Ladies and gentlemen, greetings, and welcome to the Oatly Third Quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator instruction] As a reminder, this conference is being recorded. It is now pleasure to introduce your host, Rachel Ulsh from Investor Relations. Please go ahead.

Good morning, and thank you for joining us on Oatly’s third quarter 2022 earnings conference call and webcast. On today's call are Toni Petersson, Chief Executive Officer; and Christian Hanke, Chief Financial Officer. Jean-Christophe Flatin, Global President and Daniel Ordonez, 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 Private Securities Litigation Reform Act of 1995, including statements regarding our future results of operations and financial positions, industry and business trends, business strategy and market growth and anticipated cost savings. 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 6, 2022, our report on Form 6-K for the period ended September 30, 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 in today's call, management will refer to certain non-IFRS financial measures, including EBITADA, 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 reconciliation, non-IFRS financial measures and the most comparable measures presented 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 joining us to discuss the third quarter results. Today, I will provide an update on our business performance, address strategic actions we have taken as an organization and a future growth opportunity. Christian would review our financial results and update it 2022 outlook. And Jean-Christophe, Daniel, Christian and I will be available for questions. As a reminder, our new Global President, Jean-Christophe and Chief Operating Officer, Daniel Ordonez join Oakley in June. These two accomplished industry leaders have over 60 years of combined experience, at global and fast-growing consumer brand, since joining they're focused on activating multiple growth initiatives. And positioning outlet for the next phase of growth. Since our last earnings call in early August, we have faced challenges mainly driven by COVID-19 restrictions in China, and ramp ups that take due to technical issue, in our Ogden facility in the US as well as FX headwinds. In a third quarter results had short of our expectations. However, we believe these challenges are transitory and we are encouraged by our current volume growth, underlying consumer demand and future growth opportunities. In the third quarter, we saw year-over-year sales volume growth of 16% across all regions and continue to see strong category leading velocities, the global demand remains resilient. Yet, I am disappointed with our ability to translate this third quarter gross profit margin and sequential EBITDA improvement due to our operational execution shortcomings, as well as the worsening macro environment, which I will touch on more shortly. The 2.7% gross margin fell well below our expectations. Past two years have taught us the hard way that being a high growth company in an unprecedented complex and volatile environment demands an even sharper allocation of resources and capital. This is why as shown…

Thanks, Toni. And good morning, everyone. It's nice to speak with you today. Turning to the financials on slide 18. Revenue for the third quarter of 2022 was $183 million, an increase of $11.9 million, or 7% compared to revenue of $171.1 million in third quarter of 2021. Excluding a significant foreign currency exchange headwind of $16.6 million, revenue for the third quarter would have been $199.7 million, or an increase of 16.7% in constant currency compared to the prior year period. As Toni mentioned, third quarter revenue results were below our expectations, primarily due to production challenges in Ogden and continued market restrictions in Asia due to COVID-19. However, we experienced growth across retail, food service and ecommerce channel. Moving to slide 19, sold volume for the third quarter of 2022 amounted to 126 million liters compared to 110 million liters last year, an increase of 14.5%. We experienced the broad base growth with 7% sales volume growth in EMEA, 17% growth in Americas, and 38% volume growth in Asia. Consolidated net sales per liter was $1.45 in the third quarter of 2022, compared to $1.55 in the third quarter of 2021, mainly driven by foreign exchange and promotional activities in Asia, offset by the pricing actions in Americas and EMEA. As a reminder, our highest regional net sales per liter is typically in Asia, followed by the Americas and EMEA. Gross profit in the third quarter was $5 million, or 2.7% gross margin, compared to $44.9 million 26.2% margin in the prior year period, well below our expectation. Compared to the second quarter of 2022, gross profit margin of 16.8%, we had 1,310 basis point sequential margin decline as shown on slide 20. We did not achieve sequential improvement as we had anticipated, primarily due to the mention…

In conclusion, we are disappointed in the quarterly results. I remain confident in our strategy and the strength and uniqueness of our brand, which have continued to demonstrate the ability to generate demand and grow revenue. At the same time, we’ve taken decisive action to address the operational issues to prepare for the next phase of growth. With that review, we are now ready to take your questions. Operator?

