategy 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 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 the year ended December 31st, 2021 filed with the SEC on April 6th, 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, adjusted EBITDA, and constant currency revenue. 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 non-IFRS financial measures and the most comparable measures presented in accordance with IFRS. Please also note all retail scanner data is based on Nielsen for the 12 weeks ended June 2022. In addition, Oatly has posted 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 joining us to discuss the second quarter results. Today I will provide an update on our strong business performance. And I'm very pleased to share our new sales production capacity plans. Christian will review our financial results and updated 2022 outlook. Then Peter, Christian, and I will be available for questions. In the second quarter, we delivered strong revenue growth of 22% year-over-year to $178 million or approximately 30% growth to $190 million in constant currency. This strong performance reflects I believe that we have significant growth opportunity ahead of us and we continue to believe Oatly is positioned to become the number one plant-based milk company globally. Scanner data continues to show that the oat category is gaining share and become even non-dairy default of other alternatives across our key markets and continue to grow the category. We believe that the combination on the Oatly brand our strategic foodservice-led multichannel approach and our proprietary oat-based production process differentiates us to consumers. And our mission of converting more daring users to Oatly consumer center around scaling and identifying each of these three factors in each of our regions. Now, moving to our business performance. The consistency globally is that we continue to see tremendous consumer demand and growth momentum even though the macro dynamics that we face in each region are very different. In EMEA, we're seeing a highly uncertain and rapidly changing environment. The current macro context and economic conditions, which include the ripple effects from the war in Ukraine, global inflation, energy prices, changing consumer behavior at retail, and the speed at which we can expand our channel distribution. In spite of these challenges and the risk to change in consumer spending, the plant-based dairy category has proven to be resilient…

Thanks Toni and good morning everyone. It's nice to speak to you today. Turning to the financials, revenue for the second quarter of 2022 was $178 million, an increase of $31.8 million or 21.8% compared to revenue of $146.2 million in the second quarter of 2021. Excluding a significant foreign currency exchange headwind of $11.7 million, revenue for the second quarter would have been $189.6 million or an increase of 29.7% in constant currency compared to the prior year period. In the second quarter of 2022, we experienced broad-based growth across retail and improved service channels as well as strong growth in e-commerce sales in China despite COVID-19 restrictions. The foodservice channel accounted for 35% of revenue for the second quarter of 2022, compared to 33.2% in the same period last year. As reported on a year-over-year basis, the foodservice channel was up 28.3% compared to Q2 of last year which reflects the significant focus that we are placing on expanding this channel. The retail channel accounted for 56.8% of the second quarter of 2022 revenue compared to 61.5% in the prior-year period. As reported on a year-over-year basis, the retail channel was up 12.5% compared to Q2 of last year. Consolidated net sales per liter was $1.47 in the second quarter of 2022, compared to $1.54 in the second quarter of 2021, mainly driven by a foreign exchange headwind in EMEA and customer and channel mix effects. As a reminder, our highest regional net sale per liter is typically in Asia, followed by the Americas and then EMEA. Gross profit in the second quarter was $28.1 million or 15.8% gross profit margin compared to $38.6 million or 26.4% in the prior year period. Compared to the first quarter of 2022 gross profit margin of 9.5% we had a 630…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Andrew Lazar of Barclays. Please go ahead.

Great. Thanks very much. So first I wanted to get a little bit of a better handle on the significant CapEx cut for the year. I guess in the release, in your remarks, you talked about a reduction in CapEx due to the sort of the current operating environment. And I guess there are some concerns that this move could be driven by sort of closer-in and liquidity issues. You also mentioned a more difficult time converting dairy to plant-based users. So, I guess, there's a concern that some of this could be a demand-driven decision as well. In the past, always taken much more of a growth at sort of, almost any cost mentality. So, I was hoping you could just sort of address this a little bit. Which one of those is it, or is it simply, as you mentioned just sort of a closer-in level of conservatism given the macro environment? That would be the first question.

