Oatly Group AB (OTLY) Q3 2024 Earnings Report, Transcript and Summary

Good day and welcome to the Oatly Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Brian Kearney from Investor Relations. Please go ahead.

Good morning and thanks for joining us today. On today's call are our Chief Executive Officer, Jean-Christophe Flatin; our Chief Operating Officer, Daniel Ordonez; and our Chief Financial Officer, Marie-Jose David. Before we begin, please review the disclaimer on Slide 3. During 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 position, industry and business trends, business strategy, 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 documents we have filed with 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, constant currency revenue and free cash flow. While the company believes these non-IFRS 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 posted a supplemental presentation on its website for reference. With that, I'd now like to turn the call over to Jean-Christophe.

Thank you, Brian and good morning, everyone. Slide 5 has the key messages I want you to take away from today's presentation. First, our third quarter results demonstrate continued solid progress toward reaching structural and consistent profitable growth. I am pleased to report that each of our three operating segments drove profitable growth in the quarter. This is a significant milestone as we continue to drive the total business towards structural, consistent profitable growth. While we are pleased that we have driven improvements in our profitability, we are proud that we have driven those results in a healthy way that has strengthened our business. Finally, with just one quarter remaining in the year, we are refining our full year guidance. We now expect constant currency revenue growth to be near or slightly below the low end of our previously provided range of 6% to 10%. Adjusted EBITDA near the favorable end of our previously provided range of minus $35 million to minus $50 million and capital expenditure to be below $55 million, which is below our prior expectation of below $70 million. Turning now to our report card on Slide 6. Here, you can see we continue to make progress on our journey towards profitable growth. As you can see, in the quarter, constant currency revenue growth accelerated to nearly 10% year-over-year with every segment driving volume-led growth. Similarly, we have continued to drive significant progress on our adjusted EBITDA. Today, we are reporting a quarterly loss of just $5 million and our fifth consecutive quarter of sequentially improving adjusted EBITDA. Slide 7 goes one level deeper and shows that our profitability improvements have been driven by a true strengthening of our business. Just over one year ago, on our second quarter 2023 earnings call, I shared with you my deep belief that we must have a stronger business before we are able to have a significantly bigger business. I believe the data shown on this slide demonstrates that our business is much stronger than it was back then. Our volume growth has accelerated to 13% year-over-year growth with each region reporting solid growth this quarter. As our volume has grown, we have captured the absorption benefits while relentlessly driving efficiencies. This has enabled our gross margin to steadily improve. In fact, our first quarter gross margin is a full 27 percentage points higher than it was just two years ago. And we have grown our sales and improved our gross margin, we have also continued to invest in branding and advertising in the mid to high single-digits as a percent of net sales. We still have plenty of work to do to realize what we believe to be our full potential. But clearly, we are making good, healthy progress. Turning now to Slide 8. Here, you can see how each segment's improvement plan journey has evolved. While each segment has required a slightly different path, our ways of working have been consistent across segments and in line with what I outlined on last year's Q2 call. Specifically, these ways of working include rigorous fact-based analysis, disciplined resource allocation, increased regional accountability, and aligned incentives. I want to share with you that I am very proud and grateful to our teams for embracing the challenge and making the necessary changes. And I'm pleased to report that each segment has a checkmark in each one of the stages, including the profitable growth column, which brings me to our next slide. On Slide 9, I am pleased to present that all three of our operating segments drove profitable growth in the quarter. As I said before, we still have plenty of work to do to realize our full potential, but this is a very important milestone as we continue to deliver on our commitments. I will wrap-up my section on Slide 10. As we move forward, we will maintain our North Star of driving the business towards structural, consistent profitable growth. To continue fueling our growth, we will continue investing to stimulate growth. To fulfill our company's mission, we know we need to recruit more consumers into our category and expand our consumer base beyond our most loyal advocates for our purpose and mission. On our last earnings call, I said that our advertising campaigns were going to maintain our unique voice while doubling down on substance and relevance, and this is exactly what we are doing. Daniel will share with you where we are heading with a few early examples during his presentation. Finally, we intend to complete our work on the calibration of resources. Our previously announced SG&A cost savings program is largely complete. The exits of our U.S. and U.K. manufacturing facilities remain on track and we continue to evaluate our Asian supply chain options. With that, I will turn the call over to Daniel to give you an update on each region. Daniel, over to you.

