Oatly Group - Earnings Call - Q2 2025

Transcript

Operator (participant)

Today, and welcome to the Oatly's second quarter 2025 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Brian Kearney, VP of Investor Relations. Please go ahead.

Brian Kearney (VP of Investor Relations)

Good morning and thanks for joining us today. On today's call, our Chief Executive Officer, Jean-Christophe Flatin, our Global President and Chief Operating Officer, Daniel Ordoñez, and our Chief Financial Officer, Marie-José David. Before we begin, please review the cautionary statement regarding forward-looking statements and other disclaimers on slide three, which are integrated into this presentation and include the Q&A that follows. Please also 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 Adjusted EBITDA, Constant Currency Revenue, and Free Cash Flow. Please refer to today's earnings release for reconciliation of non-IFRS financial measures to the most comparable measures prepared in accordance with IFRS.

In addition, Oatly has posted a supplementary presentation on its website for reference. I'd now like to turn the call over to Jean-Christophe.

Jean-Christophe Flatin (CEO)

Thank you, Brian, and good morning, everyone. Slide four has the key messages I want you to take away. First, we continue to make good progress on our 2025 priorities. Igniting top-line momentum is our most important priority out of the three, and the actions are working. We are continuing to roll out our Growth Playbook more broadly, and we continue to see similar results. While we are confident our playbook will continue to drive results, we are reducing our full-year outlook on the top line. This reflects reduced, slower-than-expected progress in our North America segment, as well as a soft macro environment in our Greater China business. Importantly, we plan to drive additional cost efficiencies and keep us on track on the bottom line, and we are reaffirming our Adjusted EBITDA guidance. Therefore, we are refining our 2025 guidance.

We now expect Constant Currency Revenue growth of approximately flat to +1%, Adjusted EBITDA in the range of $5 million-$15 million, which represents no change compared to our prior outlook, and CapEx of approximately $20 million. Finally, we have decided to conduct a strategic review of our Greater China business with the goal of accelerating growth and maximizing value for this part of the business. Slide five reminds you of our three priority areas. This year, we are focused on reducing costs, igniting top-line momentum, and driving profitability. We fully expect our disciplined execution on these priority areas will set us up for long-term value creation. I will start with costs on slide six. We have made good progress in driving efficiencies this year.

In the first half of this year, we have driven down our cost of goods per liter by 10% compared to last year's first half. Q2 is our eighth straight quarter of year-on-year reductions. We believe we still have runway to push it lower. We also continue to reduce our SG&A overhead expenses, which provided us with additional fuel for branding investments. We have identified additional SG&A efficiencies that will drive more impact later this year. Overall, I'm pleased with our progress on cost discipline, and we will continue to drive out inefficiencies. Slide seven shows the results of our deliberate and disciplined growth orchestration investments. As Daniel will elaborate further, our Europe and international sales performance is clear proof our refreshed Growth Playbook is working. When we launched our refreshed playbook late last year, the category growth wasn't there.

In the quarter, our business grew 4.7%, while the category grew 1.9%. As you can see, the data is even stronger for the last four weeks, where we grew over 7%. Once again, igniting category growth and outgrowing both plant-based milks and oat milk. Turning to our third priority, profitability, on slide eight. We continue to make good progress on profitability in the quarter. Our Adjusted EBITDA improved $7 million year-on-year in the quarter to -$3.6 million, which is in line with the guidance we provided on the last quarter's score. This continued progress and the actions we are taking to drive the business give us the confidence to reaffirm our full-year profitability guidance. Slide nine shows our updated outlook.

The biggest takeaway is that we are reaffirming our Adjusted EBITDA guidance of $5 million-$15 million, which I believe demonstrates that we have good flexibility within our business to deliver on our commitments. While we are adjusting our top-line outlook to reflect both slower-than-expected progress in North America and the continued soft macro environment in Greater China, we continue to believe that our refreshed Growth Playbook is working and that we are on the right path. The progress we are seeing in the Europe and international segment is clear evidence of that. Finally, we have initiated a strategic review of our Greater China business. We will consider a range of options, including a potential carve-out, with the goal of accelerating the growth and maximizing the value of the business. Our Greater China business has improved over the past few years, and it is much stronger now.