Hi, Andrew this is Toni. Thank you so much for the question. Hope you're doing well. So to your question, this is about discipline. And adjusting to unprecedented changes that we've seen in the world, we are pairing with powerful demand dynamics, which relates to focused capacity expansion, execution, so the expansion execution, optimizing the timing of production capacity additions to when we need the volumes. So we're still investing in all projects, but we are phasing them differently. And I think that's what you would expect from any business leader from a global high-growth company. We just have to be smarter and work harder to optimize our capital use without compromising growth. So this has absolutely nothing to do with our -- the fundraising capital and the timing of that, which is us adapting to unprecedented changes that is happening in the world. I am not sure if that was…

Yeah. One quick follow-up to that with -- I guess you're looking for something pretty similar in 2023 in terms of the production volume 1.2 billion versus 1.3 billion previously. I guess, I'm curious would that still suggest it can go to -- I think originally you were looking for 1.8 billion liters in 2024. Maybe that's a little too far out now to give perspective on. But what I'm trying to get a sense of does CapEx ramp up significantly more in 2023 to get to a similar place from a production standpoint in 2024, or is this to suggest maybe a slower production ramp even for the next couple of years in terms of how we should think about CapEx?

So I mean I think like we said Andrew, we are -- it’s Christian here by the way. So it's -- we're still exiting this year with 900 million liters as we've indicated. And like you said, we're close to 1.2 billion as we exit 2023. So it's all about demand matching the supply accordingly. So it's not more dramatic than that from our perspective. And we're still investing for future growth.

Got you. Last thing is just we've not really seen how plant-based products like this would perform in a tougher consumer environment given some the newness of the category. I guess are you -- it doesn't sound like you're suggesting the consumer is yet fading away from plant-based products as the environment weakens, but I wanted to make sure I'm hearing you right.

Thank you. No that's absolutely right Andrew. Plant-based nutrition is very sticky. This is not about demand. This is about the pace of growth and how -- the timing of how fast you can recruit consumers into the space. So pace not demand.

Thank you.

Yeah. Thanks.

Our next question is from Ken Goldman of JPMorgan. Please go ahead.

Hi, thank you. And just to clarify or build on that last point, Toni, you say it's not about demand. But I think there was some implication in your words today that it's a little more difficult to attract newer consumers to the product. Just given the challenging environment maybe the implication is that in EMEA for example there will be some consumers that are, obviously, just trying to pay the bills this year. But is there any implication or any read-through we can have about the pricing or the price level of your product whether that's a little bit more of a hindrance to some people coming in than what we thought. I'm just trying to square your comments about the ability to attract new consumers right now with your comment that it's not really about demand?

Absolutely Ken, and that's a really good question. So we don't see increased price elasticity due to price increases. So our velocity performance remains outstanding and strong and stable. We are gaining market shares across Europe. We are winning distribution -- these recent launches. We see really good initial performance and foodservice is growing about 30%, yeah. But there's a back problem here in Europe specifically. And we see tremendous challenges for retailers here to just navigate around this unprecedented change that is happening and also the consumers who are really monitoring their household budget -- so -- and that goes for futures as well. So this is -- there are basically three different things here that is related to timing and pay. It takes longer to expand into new markets and it takes long to expand into foodservice. They are facing exactly the same challenges as retail. And then it seems to taking more time to recruit new consumers into the category at the pace that we had planned for. And this has given all -- its unparalleled unprecedented set of factors that is impacting in parallel that people and business leaders are navigating through. So this is about pace. Fundamentally, as we can see one thing in this decline in retail plant-based milk is growing. That is an important point. And in that Oatly is extremely strong in our position. So the timing thing and not about demand.

Okay. Thank you for that. And then for my follow-up, you mentioned that there was clearly not a liquidity issue for the next 12 months, I believe is how it was phrased. Is sort of the messaging there that maybe you won't be doing a cap raise in the near term? I think a lot of observers may have expected that and some may have even hoped for it just to kind of get that overhang behind us. So can you talk a little bit about, how that comment reflects sort of your desire or need to raise capital right now? And how you balance that with sort of what may be overriding investor desire to kind of just focus on the fundamentals rather than maybe some shorter-term balance sheet questions?

Yeah. Hi, Ken, it's Christian here. I mean as you said with these adjustments, we have sufficient liquidity to fund the business now for the next 12 months. So what we have done is provide ourselves with more flexibility in terms of timing to fund our growth and we're still confident that we have multiple options to access capital. So we're still looking to raise the capital to fund our growth. And this $400 million amount that we put out there is a good estimate of how much capital is required to fund all of the CapEx projects through 2024. And that is also the number -- that's sort of the reason why we said it or previous in this year. So we made some capacity phasing. We no longer need to raise the entire amount in a single transaction this year and we have the flexibility to match the phasing of the capital raise with the CapEx schedule. And we're also approaching this with an objective of minimizing corporate capital as well.