Thank you, J.C., and good morning, everyone. I will start on Slide 12 with our largest operating segments, Europe and International. This segment reported solid results in the quarter with 6% revenue growth or 4% on a constant currency basis. This revenue growth drove 46% year-on-year increase in adjusted EBITDA as we captured the benefits of fixed cost absorption and drove efficiencies in both cost of goods and SG&A while also increasing advertising investments year-on-year. On Slide 13, you can see how we continue to see broad-based strength in the segment. In the quarter, the retail side of the business grew volume by 5% and foodservice by 7% year-on-year. As we've mentioned in the past, we continue to believe there is a significant opportunity to drive robust growth in the foodservice channel, where there is not only head space to grow, but it is also where consumers can experience the brand to its fullest. On the right side, you can see that our established markets, which represent nearly 90% of the segment volume grew by a solid 5% in the quarter. These are the markets where we have operated for many years, and they continue to drive solid mid-single-digit growth rates. The European markets where we have recently expanded drove a strong 25% volume growth in the quarter. And in many of them, we already developed leadership presence in the coffee space and number one velocities in retail. However, our international expansion markets saw a 4% volume decline in the quarter. These markets make up only 6% of the segment's volume and are primarily made up of Southeast Asia, Australia, the Arab Peninsula, Mexico, and some exports markets. While we have seen solid performance in most of these markets, Southeast Asia has become much more competitive in the recent time, and that has impacted our performance. Slide 14 shows the retail channel data for our European markets. To be more representative of our business, this chart now includes both our established European markets and almost all of our European expansion markets. While we have continued to grow, the growth of the category as a whole has clearly been sluggish recently with the category-related impact most acute in the U.K. We have steadily taken share in nearly every one of our markets, including the U.K. This continued strong share gains support our claim that there is a clear difference between plant-based milk versus oat milk and versus Oatly. But we cannot wait for others to make the category exciting. Oatly has long been the only brand that drives category growth. So we intend to use our competitive momentum to take control and reignite growth. It starts with our not-so-secret weapon on Slide 15. Our family of Barista products has been a strong growth driver for us, dominating the growing coffee space. Our newly expanded lineup, which includes new formats and new concepts like organic barista or lighter-faced [ph] Barista have been helping us to build that momentum. These products have been showing positive signs of solid velocities as well as incrementality by recruiting new consumers into the category. These are terrific executions to make Oatly available to more people in more places in different channels, formats and price points. We expect that these will continue to drive growth going forward. But we know not everybody drinks coffee. Slide 16 shows a campaign that we're running in the U.K. We all know that Brits love their tea. In fact, tea represents over a third of all dairy milk occasions in the U.K. compared to a quarter of occasions for coffee. So, we are reminding them that our products are a terrific addition to their daily ritual. This is only an example of how we will continue to surprise consumers to expand how they think about oat milk and the multiple occasions they do not consider nowadays in their repertoire, an example of our single-minded decision to recruit more consumers to the category. You can also appreciate this is not just an advertising campaign, but an immersive, engaging experience with our usual disruptive tone. WhatsApp conversations will soon reach six digits, encouraging consumers one by one that Oatly works super well in their cup-up, short for cup of tea in Britain. And Slide 17 shows another example with a campaign that takes an even bolder approach to recruiting new consumers. We know that many consumers are reluctant to change, and we know the main barrier to category adoption is a preconception on taste. So, we made it simple the Oatly way. We conducted a blind test. And guess what? More than half of the German consumers we sampled preferred Oatly over cow milk. You should expect to see this campaign running across Germany, Austria, and Switzerland over the coming months. Between the U.K. with tea and Germany with taste, you can see that we're clearly modifying our consumer advertising without modifying the essence of our unique tone of voice. We will relentlessly provide consumers with the multiple concrete reasons why they should adopt Oatly, being true to our mission. When paired with hyper-localized events such as the pop-up stores I brought to you last quarter as well as provocative in-store displays and strong shelf presence, we believe we have a solid recipe for improving growth trends. Turning now to our North America segment on Slide 18. This segment's solid results continue to be a direct result of a disciplined execution throughout the entire organization. We reported a very solid 18% growth in revenue and a strong $11 million year-on-year improvement in adjusted EBITDA. Slide 19 shows that the sales growth was well balanced between channels with over 16% growth in retail and nearly 20% growth in foodservice. Slide 20 shows the significant retail market share gains we have driven over the past year. In fact, our share of the plant-based milk category is at an all-time high. Our products are clearly showing up on shelves and consumers are choosing Oatly over the competition. And customers love our products since our dollar velocities per point of distribution remain nearly 3 times higher than our nearest competitor. Speaking of customers, Slide 21 shows that they continue to see the benefits of having our products on their shelves. Our chilled oat milk is the largest part of our retail business and its retail distribution points are up 45% year-on-year, and the ACV has increased more than 500 basis points to 44%. This is great progress, and we believe there is room to improve from here. On the right-hand side of this slide, you can see some additional distribution we have secured in the upcoming shelf resets that are expected to occur shortly after the new year. You can see that we continue to expand our relationship with several existing customers such as Walmart and Costco. And I'm also pleased to say that our chilled Barista products will return to Kroger after two years hiatus. So good momentum in North America. Turning to the Greater China segment on Slide 22. I'm pleased to report that the Greater China segment is reporting its first quarter of profitable growth. We grew sales on a constant currency basis by 12%, and we reported adjusted EBITDA of $2 million, which is an $18 million year-on-year improvement. The business is clearly in a much better position than it was over a year ago when J.C. and I started to operate it together with the local team. Our decisions to execute a strategic reset as well as separating it from the rest of Asia to drive focus are clearly driving results and have strengthened the business. Slide 23 gives an update on the new oat milk momentum that seems to be building in China, even during the warmer summer months when oat milk has been less popular than in the colder months. Oatly-based cold drinks are currently being promoted across the segment's largest customers. We expect a good level of activity to continue as we head into the colder months. While this suggests an improved momentum, we recognize that we're still in the test phase in China's largest coffee chain, and we're mindful of the clearly challenging macro environment in the region. Overall, our relationship with all customers remain strong, and we remain in a solid competitive position and the business is moving in the right direction. With that, I will now turn the call over to M.J.

