Oatly Group AB (NASDAQ:OTLY) Q4 2022 Earnings Call Transcript

Oatly Group AB (NASDAQ:OTLY) Q4 2022 Earnings Call Transcript March 15, 2023

Operator: Greetings. Welcome to Oatly’s fourth quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star, zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Brian Kearney, Vice President of Investor Relations. Thank you, you may begin.

Brian Kearney: Good morning and thank you for joining us today on Oatly’s fourth quarter and full year 2022 earnings conference call and webcast. I’m Brian Kearney, Oatly’s Head of Investor Relations. On today’s call are Toni Petersson, Chief Executive Officer, and Christian Hawke, 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 and 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 company’s annual report on Form 20-F for the year ended December 31, 2021 filed with the SEC on April 6, 2022, or our report on Form 6-K for the period ended September 30, 2022 filed with the SEC on November 14, 2022, and other reports filed from time to time 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. Please note on today’s call, management will refer to certain non-IFRS financial measures, including EBITDA, adjusted EBITDA, adjusted EBITDA margin, and constant currency revenue.

While the company believes these non-IFRS financial measures will provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS. Please refer to today’s release for a reconciliation of non-IFRS financial measures to the most comparable measures prepared 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.

Toni Petersson: Thanks Brian. Good morning everyone. We appreciate you joining us to discuss our fourth quarter and full year 2022 results. Page 5 shows the key messages that I want you to take away from today. We ended fiscal 2022 with a solid fourth quarter and gained momentum as we moved through the quarter. We continue to see strong underlying demand from our consumers and customers. We have improved the stability and enhanced our global supply chain across the regions as we announced last quarter we have shifted to a more asset-lite supply chain strategy and closed the transaction with Ya YA Foods for our Ogden and Dallas-Fort Worth facilities in the Americas. Also, as you’ve seen in the press release that we issued this morning, we have received $425 million in secured and committed financing, which we believe is enough to fund our growth plans and reach financial self sufficiency.

With our operations now stabilized and our funding in place, the company is now well positioned to start playing offense in 2023. Let’s dig into each of these points. On Page 6, you can see our financial results for the total company for the fourth quarter and full year 2022. I’d draw your attention to the fourth quarter constant currency revenue growth of 14% year-over-year, which was at the high end of our expectations. On our last call, we said that we would start seeing sequential margin improvements, and that’s exactly what we saw this quarter. On a quarter-over-quarter basis, our gross margin improved over 1,300 basis points and our adjusted EBITDA improved US $22 million compared to the third quarter. Turning to Page 7, where you can see that the category growth rate remained strong in the quarter with oat milk growing at three times the rate of the total plant-based category.

On the right-hand side, you can see that we’ve been gaining share in our core markets with a significant acceleration in the second half of the year. This performance has been driven by our teams refocusing on the execution fundamentals, increasing distribution and in-store visibility, building strong momentum of the enhanced portfolio, such as Chilled and Barista. Slide 8 shows how we intend to continue this momentum in 2023; in short, EMEA will leverage it’s existing people and supply chain assets to expand further. We will expand the product portfolio from coffee locations into all milk-based moments, including an exciting no-sugar alternative. As we said in the past, we will also look to expand our food service customer base. On this page, you can see the logos of several of our more recent customer wins, and we are very excited to partner with these high quality companies.

Finally, we will be expanding geographically into adjacent markets. The geographic expansion will be executed in a controlled manner where we are leveraging many of our existing people and supply chain facilities to service the neighboring markets. This will allow us to move faster and minimize the need for additional resources. Turning to the Americas on Page 9, we believe that the Americas continues to have significant upside relative to its recent performance. You can see on the left-hand side that the category had strong double-digit growth in the quarter and we grew below the category. We’re not satisfied with this performance. As we mentioned in prior quarters, this was largely related to supply chain issues which impacted our ability to adequately supply the marketplace.

That being said, we have a very solid base to grow from. Our velocities remain very strong despite recent price increases and are still a multiple of the nearest competitors. On top of that, we improved our fill rates back to the mid-90s, where they should be. This means that our supply chain is finally able to fulfill all orders and strengthen customer relationships to drive volume growth in 2023. Slide 10 goes a bit deeper on our supply chain improvements. You can see that our Ogden, Utah facility has now been stable for over four months. This stability has been a key driver of our improved field rates. Also, our Millville, New Jersey plant has added an additional oat-based production line which once it’s fully ramped will double Millville’s oat-based production and increase Americas capacity by over 30%.

