Good morning and welcome to the Oatly Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note that this event is being recorded. I'd now like to turn the conference over to Mr. Brian Kearney from Investor Relations. Please go ahead.

Good morning, everyone, and thanks for joining us on today's call for Oatly's second quarter 2023 earnings conference call. On today's call are our Chief Executive Officer, Jean-Christophe Flatin; our Chief Operating Officer, Daniel Ordonez; and our Chief Financial Officer, Christian Hanke. Before we begin, please review the disclaimer on Slide 3. During this call, the management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our future results of operations and financial position, industry and business trends, business strategy, market growth, and anticipated cost savings. These statements are made based on management's current expectations and beliefs, and involve risks and uncertainties that could differ materially from actual events or those described in these forward-looking statements. Please refer to the documents we have filed with the SEC 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. Also, 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, 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 of the non-IFRS financial measures to the most comparable measures prepared in accordance with IFRS. In addition Oatly has also posted a supplemental presentation on its website for reference. I’d like to now turn the call over to Jean-Christophe.

Thanks, Brian, and good morning, everyone. Page 5, the key messages I want you to take away from today's presentation. First, I'm very excited to be Oatly's new CEO because I believe Oatly has a significant amount of potential in both growth and profitability. In my time here so far, it has become equally clear that to realize our potential we must continue to take bold actions. One bold action we are taking is initiating an improvement plan in our Asia business where we are refocusing our energy and resources on strengthening the core business to have a strong foundation to go from. We expect this will enable us to adjust to the evolving post-pandemic environment and set this segment up for profitable growth. Another action we are taking is a further reduction of our overhead costs in both corporate functions and our Americas segment. This reduction will further increase our focus and agility as a company. Finally, while we are reducing our guidance for 2023 revenue growth, these bold actions keep us on track to reach our targeted gross margin for quarter four and positive adjusted EBITDA in 2024. So let's dig in. Slide 6 outlines why I so much believe Oatly is uniquely exciting company. We have an enormous sales growth opportunity in front of us as we look to revolutionize the food industry and convert consumers from dairy into plant-based. The underlying demand for the oatmilk category remains strong. And Oatly is a key driver of category growth, especially in regions where we have sustained capacity, distribution gains, and bond building investments. We also have a significant margin expansion opportunity in front of us. In full year 2022, we were at just 11% gross margin. This quarter, we are at 19% and we believe we can reach…

Thank you JC, and good morning, everyone. I'm very happy to be here with you. I will begin with our EMEA segment on Slide 12. EMEA is executing well on its 2023 priorities of strengthening the core markets, growing foodservice customers, expanding the portfolio beyond coffee and into adjacent markets. Slide 13 touches on the first two of those priorities. You can see on the left that our category continues to have strong growth growing 14% in the quarter. The needle chart shows that we continue to gain share in our core markets of Germany, the UK and the Netherlands, and we're very happy about the continued expansion of our foodservice customer base, including Starbucks in Italy, an expansion of our partnership with McDonald's into four new markets and Qatar Airways. Also, our new self-serve product continues to gain traction with many new customers across Europe. Our first ever pop-up store in Amsterdam is proving a big hit with up to 2,000 cups sold every day. Slide 14 is an update on our progress in expanding our portfolio beyond coffee occasions. As a reminder, we're expanding our non-coffee portfolio from a somewhat limited offering that was mostly just the original Oatly product to a non-coffee portfolio that more directly replicates dairy products such as Whole Milk, Semi Skim and No Sugars. We are calling this expanded portfolio, the Go Blue portfolio. We're very excited about this as it enhances our product offering while expanding margins. Our UK business is the furthest along in this mixed shift. In the second quarter, the next impact of this mixed shift is a 13% year-on-year volume growth as we increase usage and bring new consumers into the category. So while still in the early days, we're seeing good progress on volumes and margins. Slide…