[Operator Instructions] Our first question comes from the line of Andrew Lazar from Barclays.

Great, thanks very much. Maybe to start off, I think your initial target for self-manufacturing was 50% to 60%. Do you have a new longer-term target for what self-manufacturing would look like given some of the actions you're taking? And is this move around more of an asset light model targeted to a more specific geographic region? And then as part of that, obviously, the shift to self-manufacturing was a key factor, I think, basically in the longer-term margin improvement story. So I guess how does this margin improvement come about now? And aren’t some of these sort of self-manufacturing facilities already under various states have kind of construction or completion?

Hi, Andrew, this is Toni here. Thanks for your question. Just let me -- just start off with the gross margin, I will let Christian, double click on the rest of the questions here. Now, in terms of gross margin, transitioning into hybrid will potentially have a small concession on margins. But we are not ready at this time to provide a guidance, as we are discussing with various parties. The small concession, though, our modest will -- is outweighed by simplifying supply chain operations and execution. So I can't give you any clear updates on the margin. Let's come back to that whilst we're finalizing all the discussions.

I don't think there's anything more to add there, Toni. We will come back.

No, but in terms of maybe, Christian, the settlement --

Factoring piece will obviously have a slightly different share of our total capacity as compared to before. I will have to come back on that point.

Got it. Yes. I just didn't know how significant the magnitude of that change would be. And then any specific geographic region that that's focused on and as you make these shifts? Or do we not know that yet either?

Well, we're working across all the various regions. I mean, we're specifically looking at one facility in the U.S., Dallas Fort work and U.K.

Got it, and then just a quick clarification. I think you had mentioned 4Q, you expect gross margins to improve sequentially. And then Christian, earlier in the prepared remarks, you mentioned 4Q gross margin expansion. So I didn't know if that made year-over-year expansion or not. I was hoping you could just clarify that. Thank you.

Sequential improvement compared to the third quarter is what we meant.

Andrew can I just clarify again because you mentioned magnitude. What we see is potentially a small concession of the margins not much.

Our next question comes from the line of Ken Goldman from JPMorgan.

Hi, thank you. I wanted to build on Andrew's line of questioning about the pivot towards a more hybrid strategy. Obviously, to his point in your point, there were better economics that you had laid out for the NTN manufacturing. But you had also talked about some others, some other tailwinds, right, in terms of having more control over the process. I think you had mentioned some flexibility to maybe build some value-added processes when you control the entire supply chain. So I do appreciate the need to conserve cash right now. I do understand that companies can pivot. But I'm just curious how comfortable you are with some of the choices you have to make. I don't want to use the word sacrifices, but choices as you kind of veer away from end to end on a more permanent basis.

No. Thanks, Ken. I think that's a great question here. So let me just elaborate a little bit here. So we are continuously adapting to our environment. And this is just one example of that. Fundamentally, we will need more capacity to support growth. This gives us flexibility to add capacity faster. There are a number of reasons why we're taking this course. And if you allow me, just let me bring forward the three of them. So first of them is resource allocation decision. Now building multiple end-to-end factories is just a heavy lift, especially now hybrid enables us to put more focus on our proprietary on base production and other value-driving items such as innovation, branding, sales, et cetera. So we simplify and remove complexity. Second, the availability of strategic co-packers is easier to find now than before since we have both scale and growth. So meaning that we have more qualified partners to work with in terms of food safety, quality and security of supply. Now because you are hitting on the finance here, we have the liquidity and are confident in our ability to raise capital going forward. But this does not drive the decision. This is a business strategic decision considering the macro environment. We want to drive innovation and sales aggressively and want to be focused about it. So it was difficult to do everything with this before, and it's even hard now as you know. So we just want to make things easier on ourselves to simplify execution. So I know it was a long answer, but I just want to give the color.

That's helpful. Thank you. And then I wanted to ask the departures of the Chief Supply Chain and EMEA head. Can you give us a little more color about the circumstances around that, places made by these individuals. Typically, we'll hear a little more color than just the part of the company.