Great. Thank you.

Thank you, Ken.

Our next question is from Kaumil Gajrawala of Credit Suisse. Please go ahead.

Hi. Thank you. When I think about some of your commentary on macro and your answer to Ken's question on how conversions may be getting a little harder and stuff. Can you just talk about what your expectations are for that going forward in that, we might just be at the beginning of these macro issues, particularly as we get into the winter in Europe. So can you just talk about what you're expecting versus what you're observing? And is this -- is the adjustment to top line just more about what you're observing so far, or do you have expectations for the chance that things might get materially worse in the next six months or so?

So yes, the revised guidance reflects what we see the back end of this year, especially in Europe and then Asia that is not opening up the way we would hope for. The run rate is absolutely massive. So if anybody here in Europe understand is that it is very shaky, right? People are monitoring the household budget and the living costs is definitely increasing. But our -- Oatly's performance in that environment is stable and has proven to be resilient even with the price increases. We also see that people are moving more into soft discount. So when we see -- we are launching in Ogden, Utah the velocity performance is absolutely massive. It's more sentiment that consumers have. And I want to add, the runway that we have in expanding. That hasn't changed. None of the fundamentals of the business have changed. And there's an enormous white space for us to take in expanding into new markets more foodservice discounts. What we are saying is that, it just takes longer to close those deals. And also people are distracted with everything else that is happening in the world. So this is about the remainder of 2022, and nothing more than that according to us.

Okay. Got it. And then as it relates to the price increases, I'm sorry go ahead.

Ken can, I just add. That said, we are expecting accelerated growth for the company for the last half of the year.

Okay. Got it. And then on price increases can you talk maybe a little bit more about your price increases versus price increases of your competition maybe by region? And then also just how are you thinking about your – the price caps you're typically the premium offering in the space as we are going into maybe a bit of a different macro world how are you thinking about price gaps between yourself and some of the other players in this space?

Very good question. So first of all, no increased price elasticity, due to the price increases that we made in Europe. And also the relative price gaps between us and competition is overall the same. So nothing has really changed from that perspective.

Great. Thank you.

And we are including the double-digit price increase in place in the US starting yesterday.

Got it. Great.

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

Good morning. Thanks for taking my question. So on the cost side, I was hoping to get an update in terms of the cost pressures that you're facing. Just curious to the level of cost inflation you're seeing right now versus I think the 8% to 9% expectations you had last quarter?

Hi, Rupesh, it's Christian here. Good question. I understand, of course, it's an interesting topic in today's world. Last year, we didn't speak about inflation at all. But of course, now it's more relevant. So in total, we expect inflation to increase our total cost, and we'll get another 5% to 6% in the coming quarters compared to where we are today in the second quarter. So, we have slightly increased inflation levels or expectations, 2022 versus 2021 compared to where we were when we reported in our first earnings call. Now, we expect on a consolidated level low double digits globally. And previously, we were high single digits. And this is primarily as a consequence of the – coming out of the macroeconomic situation, with the war in Ukraine we have elevated energy costs here in Europe, but it's also impacting cost of materials.

And do your pricing actions contemplated so far incorporate these additional cost pressures, or would you expect to be more adjustments later in the year or next year?

We are evaluating additional price increases in Europe.

Okay. Great. And then maybe one follow-up question. Just on the gross margin front. So obviously we saw some sequential improvement from Q1. But last year, you did have gross margins in the 20%-plus range for the full year. Any – I know you guys maybe aren't providing exact guidance but any way to frame like how where we could shake out at an exit rate for Q4 on the gross margin line?

I think compared to what we have communicated in the past where we sort of remain in that range of mid-20s exiting Q4.

Okay. Great. Thank you.

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

Good morning. Thank you. I just want to come back to the revenue guidance, and I understand – so you're calling out a reduction on some of the macro environment and you've given that color, but you're also capacity constrained or have been and you're holding your capacity expectations for the year. So, how do we reconcile those? Should we expect 100% customer service levels for the rest of the year and on just a weaker demand profile? How do I tie that all together?