Thank you, Daniel, and good morning everyone. Slide 27 gives you an overview of the P&L for the quarter. We reported 10% year-over-year revenue growth and 11% constant currency revenue growth. Gross margin for the quarter was 19.2%, which is a 340 basis point improvement versus the prior year quarter, and a 180 basis point sequential improvement from Q1. Adjusted EBITDA was a $53 million loss, which was a $1 million improvement versus the prior year. This came in slightly below our expectations. Slide 28 shows the bridging items of our second quarter revenue growth. You can see that volume grew 3%, price mix grew 8% for a constant currency revenue growth of 11%, that was partially offset by a 1% foreign exchange headwind to result in 10% total revenue growth for the quarter. Slide 29 double clicks on the revenue bridge a bit further and shows it by segment. We are pleased to see that both EMEA and Americas posted constant currency sales growth of high-teens, which was offset by an 11% constant currency sales decline in Asia. As a reminder, as we move through the third quarter, we will lapse the Americas price increases that they took in August of last year, so we expect that strong price mix number to come down going forward. Slide 30 shows you the sequential quarter-over-quarter gross margin bridge. A year-over-year bridge is provided in the appendix of this presentation. The sequential improvement in gross margin was driven primarily by improvements in our supply chain costs and absorption rates in the Americas and EMEA. To a lesser extent, we also benefited from the impact of a full quarter of the impact of EMEA price increases. These benefits were partially offset by the slower than expected post COVID-19 recovery in China, and the…

[Operator Instructions] The first question comes with Christian Junquera with Bank of America.

Good morning, everybody. How much of the reduction in your organic sales outlook was driven by Asia versus the Americas segment? You mentioned on the call earlier that you have a more conservative outlook for the Americas business. Is that entirely driven by slower than expected distribution bill that you guys talked about? Or are you guys also assuming slower growth for the oatmilk category in the U.S.? Scanner data for the U.S. shows that retail sales just continues to slow sequentially.

Hi, Christian. Jean-Christophe speaking. The first part of your question is, 66% of the guide down is due to the Asia reset, only the rest is related to the U.S. and I hand over to Daniel to give you the answer -- the detailed answer to your question on the U.S.

Thank you, Christian. We see sustained progress in our ability to continue to fulfill distributions both in TDP, you saw in the recorded remarks about 20% and ACV now reaching the 40s for oatmilk, which is very good progress. And as you can expect, we're working on reset -- range reset in the rest of the calendar year, so expect more to come. When it comes to promotions, we have seen now a good part of two months with units volume growth, which is slightly behind our expectations, but it's solid progress after we have resolved our supply chain issues and fill rates issues. Of course what you're seeing is a more muted performance for plant-based in general. But let's face it. Our oatmilk continues to outperform all other crops. So as we move forward and as we continue to stimulate category growth, as we have proven in EMEA, we're very confident that we will continue to gain share and we'll continue to make the category grow. This is more to come in the U.S. of course, but perseverance and investment on growth will eventually pay back.

The next question comes with Michael Lavery with Piper Sandler.

I just wanted to come back to your launch in McDonald's in several European countries and just to get a sense of what could be next. I know you don't want to get over your skis on that. But is this a little bit of a test that could have a broader rollout or just how do we think about that relationship and what it would take to translate into other markets?

Very good, Michael. Good to speak to you this morning. Indeed, as you saw, we started with Austria, now we are expanding East and it's -- I can tell you that there's more to come on a country by country basis. And as you know, it's part of our strategy. There is substantial head space for us to grow in EMEA, but around the world in foodservice. In EMEA less than 20% of our volumes come from foodservice and it's a priority strategy. So you should expect some important names coming in the upcoming quarters in this field, not just McDonald's, but some others. So indeed, it is a priority of our strategy.

And then just to Asia, that was certainly where numbers were worse than we'd expected. And we've seen some headlines about just the macro picture there. Certainly the reopening hasn't gone the way I think you or many would've hoped. But can you just give us maybe a little bit more granular sense of how the consumer is adapting? You've got your mostly foodservice there. Is the pressure on the -- are people just not leaving the house as much? Are they cutting back on at-home purchases? Are they more frugal across the board? I guess, what are you seeing? And I know you're adjusting your strategy to try to fit more appropriately and at the very least be more focused. I think which is quite reasonable. But as far as just the consumer piece of it, do you have a sense of how long this malaise could last? What are you seeing as far as the view on the ground?

Thank you so much, Michael. I think it's a great opportunity for me to share a bit deeper what's happened in our view on this region. Where do we come from? Let's come back to that. This business -- over the past five years, our business in greater China and Asia has really been building and driving the category. We have been leading the plant-based innovation and sustainability and honestly establishing quite a bond phenomenon there. And as the pandemic hit a few years ago, our Asian business was doing everything they could to prolong and continue their growth. And for that they have put quite a number of bets so that we could be positioned to benefit from the post-pandemic boom. That was the intent. So what has happened? What's the macro environment we are all seeing today? As the region moved from zero COVID to zero restrictions, like all of you, we got surprised because consumption, customers, consumer behaviors, exactly as you said, were not aligned with our assumptions. And as a consequence, we quickly realized that the bets we had placed, we are not paying off. We saw some of the new channels, customer, products we had been putting bets on, were not generating the level of revenue we were looking for. And at the same time, they were not justifying the expenses we had put behind them. So what we saw is the need to very quickly reset because in that kind of circumstances, in my book, wait and see is not a strategy. So we decided to act and act quickly and immediately. With the reopening of the travel, Daniel and myself, we've been able to go there twice in the past two months and in order to act finally able to be on the…

And this concludes the question-and-answer session. I would like to turn the conference back over to Mr. Kearney for any further observation. Please go ahead.