Thank you, Daniel and good morning, everyone. Slide 25 shows an overview of the quarterly P&L. We reported 10.9% year-over-year revenue growth and constant currency revenue growth of 9.6%. Gross margin for the quarter was 29.8%, which is 1,240 basis points higher than a year ago. It was also 60 basis points higher than the second quarter, and this is the first time we have reported a sequential improvement in first quarter gross margin since well before our IPO, which we believe demonstrates an increased level of operational and financial discipline. Adjusted EBITDA was a loss of $5 million, which is $31 million improvement compared to last year's first quarter. As a percent of revenue, our adjusted EBITDA loss was approximately 2%. Comparing that 2% to our branding and advertising investment in the mid- to high single-digits as a percentage of revenue highlights that we are continuing to invest for the long-term, while also improving profitability in the short-term. In summary, we had solid performance in the quarter. Slide 26 shows the bridging items of our total company quarterly revenue growth. Volume grew 13%. Price/mix was a 3.4% headwind for a 9.6% constant currency revenue growth. Foreign exchange was a tailwind of 1.3%, resulting in 10.9% total revenue growth for the quarter. Slide 27 shows the revenue bridge by segment. Jean-Christophe and Daniel's presentation outlined everything we are doing in each region to drive solid growth. The takeaway of this slide is that each region drove solid volume growth as our strategic initiatives and growth plans continue to work. Europe and International continued to report solid growth with 4% constant currency revenue growth, led by 5.4% volume growth. North America's revenue growth of 18.1% was driven mainly by the strong 17.6% volume growth. Greater China's 12.4% constant currency growth was driven largely by the test with China's largest coffee chain. As we mentioned last quarter, this customer mix has a clear impact on the segment bridge with a large volume increase and an impact on price/mix. Since we are continuing to run the LTO with this large customer, we expect the bridging items to continue to be impacted at least through Q4. Slide 28 shows the drivers of our 12.4% point year-over-year gross margin expansion. This biggest item is a 10.9 percentage point increase driven by absorption and supply chain improvement. Of this 10.9%, 3.2% of them are related to last year's margin being impacted by costs related to the Greater China segment strategic reset. The remaining portion was primarily driven by increased efficiencies in our supply chain. This is the impact of our strategy to consolidate the co-packers in North America as well as improved inventory management, leading to fewer supplier penalties and inventory write-offs across our segments. It also includes better absorption benefits by optimizing our production between different facilities. Our supply chain team has been doing a very good job on driving efficiencies while supporting growth, but we do not expect efficiencies to drive this level of margin improvement going forward. Our net pricing and product mix improved margin by 100 basis points, primarily driven by mix improvement in Greater China as part of its strategic reset. Foreign exchange increased our margin by 50 basis points and inflation was roughly neutral to margin. Slide 29 shows the year-over-year improvement in our adjusted EBITDA was driven primarily by a $29.5 million improvement in gross profit. Our SG&A savings program is now largely complete. As we move forward, while we remain disciplined on SG&A cost control and will always be searching for efficiencies, we expect gross profit to be the main driver of profit improvement. Slide 30 shows our adjusted EBITDA by segment. Each segment continued to report a significant improvement compared to the prior year. For the fourth quarter in a row, the sum total of the adjusted EBITDA for the three segments was positive. On top of that, each of the three operating segments reported positive adjusted EBITDA in the quarter. Corporate expenses increased by $2.4 million as savings in personnel costs were more than offset by a foreign exchange headwind as well as the increased global advertising spend that is recorded in corporate that we discussed on our last quarter's call. As you can see, the strategic actions we have been taking are driving strong results. Turning to our balance sheet and cash flow on Slide 31. First, we remain fully funded. We ended the quarter with a strong liquidity position of $322 million, which is comprised of $119 million of cash and $203 million of our undrawn credit facilities, which are denominated in Swedish krona. Next, our total cash flow remains on track with our plans. Our profitability continues to improve. We continue to optimize our capital expenditures and working capital, and our exit of U.K. and U.S. plants remain on track. Specific to the plant exit, we had a net $3 million cash inflow in the quarter, which brings the cumulative impact to a $10 million cash outflow. We are on track to have no more than $20 million of total net cash outflow for the exit. Finally, as you know, I have repeatedly said that improving our cash flow is a priority for me, and I'm pleased that this quarter free cash flow is the company's best quarterly performance since our IPO. We have work to do, but we're clearly improving. Slide 32 shows our 2024 guidance. With just one quarter remaining in the year, we are refining our 2024 guidance. We expect constant currency revenue growth near or slightly below the low end of our prior range of 6% to 10%, and we continue to expect foreign exchange to have a minimal impact. For adjusted EBITDA, we expect to report a loss near the favorable end of our range of between negative $35 million and negative $5 million in 2024. Finally, we expect CapEx to be below $55 million for 2024. This concludes our prepared remarks. Operator, we are now prepared to take questions.