Well, we are continuously evaluating the skill set. As we grow, we're a high-growth company. The capabilities of both JC Daniel and especially combined is really, really adding a lot of value to the company. And Jean-Christophe has a very solid background in building other companies rapidly, including the complete supply chain network on a global scale. And that is, of course, something that we want to benefit from. And besides that, Jean-Christophe is also, we're seeing innovation in food science, supply chain, [inaudible] and people transformation functions. Daniel is focusing on supporting and leading the regional businesses here. But to your point, we are just an organization that is continuously evaluating various good sets across the organization.

Our next question comes from the line of Rupesh Parikh from Oppenheimer.

Good morning. This is actually Erica Eiler on for Rupesh. Thanks for taking our questions. So I guess I just wanted to hit on cost pressures really quickly. Just sort of the latest you're seeing here, curious what remains the biggest pressure at this point and maybe where you see some things starting to ease? And then along those lines, some of your CPG peers have given some early reads in terms of what they're expecting next year. If there's any color you can provide there, that would also be helpful.

Yes. I mean in terms of inflationary pressure, what we're expecting in the fourth quarter compared to the third quarter is in terms of COGS inflation increase of around 3% to 4% across direct materials, converting costs, electricity, labor. So that's what we're seeing. And then going into 2023, it's not at the same levels that we have experienced so far this year, which is in the high double digits. Currently, what we're seeing is in the range of 6% to 7% on a consolidated level in 2023. And I think I also want to add in terms of what we will do is to continuously combat inflation with pricing actions.

Okay. Great. And then just given the macro impacts on your business, I mean you've talked about some of the slower conversion to plant base that you've seen in recent quarters. I mean can you maybe just give us an update in terms of what you're seeing there in terms of consumer behavior and kind of the slower conversion that you've been seeing and kind of how that looks lately?

Thanks, Erica. This is Toni. So just want to make sure that it's clear that the guiding down has nothing to do with the brand or demand the underlying demand for our product is still strong. We start to see signs of growth in Europe that Daniel will -- can double-click on. In Asia, we are building our positioning stronger despite COVID-19 in terms of adding doors and partnerships in foodservice and in retail channels. And in U.S., we still have the highest velocities in the dairy universe. And Daniel, maybe you can put some cost to that.

Of course. Thank you, Toni, and thank you for the question. It is indeed, let me acknowledge that this is a pretty extraordinary environment and why we are experiencing. However, what we observed is that our velocities remain very strong, and the penetration levels continue to be very stable. So we don't see any wavering on that. And we also see specifically related to the last earnings call and that we improved execution in our part, we see that the ability to start changing the dynamics of the category. So we have seen some volume growth restoring in the countries in EMEA, The Netherlands, Germany, where we are growing ahead of private label and also the U.K. So with improved execution, the path is to converting dairy consumers into plant based, and we see that intact. As you know very well, better than me in the U.S., it's all about capacity, supply meet the service levels, which are improving.

Our next question comes from the line of Brian Holland from Cowen & Company.

Yes, thanks, good morning. I wanted to follow up on Andrew Lazar's question at the top. I think you mentioned, Toni, during your prepared remarks, you called out Texas, in particular, when discussing the pivot to a more hybrid production network. I just wanted to try to get a little more color around that. So is the Texas facility under construction yet? And what could a manufacturing partnership look like? Would that be a leaseback? I think Andrew was asking about how this sort of evolves given some of these facilities are under construction. So just trying to get a sense of the capacity situation sort of shifts from Oatly to co-manufacturers or, in essence, taking capacity out or if you're still building all these plants and maybe just working with partners from there?

Hi, there. So that's a good question. Thank you. First of all, what we do here is to protect growth, and we're balancing and calibrating growth and cost here. And first of all, it will not have an impact on volumes going forward or the growth rate going forward. In terms of Texas, yes, we are building there. But what we are now thinking about is to -- or very actively pursuing is to turn Fort Worth into hybrid model, like we had in listing and as we had in Singapore, and that also goes for Peterborough. Now JC, maybe you want add a little bit?