It has been a strong contributor, delivered better results, established market leadership, and is now well-positioned for the future. We believe in the future potential of this business. Therefore, we believe now is the right time to conduct this review to help the business reach its future potential. As we conduct this strategic review, we will continue to operate in the region, including our mansion facility. We remain committed to our customers, our consumers, and our employees whilst maintaining the safety and continuity of our operation. I must note though, there are no assurances that the process will result in any transaction or strategic change. We will update the market on our progress as is necessary and appropriate. Daniel, over to you.

Daniel Ordoñez (Global President and COO)

Thank you, JC. Good morning, everyone. Slide 12 shows how the Europe and international segment has been performing. Strong volume-led double-digit revenue growth in the quarter.

The steady volume-led growth, coupled with reliable operational efficiency, pushed the segment's EBITDA margin from the low double digits in early 2024 to the mid-teens in Q4 and Q1, and now north of 20% for quarter two. This segment is now focused on generating incremental consumer demand, which we expect will drive continued profit improvement. Today, I will discuss how we're driving demand and our plans for the future. Slide 13 reminds you of the three pillars of our Growth Playbook. The first is to increase our relevance to consumers. As you saw in my first slide, we have significantly expanded our portfolio from a position of strength and uniqueness out of our iconic Barista Original Edition. We're doing so by leveraging new usage occasions and the emerging taste and flavor bonanza that Gen Z is driving, and that is evolving coffee into a much broader beverages space.

At the same time, our advertising has become simpler, equally arresting, and with messaging focused on the barriers to conversion. The second pillar is to attack those barriers to conversion, most notably preconceptions on taste. Anywhere we test blind, we see that around one in two people prefer Oatly to cow's milk in their coffee. This is a very persuasive tool that we expect to intensify in our communication. We add to this our elevated signature drinks experience, so relevant in this new beverages space. The final pillar is to increase the availability of our products to consumers. We continue to add new customers and new distribution points every day. We know there is still a tremendous amount of runway ahead of us, and we're relentlessly pursuing it. Slide 14 shows the early results of executing this Growth Playbook.

We started rolling this out in Germany and the U.K. late last year. Given the cultural relevance of our brand in food service channels, the impact of this strategy is hitting food service first, with retail following. We drove a strong growth acceleration in the German food service channel when we started our refresh strategy. Encouragingly, these strong growth rates have been sustained for several quarters now. Retail is a much larger portion of the German business, and we're seeing strong results there as well. We grew 5% in the last 12 weeks and a very strong 14% in the last four weeks. On this slide, you can see an in-store retail example of how we're maximizing our expanded Barista portfolio to gain incremental distribution and space in store. This retailer is showing our entire lineup: 1.5 L, lighter taste, a scannable six-pack, Organic Barista, and Original Barista.

With this new enhanced portfolio, our distribution has grown over 35%, and we're bringing new consumers into the category. After seeing traction in the first markets, we rolled out this strategy to our third largest European market, Sweden. Sweden is the company's original market where we have been operating the longest and where penetration is the highest. Given our long history there, we thought it might be more difficult to drive improvements. After deploying the playbook earlier this year, I'm pleased to report that we have started to see solid positive growth in our retail sales. Not only are we driving growth, but the velocities on our new Barista product are outperforming our own expectations. These results give us confidence to say that there's still much more runway for expansion everywhere, given the significant headspace we have in front of us to gain more penetration and drive further category growth.

This strategy is not only working in countries where we already have a strong presence. It is also working in our expansion markets, where we grew 40% year-on-year in quarter two as we continue to create the category. From Madrid to Melbourne to Mexico City and everywhere in between, the teams are doing an amazing job connecting with customers and consumers, driving distribution gains, and dominating the coffee and beverage culture around the world. Today, in Paris, two out of three cafes have adopted Oatly, driving a headline-making category explosion. In Spain, for instance, which is already one of the third largest plant-based beverage markets in Europe, our track channel data is growing over 70%, which is pushing the overall category upwards. In Mexico City, we have taken the massive coffee space by storm and have become the fastest earning retail item in less than two years.