Mike -- and then I think Toni, will definitely jump in. I mean it's not a demand issue. It's all about us increasing the output from our new facilities, in the second half of the year and that would be converted into revenue. I think what we have talked about is the pace of growth in Europe, driven by the macro environment. It's a bit different. But we still expect, very solid and strong growth on a consolidated level, but more specifically in Americas and Asia. And we're prioritizing US and Asia, from a CapEx phasing point of view, which we also have spoken to during earnings calls.

Yes. Michael, just to clarify on the field rate. We're at 96% in Europe, we still have -- and spread out throughout the whole product range. There is more to do in some specific products there. In the US, we increased the fill-rate gaps or closed the fill rate gaps, throughout the quarter from 60% up to plus 70% and that's going to continue to increase over time here. But again, it's -- since it's not a demand thing, it's going to be a catch-up gain for us. As we always mentioned, if demand continues to increase for our product, it's going to be more difficult for us to close the gap. But production is definitely coming on board. So yes, we hope they're going to be great progress here for next quarter. So last part of the year.

If someone [ph] tells me maybe one more try, I don't mean to be dense, but if there's no supply issue in terms of change, and if you're saying there's no demand issue is it just a conservatism update then to lower the guidance?

Well, there are different natures, right? I mean in US, we are completely right on getting the output from Ogden at full fee. And also we have Millville, coming on board not to forget right at the end of this year. So that's completely driven by our ability to supply there.

Okay. And then, just if I could do one more with the color on EBITDA. You called out a positive currency contribution. But obviously, it's a headwind on the translation on the top line. So presumably, there's some transactional impact there. Can you just explain how that works?

Yes. So, I mean, if you think about FX, which we are calling out from a translation point of view like you said, we have a headwind on revenue, but we do have tailwinds both in COGS and OpEx. It's pretty neutral on gross profit. But net-net with OpEx, yes, we saw a tailwind of was it $7.8 million or something like that for Q2. But we have in European currencies, which have depreciated quite significantly versus US dollar, as compared to last year and that is the impact that you see. Translation.

So, it's SG&A driven?

Yes. Yes, SG&A driven. Correct.

Okay. Thanks so much.

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

Yes. Hi. Thanks. For my first question, I wanted to focus on the Americas. It looks like your shipment growth in the Americas, in the quarter was quite a bit below the retail takeaway in the IRI Nielsen data. Also the America sales dollars that you've reported, on an absolute basis, been relatively flattish around $50 million over the past four quarters or so. So just, could you give us a bit of an update on what's happening from a capacity standpoint? And what's -- when do you expect, I guess to more fully be able to meet demand and again shift to kind of consumption levels.

So, I mean I'll start and then I'm sure Toni, will chime in as well. So it's all related to our ability to scale our facility in Ogden, having more supply and that will help us from a channel and customer mix allocation. And that's sort of what you're seeing, in terms of retail performance compared to your expectations. So, it's a strategic allocation that we're doing.

And when it comes to production in US, we see -- we saw great progress in Ogden. And it's adjusted -- we hit around 10 million liters per month by the end of the second quarter in line with our expectations. So, a big uplift from quarter one. So -- and then, of course, it takes some time to get that out to customers. And that's what we expect for quarter three and quarter four. So, great improvement in production output both in America and Asia.

And also I want to add there's also the channel mix, we have that we have to balance and that is still on.

So just a quick follow-up on that. So is there a time frame at this point where you would be comfortable or semi comfortable saying, we expect to be able to ship that 90%, 95% kind of fill rates across channels based on continued ramp at Ogden and the upgrade at Millville or is that just too uncertain at this point?

Yes. It is uncertain, but we do expect definitely improvement in Q4. Demand continues to increase that we see we are very strong. We went on ACV from 34% to 38% this year, but still with very strong velocity numbers, but we do hope and we really do expect that to improve in Q4.

Okay. And just one quick follow-up. So you talked about it's a more challenging time to recruit new consumers into plant-based. And so I'm wondering if you might focus on leveraging existing plant-based consumers across a broader range of plant-based products Oatly products. So, things outside of milk. Is that something that makes sense or you're focusing on, or is the effort again with milk in the near term and converting customers even though it's a bit more challenging at the moment? Thanks.

That I think that's a relevant question. Our focus is definitely, as we said previously, milk and that's going to be the biggest contributor of growth throughout the company. We're not -- we absolutely see a big opportunity in the subcategories here. And we just need to have the production set up to produce those type of products for us.