Thank you, Toni. Hi, Brian. And so scope-wise, of course, Talaris in the U.S. the other one that we are currently building that is also in scope is Peterborough in the U.K. In both cases, we are actively working to find the right strategic partners. And to answer the second part of your question, Brian, we are looking at what we call our hybrid model, where we really take ownership and put responsibility for proprietary oat-based process. And then we partner with other strategic partners for the filling parts. So I think we -- the intent is to follow exactly the same model. It has served us well, and we see that as a great way to nurture for [inaudible]

Great. I appreciate the color there. And then I wanted to talk about the U.S. total distribution points in the tracked channels appear to decelerate meaningfully commensurate with the recent shelf resets, several of your oat mill competitors accelerated simultaneously. How much of that dynamic that we're seeing is just your inability to supply at this point versus customers now opting to give space to peers who maybe today, are in a better position to fill that shelf space? Maybe said another way, is it fair to say you are getting punished by customers at this point for lack of a better term?

I take that, Brian, Daniel here again. Let me add some of the details that you're asking rightfully. Demand and velocities remain very resilient in the U.S. and we don't see any effects, any impact on that. And the best proof of that is the recent market share development, where we see in the last 12 and 4 weeks, we see we're gaining share despite the service level issues. So that's exactly, as you said, that's exactly what you're seeing there. The impact on some of the TDPs have to do with the service levels, which we see are improving already. and we look forward to sharing more with you in the next earnings call.

Brian, just to be very clear. Now it is related to supply and also remember that we are still balancing supply between retail and food service channel.

Our next question comes from the line of Rob Dickerson from Jefferies.

Great, thanks so much. Just a question for you, Christian. I thought I heard you say in the prepared remarks kind of briefly also kind of looking into other or, let's say, multiple financing tracks if needed over time for incremental capital, maybe if you could just expound on that, whatever you're willing to actually say would be helpful.

No. I mean I think we are actively working on multiple financing tracks, and we will provide more clarity when we have more to share. I mean, one example is which I've been saying in our prepared remarks is that we just recently signed a credit -- local credit facility in Asia for $25 million, providing more flexibility there. But we're actively working on and we're very confident. We also have the support from our shareholders as well.

Okay. Fair enough. And then just in terms of, I mean, it sounds like it's really the two facilities that are shifting more to hybrid versus the end-to-end. When we think about the capital needs kind of previously that sounded required kind of for the full development of the prior plan, I think at some point, you had thrown out a number approximately, let's say, $400 million or so to complete all the projects in CapEx. Now I look at all the facilities. I know the two that would be shifting and then I hear you talk about the savings coming kind of more from the P&L side. In terms of that capital savings piece, is this like somewhat of a material savings piece on the CapEx side? Or would you argue it's probably a little bit more P&L related with obviously some reduction in longer-term CapEx? And that's it. Thanks.

No, in terms of the capital -- the lower capital requirement, a big part of that is related to the strategic direction that we laid out in the call, in terms of turning into a more asset-light model. We also talked about the CapEx phasing actually in our previous earnings call when we reduced our annual CapEx by $200 million in 2022. So that combined sort of reduced the capital funding that we have by $200 million.

Right. Okay. But I mean this next phase that we're discussing today it doesn't sound like that was the lion share. The lion's share was kind of what we were talking about on the reduction in the Q2 call. Is that fair?

Yes. But also looking ahead, if you're looking more -- moving towards an asset-light model, that will also drive a lower capital need going forward as well.

Our next question comes from the line of Bryan Spillane from Bank of America.

Thanks operator. Good morning, everyone. Just two questions on my end. The first one, in Ogden, you described technical -- some technical issues. Can you provide more color on what the technical issues are? Is it the equipment doesn't work? Is it a lack of training? Just really trying to understand like what actually isn't working.

Thank you, Brian. Jean-Christophe. I will take this one. So on Ogden, we need to deal at two different things. One is the continued ramp-up of the factory. I think we said last quarter, we were in the last mile improvement to ramp up production. And the reality is that we are still improving and stabilizing production. So Daniel and myself have been three times to the site. We have now a very clear root cause analysis of what's driving this long ramp-up and we have now a clear action plan. I'm happy to report that over the last 6 to 8 weeks now, we are seeing stable production there. On the other side, what Toni referred to is we had a onetime incident, technical incidents in the line at the end of the third week of August that kept one of our two oat-based line still up to mid-September. And because you asked for specificity, what happened is we had an incident with one of our fire suppression systems, which is a safety device that is connected in the pipe between the oat, where we received oat from our oat tank into the process. It's a safety device that didn't work anymore and it took us a lot of time to get it replaced simply because it has an anti-explosive device into that, which means we cannot air tight it, and it has to go through the hole. So that's exactly what happened. But the main topic is we continue the ramp up of our production, and we see good stability in the past weeks.