We believe these markets have a long runway for growth, and we're excited to continue bringing the Oatly magic to more people in more places around the world. To be clear, though, while we are pleased with our performance in both established and expansion markets, we're not satisfied. We have much bigger expectations on where our business can go. That is why we're taking this strategy to the next stage. We're doubling down on taste with the rollout of the Oatly Look Book as shown on slide 17. We know one of the biggest barriers to conversion is consumers' preconceptions on the taste of a plant-based product. The Look Book is helping us break down those barriers and drive incremental demand, generating excitement with codes reminiscent of fashion and unexpected recipes that totally change the way in which consumers view oat milk.

Not anymore an alternative tool, but an exciting canvas to enjoy their beverage. There is a taste and flavor bonanza going on in coffee shops around the world, with Gen Z leading the way. Our unique Barista Market Developers team, who are intimately woven into this space, are working hand in hand with our food service customers to revitalize their offering. A win-win that builds traffic and ticket growth with provocative, exciting, and most importantly, Oatly-based items on their menus. These are not your grandparents' cappuccinos. These are premium signature drinks that tap into Gen Z's obsession with flavor and cold drinks. Can you imagine any of these drinks with cow's milk? We don't think so. With these flavors gaining popularity, we're launching new products to increase their convenience.

This makes the flavor profiles accessible for at-home consumption while also helping us to become the vendor of choice in food service. For example, in Sweden, we have partnered with movie theaters to develop sweet and salty popcorn lattes that consumers can enjoy while there. These drinks rapidly gained in popularity, and we launched a popcorn-flavored product in no time. As we have moved from food service to retail, the velocities have outperformed our expectations, and now this item will be rolled out across Europe. This new product uses our already amazing Barista products as the chassis and then adds the flavoring near the end of the production process. Our supply chain can execute this customization quickly and efficiently. Slide 19 shows that we don't stop there. If you look at the current version of our Look Book, which is on our company website, you will see many matcha-based drinks.

You know, there's currently an explosion of matcha around the world, and we have decided to capitalize upon it. Here you can see the new matcha portfolio that we're rolling out across Europe as we speak. Not only will you be able to go to your favorite cafe to get an Oatly Rosemary Matcha Latte or a Smokey Matcha, but you will be able to go to your local retailer and get a carton for home use or the small cute bricks while you're on the go. Turning now to North America on slide 21, where we are still in the early stages of implementing our refreshed Growth Playbook. While we continue to face the discrete headwinds we mentioned last quarter, including a large customer sourcing strategy shift and the frozen SKU rationalization that were both greater than planned, we remain confident in the underlying strength of our approach.

In fact, excluding these headwinds, the rest of the North America business has grown. We achieved record quarterly retail sales and the highest ever food service revenue outside our largest customer. Let me say this straight, though. Our overall results in North America were below our own expectations. Yes, we made progress, but we had higher expectations. Given the success we've seen in Europe and internationally using this same playbook, we know what's possible, and we remain committed to applying these lessons to drive the consistent performance that we expect from our North American business. We're being even more thoughtful, more deliberate, and more disciplined in executing our strategy to accelerate demand. At the same time, we continue to solidify the operational fundamentals that will generate the muscle to increase investment while we step up execution. Slide 21 shows how we started to roll out this playbook.

We began to attack the barrier to conversion that is faced. Same as in Europe, we have been running these campaigns in high-impact areas to capture the opportunity in people's dormant oat milk preference, or don't, as our U.S. team calls it. We have also started to roll out the Look Book with provocative flavors to enhance menus. Over the balance of the year, we will be focused on a continued disciplined rollout of our playbook. We are confident that with proper execution and future steady investments, this strategy can drive incremental demand. We continue to believe there is a significant opportunity to expand distribution in the U.S. in all channels, and we have exciting upcoming tests with new customers.