Thank you.

Thank you.

Our next question is from Bill Chappell of Truist. Please go ahead.

Thanks. Good morning or good afternoon to you. A couple of kind of follow-ups. Looking again to the US or to North America and kind of the acceleration in the back half, is that the thought that that's going to be largely foodservice driven as you meet capacity or meet fill rates, or do you -- I guess, the question has been for the past year of as you were not shipping the full fill rates, you lost a lot of shelf space at retail. Do you still think you can get some of that shelf space back at retail, or is most of the growth going to come kind of I guess you said through foodservice?

So, first of all, we didn't lose any shelf space in the US. And then it's going to be a balanced growth between all these channels. So, all the channels are going to grow.

Okay. I guess not lose but it seems like a lot of competitors have filled tangential shelf space. So it doesn't sound like you will be adding shelf space from here. It's just it's more sell-through at retail?

It's first of all it's to close the fill rate gaps that we have with existing customers. And we are still the number one -- sorry the number two in multi-channels in the US and another one overall in the US in terms of net sales. But certainly this new outperformed at Ogden and the Millville coming on board is going to help us greatly in expanding or really gaining market share in multi-channel, which is going to be visible to you again hopefully by the end of this year.

Okay. And then a follow-up to Kaumil's question on pricing not necessarily your direct oat competitors. But I mean how will the pricing change the gaps between dairy, between almond, between soy does it put you at a more of a premium or less of a premium versus the others as they're -- even within plant-based there's more switching or trading up or trading around?

No, no. I think we -- our position has remained extremely strong, especially, in Europe through this turmoil. We don't see any changes between crops and competition. What we can see in Sweden, which is extreme. Dairy prices increased by 20%. So that's like what stands out in what we see on the market. But other than that the balance is intact.

Okay. Great. Thank you.

Thank you.

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

Good morning. Thanks for the question. I wanted to focus on the middle of the P&L on the SG&A line. It's still a pretty big number relative to the size of the business. And I'm wondering how you think about discretionary costs and adjustments within that. I mean as revenue growth is more moderate obviously your leverage is more moderate as well. But how do we think about the ability and timing for outright cost reductions in that line whether it's the external consultants or anything else. When do you think you can really begin to see compression there in those costs?

Hi, John. It's Christian here. I mean, I think, we are already today more disciplined in our spending related to our day-to-day activities and business operations. And so we're being also a bit strategic as we're looking for the second half of this year how to best manage that cost pool. But we believe over time that this is an area that we are looking at to ensure that we are finding sort of the right level in relation to how we're growing as a company. But then you also have part of our SG&A that is growing as our revenue grows. So if you take customer distribution expenses just to keep that in mind as our top-line is growing in the second half of the year our SG&A will grow as well. And that is sort of a direct link to revenue growth.

Thanks, Christian. And just a follow-up. When we think about, sort of, the macro pressures in delaying consumption increases, I'm curious just given how long the company has been around. I look at per capita consumption in North America it's higher than a lot of places in Europe. It's lower than places like Spain. Have you ever seen over the years sort of a period where the rate of consumption sort of levels off even independent of the macro environment in some of your countries in Europe? And what sort of, prompted that sort of reinvigorated growth going forward? Because it feels like some of this may just be growing pains for the category where you get a moderation of new consumers coming in maybe even independent of the macro backdrop. I'm just curious your thoughts there. Thank you.

No, we don't see any such things. And we have been driving the category and we're still in the very early in -- if you look at the household penetration from a volume perspective it's very low still. And yes, this data once we try a way to get -- once we get into the space it is very sticky. You don't go back. And that's what we see across all our markets. Now it's about the pace, especially, in Europe and how fast you can drive new consumers into the space given everything else that is happening in the world, right? So also the fundamentals has changed. What we said when we said all along it's still very much true. This is like an opportunity that is absolutely massive. This is important for -- if this is increasingly -- will be increasingly important for people as time flies.

Okay. Thank you very much.

[Operator Instructions]

So for all the questions, right? So I just want to thank everybody for joining us today and we look forward to speaking with you on our next earnings call in November. And we certainly hope everyone has a great rest of the summer. Thank you.

This concludes today's conference. Thank you for joining us. You may now disconnect your lines.