The first question comes from Max Davenport with BNP Paribas. Please go ahead.

Hi, this is Alex Hilsenrath on for Max. Thanks for the question. So, guidance implies a slowdown in revenue growth to around 7% in 4Q 2024. What is driving the deceleration? And then how should we think about the exit rate going into 2025?

Alex, Jean-Christophe, thank you so much for the question. First, let me give you the context. As you know, we always strive to deliver on our commitments, but we think it's important to be open about the reality of the situation. So, the main element that has changed over the past three months since we last guided is the category growth dynamics in Europe that Daniel mentioned in his prepared remarks and most notably, the recent category sluggishness in the U.K. As you have heard us say multiple times, the way we work is we are really going to focus on controlling the controllables. In this case, what we call the controllables includes the most -- the most thoughtful and deliberate approach to consumer engagement and advertising that Daniel has discussed. So, that's the way we look at it.

Got it. Makes sense. And then just one more follow-up. So, given the progress on EBITDA with all three segments turning positive, are there any factors to consider that would prevent the company from achieving positive adjusted EBITDA in 2025?

Thank you again, Alex. And I'm sure there will be plenty of your colleagues that also have questions they want to ask about 2025. So, let us cover that now and tell you what we can tell you at this stage. I propose that we start and then hand over to M.J., if she wants to add on anything. First of all, let me remind, achieving profitable growth is -- has been and remains our unique North Star. I am and we are fully committed to it. We are really pleased to see the significant structural progresses we have made so far. You can see it in the gross margin significant increase. You can see that in the SG&A recalibration that we highlighted in our prepared remarks. We are clearly moving in the right direction, and we expect to continue making progress as we move forward. The way we do that is by making the right decision day by day, one after the other to bring this business to profitable growth as quickly as possible. Obviously, we are not going to give you any 2025 guidance today, but you should expect that our teams will continue to drive distribution gains, market share improvement as well as category creation in expansion markets. At the same time, we will also remain super disciplined on our costs and capital to ensure that all the great things we are doing to drive demand flow through to improvements in the P&L and ultimately improvement in the cash flow. M.J., Marie-Jose, anything you want to add?

No. Maybe just to build, we are still going through our budget process. We will give you, for sure, full outlook in our next call. However, here are some high-level thoughts on how we are looking at 2025. On top line, Daniel spoke about the momentum we have still building, and we will look to build on that. From a margin perspective, I would point out that Greater China will anniversary this first large LTO starting in Q2. Our supply chain teams will continue to drive efficiency, whether for absorption or other productivity improvements. We will continue to support our strategy to stimulate demand through healthy branding and advertising investments. We will, of course, continue to stay diligent and disciplined on SG&A. And finally, as we look forward, we will continue to embrace a rigorous fact-based analysis of our CapEx. By the way, we expect most of the majority of them to go through safety, efficiency and sustainability projects within our existing sites. So, I hope that helps. But again, we are sharing as much as we can at this stage, Alex, I hope that helps.

Great. Thanks so much. I'll pass it on.

Thank you. [Operator Instructions] We have no further questions, ladies and gentlemen. I would like to turn the conference back over to Brian Kearney for any closing remarks. Over to you.

Great. Seen as there are no more questions in the queue, we will end the call here. Thank you, everybody, for joining us. Feel free to reach out to me if you have any questions, and we can set up some time to chat. Thanks, everybody, and have a great day.

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