So, there were a couple of questions that I've received that I think might be helpful to tackle in this venue. The first would be, probably for Daniel. In the prepared remarks, we said that our outlook for EMEA's sales has not changed. And could you elaborate on kind of the, what we're seeing in that market and what leads us to continue to be confident there?

With pleasure. Thanks, Brian. EMEA, what we see in EMEA now, I guess you're getting familiar with the consistency of our solid performance in the segment. We see the metrics going -- continue to move in the right direction, volume growth in the core markets, continuous share gains year-on-year and the proof that we continue to stimulate category growth. In the core markets, oatmilk continues to grow at more than double-digit in growth. Now, what makes us more excited moving forward is that the opportunities to continue to expand in this segment as well as across the other regions as well are three things that we only started to explore. Number one, portfolio. Portfolio, we alluded in the prerecorded remarks about our non-coffee occasions portfolio, which is only in the early innings, expect much more on pack and size architecture as we move forward. Secondly, on foodservice. Foodservice, it's less than 20% of our revenue in EMEA and we are only starting to explore the impacts and the opportunity to generate consumption and to drive conversion in the big foodservice accounts. We are investing in capabilities, both in route to market and innovation to make sure that continues to be the case. And number three is new geographies. We're super excited about the new geographies. We have seen now our products, Oatly appearing in the most prominent cities across Europe in the new regions. So you will find very easily Oatly in most of the coffee stores in Paris, Barcelona, Madrid, Milan, Brussels, Warsaw, you name it. And that's only the beginning. And we start to see that whether it's in Montpellier in France, or whether it's in [Calp] in Spain, Oatly Barista is already the number one turning SKU. So with patience and playing up to the strength of our model, there is much more bright future to come in EMEA.

And then the other question that we've gone for Christian would be on path to profitability. And if you could remind everybody of the drivers and how to think about that going forward?

Happy to do that, Brian. So what we stated in our prepared remarks is that we are confident that with the actions that we have taken and will take during the second half of 2023, we are still on track to achieve positive adjusted EBITDA in 2024. As you might recall, the key drivers in our path to profitability consists of gross profit margin expansion throughout 2023 and beyond. As we continue to grow our business and also optimizing and streamlining our organization to balance growth with profitability. Our sequential gross profit margin expansion is on track, to achieve a margin of the high 20s in the fourth quarter. In our Q4 earnings call, we laid out the four buckets which would drive the gross profit margin improvement. We have three of the four buckets largely behind us, namely implementation of price increases in EMEA, that is done. Improved channel mix effects as we expand distribution, we're seeing those effects already. And improving our cost per liter as we optimize our supply chain operations and network and that is also largely behind us, but it will also continue into the second half of the year as we improve our growth. We believe that with the improvement plans in China that we are about to implement, such as the SKU rationalization that JC spoke to, will result in gross profit margin improvement in the Asia segment, and that is related to the bucket that we call COVID-19 recovery in China. So that's the gross profit margin story. We remain on track and we've seen sequential improvement now over four quarters. In terms of optimizing and streamlining the organization, as we communicated on today's call, we have identified $85 million of annualized SG&A expense savings, of which the Americas and the corporate segment is already behind us, that is $45 million out of the $85 million and with Asia happening in the second half of this year. Thus, we will see an US$85 million reduction of our forecasted '24 SG&A expenses and as noted in our prepared remarks, our total SG&A in 2024 will be lower than in 2022. We are confident that these actions combined will result in positive adjusted EBITDA in 2024.

Thank you, Christian, and thank you for everything, Christian. I just wanted to add my voice to that to say we have one single guiding North Star, which is profitable goals, and myself, the leadership team, the organization is laser focused on delivering full year 2024 positive adjusted EBITDA in order to fuel profitable growth. The clarity of having one guiding star is what's driving our choices, our decisions and actions, and this is what we do every day. So I just wanted to add my voice to a guide detailed summary you gave to say that's what makes us confident, because we talk about actions we have taken or we are taking. Thank you.

Terrific. Thank you. This concludes our conference call today. Feel free to reach out to me and investor relations if you have any follow up questions. Have a great day.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.