However, we remain vigilant of the consumer environment and the category dynamics, and we do not expect an immediate inflection to growth until the full playbook has been deployed steadily and with sufficient resources for a good period of time. Turning to the Greater China segment on slide 22, our Greater China team continued to execute well in a challenging consumer environment. The food service side of the business, which is the largest part of this segment, grew revenue by 12% in the first half, and we maintained a strong relationship with the market's largest coffee chains. We have also continued to develop the retail channel with our entrance into club stores. In the quarter, the segment's retail volume reached an all-time high. I will now turn the call over to Marie-José. MJ, please.

Marie-José David (CFO)

Thank you, Daniel. Good morning, everyone. Slide 24 shows an overview of the quarterly P&L. In the quarter, we grew revenue 3%, but declined 0.2% on a constant currency basis. We continued to drive strong margin expansion with Q2 gross margin expanding 330 basis points year-over-year to 32.5%. Our Adjusted EBITDA was a loss of $3.6 million in the quarter, which was approximately in line with the first quarter's level and what we guided to on last quarter's score. Both our gross margin and Adjusted EBITDA are our best quarterly results as a public company. Slide 25 shows the bridging item of our revenue growth. We grew volume by 2.8% in the quarter, which was offset by a 3% decline in price growth. Current exchange was a 3.2% tailwind. Slide 26 shows the driver of our year-over-year gross margin expansion.

The benefits of absorption and supply chain efficiencies improved margin by 270 basis points. This reflects the benefit of closure of our Singapore manufacturing facility in December, as well as volume absorption, productivity efficiencies, and improved sourcing. Pricing and product mix added 110 basis points to our gross margin in the quarter. While our revenue bridge that I discussed on the prior slide showed a headwind from price mix, we drove margin mix benefits in the quarter as we reduced sales in lower margin products and customers and increased sales in higher margin ones. For example, some of the newer products in large pack sizes are diluted to price mix in the sales bridge but are margin accurate. We experienced a 90 basis point headwind from inflation in the quarter, which was mainly driven by higher labor costs in our European supply chain and certain inputs in North America.

Finally, the impact of foreign exchange movements added 40 basis points to gross margin. Slide 27 shows the year-over-year improvement in our Adjusted EBITDA. The $7.4 million improvement compared to last year's second quarter was mainly driven by an $8.6 million increase in gross profit. The $1.2 million increase in SG&A and over mainly reflects foreign exchange movements, which were a $3.5 million headwind in the quarter. Excluding those FX headwinds, SG&A would have decreased as we continued to reduce our overhead expenses. Slide 28 shows segment-level detail. Europe and international grew volume by 9.4%, which highlights that our Growth Playbook is working. The second quarter was the segment's all-time highest volume quarter. North America's 6.8% decline in revenue was driven mainly by the change in sourcing strategy and the segment's largest customer.

The segment's Adjusted EBITDA declined $3.5 million compared to the prior year, which was almost entirely driven by an increase in branding and advertising. Greater China saw a 6.6% Constant Currency Revenue decline, which mainly reflects the difficult macro environment impact on the consumer. Turning to our balance sheet and cash flow on slide 29, our business plan remains fully funded. As of the end of the quarter, we had $68 million of cash and $221 million of credit facilities. The middle of the slide shows our Free Cash Flow improvement. The Q2 cash outflow of $5 million was our best quarterly performance as a public company and confirms our approach in developing a cash culture mindset in the company. In the quarter, our total trade working capital balance was the lowest since 2021, when our business was much smaller.

Our quarterly cash conversion cycle was the best since our IPO, driven by strong processes to manage inventory, collections, and payment terms. I am seeing good progress throughout the company, and we continue to believe there is still room to improve. Slide 30 shows our redesigned outlook, which continues to include the Greater China segment. We now expect Constant Currency Revenue growth in the range of approximately flat to +1%. We have revised our outlook to reflect slower-than-expected progress in North America execution, as well as softer macroeconomic conditions in the Greater China region. In addition, our prior outlook assumed that foreign exchange would be a 100 basis point headwind to net sales. Based on recent FX rates and assuming they hold for the balance of the year, we now estimate FX to be an approximately 150 basis point tailwind to full year net sales.