This capacity expansion is enabled by our strategic alliance with our local hybrid manufacturing partner. We expect this stability and expanded capacity to be a critical part of unlocking the growth of our Americas segment and expanding our distribution, as well as drive significant margin growth as we consolidate co-packers. Turning to Page 11, you can see the details of the Ya YA Foods transaction, which we recently closed on March 1. We are very excited about this long-term partnership which will convert our Ogden and Dallas-Fort Worth facilities from self-manufacturing to a hybrid model, meaning that we will retain ownership and operation of our proprietary oat-based technology and Ya YA will be responsible for the filling portion of the production process.

This partnership simplifies our operations and is expected to further support our growth. We are working hand-in-hand with the Ya YA Foods team to develop a joint site plan for the DFW facility in order to optimize facility design and the road map to completion, which we expect to be in 2024 or 2025. With this transaction, all of our American manufacturing facilities will now be a hybrid model, reducing both cost volatility and future capex. We expect that having two strong co-packing partners will enable us to consolidate our co-packing network and drive margin expansion going forward. On Page 12, we’ve laid out Americas plans and priorities for 2023, which is accelerating growth and continuous improvement of the supply chain. Now that the supply chain is back on firmer footing and we have the capacity to meet our estimated demand in the near to medium term, we can focus more on building awareness, trial, repeat and ultimately brand loyalty.

We will be looking to expand our distribution across all channels by adding new doors and customers, as well as incremental SKUs at existing customers. We will also be stepping up our in-store promotions beginning in Q1 and gain significant visibility and competitiveness. To support this expansion, we will be unleashing our creative department to amplify our culture creating brand starting in late Q1 and early Q2, and while we are very happy with the progress that our supply chain has made to date, we are not done yet. Now that the local deal closed, our teams on the ground will now be focused on executing the transition to Ya YA Foods, completing the DFW facility and ensuring that we fulfill our customers’ and consumers’ needs. Finally, we are consolidating our Americas co-packer network to drive significant additional efficiency and absorption into the supply chain.

Turning to Asia on Page 13, as you all know, our Asia business had been impacted by the ongoing COVID-19 pandemic, and the Asia team has been managing through the volatility very well. In the uncertainties and restrictions due to the virus, managing inventory has been a challenge, and the team has had to adjust prices to be able to minimize inventory write-offs. You can see this in the sales bridge shown on the left-hand of the slide. However, the team has not lost sight about the longer term health of the business. We have cautiously continued to invest in marketing as we move through the year; in fact, we increased our marketing spend as a percentage of the segment’s revenue from the mid teens in Q1 to north of 20% as of Q4 to support the brand and strengthen our position ahead of the post-COVID reopening.

We concentrated our efforts in the retail channel, which as many of you know requires a higher level of marketing support. On the slide, you can see an example of our presence online and in-store leading up to the Chinese New Year. This rate of marketing spend is well above what we would consider normal levels, and we expect it to migrate down going forward. The team also did a terrific job gaining distribution through the year. We increased the number of doors and we’re now sold in 150% in 2022 compared to 2021. Page 14 discusses how the Asia business is going to capitalize on those strong distribution gains and brand awareness. First, it’s important to remind you that the Asia business now has local supply and is no longer as reliant on EMEA for product, and after a brief COVID-related disruption that impacted production in January, the production is stable.

This stable local supply will be a key enabler for Asia in 2023. In 2023, the Asia segment will be focused on three strategies: expanding distribution, launching new product, and driving efficiency. We believe there are plenty of opportunities that remain in the coffee channel as well as QSRs, and we will be aggressively pursuing those in the year to come. We also believe that there is an even bigger opportunity to expand in the tea channel as well as ecommerce, and finally, we will be accelerating our entrance into the retail channel in mainland China this year. To enhance our distribution expansion, we’ll continue rolling out our recent new product launches such as our Tea Master product, which is our tea channel-focused item. We helped pioneer the plant-based ice cream category.

We will look to capitalize on and grow our very strong market share in this category. We will also be launching new formats and sizes of our existing products. For those who know the Chinese market well, you know that having the smaller format item is critical in order to really tap into the retail and ecommerce channels. We’ll also be leveraging our co-branding for additional ready-to-drink items, including the item you see on the page. That is a co-branded that we are very excited about. Finally, efficiency. The supply chain team will look for continuous improvement opportunities and use additional expected volume to drive absorption. The team will focus on cost control both in cost of goods sold as well as SG&A, while continuing to enable growth.

Turning to Page 15, as I mentioned earlier, we have received $425 million in secured and committed financing between the combination of private convertible bonds, as well as Term Loan B. We have also signed a commitment letter to renew our revolving credit facility. We have support by our key anchor shareholders and we believe that this fundraising will be enough for us to support our growth investments and enable us to reach financial self-sufficiency. Christian will take you through the finer details in a moment. To wrap it up on Page 16, our foundation for growth is stronger than ever. We have an enormous global market opportunity. Our relative velocities remain outstanding and we have enhanced and upgraded our supply chain, increased the agility of our organization, and we now have our financing in place.