Okay. No, that's very helpful. Thank you for the detail. And then I guess maybe to follow up on the earlier question around multiple financing tracks. Toni, have you thought at all? Have you -- has Oatly at all explored the potential of just merging with someone who's larger has more scale? I mean, there's a little bit of like the dog caught the car here, like you've got the growth but really having a difficult time scaling up to sort of service that growth. So in the range of possibilities, it is that something you've considered? And if not, why?

No, it's a good question, and the answer is no. We're not exploring that path.

And why?

Well, the why is that we have our runway is absolutely massive. And remember one thing, the hurdles that we had experienced are very much related to the macro combined with supporting the high growth that we have. So there's so much more to do, and we have so much confidence in these very decisive strategic actions that we're taking now to prepare this organization company for growth. And again, we have this underlying demand. Again, no demand issues we see the opposite. We see velocity strength. We see market share gains. We see us expanding across regions. So the confidence level is high. This has been very much an executional exercise that we need to improve, and we are taking decisive action. So that is the reason.

Our next question comes from the line of John Baumgartner from Mizuho.

Good morning, thanks for the question. Wanted to come back to the reorganization and your reductions for operating expenses. Relative to sales, your OpEx is a multiple of your peers with similar levels of revenue. And I guess a big part of that gap can be explained by the infrastructure to support your geographic breadth, and that gets leveraged over time with sales. So as you've given the business a second look here, what costs have become more discretionary in your view relative to what was maybe previously viewed as more structural in nature? And how do we think about the risk that you're reducing costs excessively or at least prematurely. Thank you.

So first of all, John, Jean-Christophe speaking. I think technically, within our SG&A costs, we have our customer distribution costs. So I think that's an important factor when you benchmark or compare which I know is at the heart of your job rightly. So then to your next question, which was, as we reset our cost base. Are we taking any risk there? I think we have had a very, very bottom-up approach. We have done the entire analysis ourselves, leveraging the guide people that exist in the various teams and we have really done the exercise in reset with the three intents that Toni has listed initially. So the question we asked was, what do we need capability-wise in order to propel us into the next step towards growth. So we were really looking for a scalable model. The second thing that has given us is simplicity and clarity. As any fast growth company, we have grown very fast and so has some parts of our organization. And therefore, we really need to bring simplicity and clarity. And finally, the expected outcome of that is by diminishing our fixed cost structure is to accelerate the path to profitability, which both Toni and Christian have referred to. The specific intersection, we have looked at first back to your regional resources was the intersection of the corporate and the global player with the European player. And Daniel and I coming in June, we had the opportunity to see some opportunities there, and this is what we have done. So I want to leave you with the thing that really the main priority, the main focus for us has been to position ourselves to invest in those because that is and will remain our number one priority.

Thanks for that. And just a follow-up on the European environment. It looks like from the slide deck that velocity in the U.K. and Germany was down about high single digits sequentially versus Q2, which was better than the category. I'm just curious, how much of that was due to the seasonality relative to just the overall macro environment? And what's your confidence level for seeing velocities and demand sort of bottoming given the macro uncertainty in Europe? Thank you.

Thanks for the question. It's Daniel taking it here. And I think you're referring very well to what Toni was mentioning in the previous earnings call. And that means is with the following. We have seen with improved execution better synchronization and resource allocation on our innovation and distribution points, we see the early signs of restoration of growth. It's early days, but we have seen two, three months of stable volume growth across the markets in Europe. And we have seen now reflected -- that reflected in market share gains. As I said to one of your colleagues before, we're even growing ahead of private labels in Germany. So we are starting to connect the dots. Thank you.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And now I would like to turn the conference to Toni Petersen, CEO, for closing comments.

So thanks, everybody, for joining us today. We look forward to speaking with many of you over the coming weeks and on our next earnings call in March. Have a safe and happy holiday season. Thank you, everybody.

Thank you. The conference has now concluded. Thank you for your participation. You may now disconnect your lines.