For Adjusted EBITDA, we are reaffirming the range of +$4 million-$15 million. We continue to expect gross profit dollars to improve in the second half compared to the first half, benefiting from best-in-class supply chain processes combined with our higher sales. We have also identified additional SG&A savings. We plan to drive these savings by accelerating our work of eliminating inefficient spend in areas such as indirect procurement, which we expect will primarily hit the corporate segment, with the impact starting to hit in Q3 and then growing in Q4. While some of these savings are one-time in nature, such as incentive pay, we expect a large portion to benefit us beyond this fiscal year. Our guidance assumes no direct impact from tariffs since we expect the products that we import to the U.S. to be exempt to the U.S. NTA.

We also assume that the current economic conditions and consumer behavior will remain largely consistent for the rest of the year. Finally, we now expect FX to be approximately $20 million for the full year. We have continued to drive efficiencies in our supply chain, and we believe this is an appropriate level of investment where we are continuing to invest in our business while being disciplined in our capital. This concludes our prepared remarks. Operator, we are now prepared to take questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Kaumil Gajrawala with Jefferies. Please go ahead.

Kaumil Gajrawala (Managing Director)

Hey, everybody. Good morning. Good afternoon. I guess a couple of things on the decision on the strategic review of Greater China. The first is, you know, why is now the right time? More importantly, what does an optimal outcome look like? To give you maybe make it a multiple-choice question, is the preference to sell it, is the preference to, you know, raise some capital through a JV, is the preference to, you know, find a strategic that helps improve the condition of the business? If you can maybe just help us out with where you hope to get to with this review.

Jean-Christophe Flatin (CEO)

Hi, Kaumil. Jean-Christophe, thank you so much for the multifaceted question on the same topic. Let's answer them one by one. First, why. The why we're doing that is because we believe in the future potential of this business, and we are looking to maximize shareholder value. Your second question was, why now? The why now is that after the reset that we conducted in this business in 2023 and 2024, we believe this business is now leaner and stronger, and therefore it's a good time to step back and evaluate how do I accelerate its growth and maximize its value. The next thing I want to tackle is your question about what are we looking for. As we said, we are considering a range of options, including a potential carve-out.

Of course, we are not going to speculate today on the ultimate outcome of this strategic review, and we will provide updates on this strategic process as appropriate and when relevant. The final thing I want to insist on is that as we conduct this review, we remain fully committed to our team, to our customers, and suppliers in Greater China.

Kaumil Gajrawala (Managing Director)

Okay. Great. Got it. Looking forward to hearing about progress. On North America, I think the business was flat, excluding business losses or discontinuations. Flat still sounds like a challenged market to some degree. Why do you think that is, and what do you think you can do to turn that around? Again, excluding any of the sort of discontinuations or business losses.

Daniel Ordoñez (Global President and COO)

Thank you, Kaumil. Daniel here. Good to speak to you again. It's important to accentuate what you said, right? When we exclude these two one-offs that we are going through this year and that we expect to affect us for the year to go on a full-year basis, we see a solid performance in a challenged market, as you said. The market continues to show softness, Kaumil, but as we discussed, it's plateauing. The underperformance of the market is plateauing and slightly inflecting that curve, right? For the future, while in the short term, performance is below our expectations, and our expectations, as we discussed before, is for the North American segment to be our largest and fastest growing, the opportunity remains intact for two reasons.

In one hand, the mechanical growth, be it distribution, be it category growth, and be it operational excellence, is still to be deployed, if I'm brutally honest. On the second hand, we have every confidence that the early signs of significant improvement we're seeing in Europe can be fully deployed in North America. If you want, I can elaborate why, but the consumer and the demand situation in Europe compared to North America is similar. You know, beyond the most vegan and climate-focused consumers, the barrier beyond those tastes continues to be the number one barrier to consumption. North America and Europe are identical. Whether we taste in Germany or the U.K. or in the U.S., one out of two Americans prefer Oatly to cow's milk in their coffee. The brand is equally strong and equally hot in both markets.

Also, the way coffee is developing in Europe and in North America is identical. It's going from the Oat Latte cappuccino, warm, mostly in winter, to a raft of choices and signature drinks, mostly cold. All of that combined proves to us that when we are able to execute the playbook and invest accordingly in full, Kaumil, the same dynamics will progress.

Kaumil Gajrawala (Managing Director)

Great. Thank you.

Jean-Christophe Flatin (CEO)

Thank you.

Operator (participant)

The next question comes from John Joseph Baumgartner with Mizuho. Please go ahead.

John Baumgartner (Senior Analyst)

Good morning. Thanks for the question. Maybe first off, Daniel, if I could come back to North America and just keep on this topic, I think just given the magnitude and duration of the volume declines at this point for the category, we're four or five years into this. It seems like it's become less of an issue of maybe reduced frequency by existing households and more just folks leaving the category. I appreciate the Growth Playbook and flavor innovation, but to the extent, I mean, I guess to what extent is this weakness just simply the protein content in the U.S. relative to traditional dairy, whether it's protein and trends, GLP-1s, whatever it may be, which might limit the ability or ease of duplicating some of the turnarounds that you've highlighted in Europe?

Daniel Ordoñez (Global President and COO)

That's a very provocative question. You make the point, as you have done in the past, about frequency and penetration, John, and I totally get it. If we go through some facts, the reality of the penetration numbers is not necessarily showing that. Penetration for oat milk in the U.S., it's stable, and in the case of Oatly, it has shown consistent decimals of growth in our yearly and monthly penetration. There is a relevance, and there is a frequency topic that we are addressing and point taken about protein. The reality, as we have discussed in previous calls and one-on-one, the protein topic is more of a value phenomenon in North America, less than a volume phenomenon when you look at the dairy category. We will be hand-in-hand focused on driving relevance.

We don't make a choice between health, protein, fibers, and we strongly believe that we are focused on driving both penetration and frequency in that order. Penetration and frequency in that order. Taste remains the number one barrier to consumption for plant-based products and certainly for oat milk and plant-based milk. You will see us, without ignoring the point about protein, a lot of focus on the health topic via enhanced fiber contents, wholeheartedly driving the taste strategy, which is proven, it's starting to prove to work in Europe, John.

John Baumgartner (Senior Analyst)

Okay. Thanks for that. A follow-up on the P&L. You identified these incremental SG&A savings for this year and moving forward as well. Can you detail a bit more where these savings are derived? I think you mentioned some procurement, but I mean, I guess what prompted these reductions right now? Can you isolate the savings between corporate expenses relative to the individual segments? I guess, to what extent should investors feel confident that you're not cutting too close where it begins to sacrifice resources for growth?

Marie-José David (CFO)

Hey, John. This is Marie-José. I specified this question to the other men. As you know, over the past two years, we've gone through two big savings programs which allow us to look at all the details and understanding in a very deep detail our cost structure. What does this mean? It means that this approach led us to be in a place where either we want to be aggressive at all costs, which is absolutely not the way that we are looking at it. We are looking at it with the approach where we want to be aggressive, but with the right level of efficiency and refueling as well as the supply. The way that I want you to think about it is it's about efficiency without hurting the business, and it's about what we have identified as additional SG&A savings.

With that said, let me double-click on those additional SG&A savings. Most of it will come from corporate, just to answer to your question. Yes, it's a part of the indirect savings, which will come from initiatives, right? I'm not going to tell you all the initiatives, but it could be just like centralizing some contracts. It could be like professionalizing our ways of negotiating. That's one thing. The other things are coming from the efficiencies that we have been looking at, analyzing, and making sure that they will come through as we go into the year. Clearly, corporate segments, as aggressive as we can without hurting the business on both sides, efficiency and incremental from indirect. Hope this answers.

John Baumgartner (Senior Analyst)

Great, thank you very much.

Jean-Christophe Flatin (CEO)

Joe.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over for any closing remarks.

Brian Kearney (VP of Investor Relations)

Great. Thank you, everyone. If you have any follow-up questions, feel free to reach out to me and Investor Relations. Have a great day.

Operator (participant)

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