Trust me when I say that our team is excited to start playing offense in 2023. In 2023, we’ll be focused on: one, accelerating our top line growth across all segments; two, continuously improving the supply chain; three, balancing growth and efficiency appropriately as we drive towards profitability; and four and finally, delivering our 2023 guidance. With that, I would now like to turn the call over to Christian to walk through the financials and guidance.

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Christian Hanke: Thanks Toni, and good morning everyone. Nice to speak with you today. Turning to the financials on Slide 18, as Toni mentioned, we ended the year with a solid fourth quarter. Revenue for the fourth quarter of 2022 was $195.1 million, an increase of 5% or 14% on a constant currency basis compared to the prior year period. Gross margin in the fourth quarter of 2022 was 16%, flat compared to the prior year period and an increase of 1,320 basis points compared to the third quarter of 2022. Adjusted EBITDA for the fourth quarter of 2022 was a loss of $60 million, a $5 million improvement versus the prior year and a $22 million improvement from the third quarter of 2022. On Slide 19, you can see the total company bridge for the fourth quarter’s 5% revenue growth.

The 14% constant currency revenue increase was primarily driven by continued solid volume growth for Oatly products in addition to price increases implemented the year. We also experienced a 900 basis point headwind from foreign exchange impacts. Turning to Slide 20, you can see the fourth quarter sales bridges for each segment. EMEA reported a solid 15% constant currency growth behind a good balance of volume and price mix growth. The 4% price mix growth does not fully reflect the segment’s recent pricing actions as we have implemented a double-digit price increase in December and January across all markets and channels. Americas reported 16% constant currency revenue growth driven by their price increases that were executed during the third quarter.

Sold volume was flat as we lapped a very strong year-ago period in the food service business as the U.S. was reopening. We also focused on improving fill rates and rebuilding inventory in the fourth quarter, as Toni mentioned earlier. In Asia, we reduced selling prices to manage inventory as the team continued to navigate through the pandemic. Digging into gross margin a bit deeper on Slide 21, compared to the third quarter of 2022 gross profit margin of 2.7%, we had a 1,320 basis point sequential margin improvement. The increase was mainly driven by supply chain improvements in the Americas and EMEA, including improved absorption and productivity as well as fewer one-offs of 660 basis points, the COVID-19 impact easing in Asia that resulted in better utilization of the Asia facilities and net fewer one-off expenses of 430 basis points, pricing actions of 140 basis points with the full quarter pricing impact in Americas, deflationary costs of 60 basis points mainly driven by lower energy costs, other items net of approximately 30 basis points.

Moving to Slide 22, adjusted EBITDA loss for the fourth quarter of 2022 was $60 million compared to a loss of $83 million in the third quarter of 2022. We saw sequential EBITDA improvement across each operating segment with EMEA returning to positive adjusted EBITDA in the quarter. The quarter-over-quarter increase in corporate expenses was largely driven by the seasonality of spending given the European vacation period, as well as higher consulting expenses. Now focusing on our balance sheet and cash flow, as of December 31, 2022, we had cash and cash equivalents of $82.6 million and total outstanding debt to credit institution of $52.6 million. With the closing of the Ya YA Foods transaction subsequent to year end on March 1, we received $44 million in cash.

Net cash used in operating activities was $268.9 million for the year ended December 31, 2022 compared to $213.8 million during the prior year period, driven by our higher loss from operations. Capital expenditures were $201.7 million for the year ended December 31, 2022 compared to $273.8 million in the prior year period and below our guidance of $220 million to $240 million due to the phasing of our facility investments. Our 2022 capex was mainly spent on the construction of our future facilities as well as maintenance. Turning to Slide 23, as Toni mentioned earlier, we announced that we have received $425 million of secured and committed financing through a combination of private convertible bonds and a Term Loan B. We also signed a commitment letter for the renewal of our revolving credit facility to approximately $200 million and extending the term.

With these actions, we believe we are now fully funded to support our growth investments until we reach financial self-sufficiency. The private convertible bonds totaling $300 million have key shareholder support from Verlinvest, China Resources, and Blackstone that have a five and a half year term and a conversion premium of 17% based on yesterday’s closing price. The $125 million senior secured Term Loan B has a five-year term with an interest rate of SOFR plus 7.5%. The approximately $200 million RCF which is currently undrawn will be used as a liquidity backstop. When we combine the proceeds from this financing event with the proceeds from the Ya YA Foods transaction, we have raised over $450 million. We intend to use these funds as fuel to drive our growth.

The funds will be used for activities such as completing our supply chain network build-out, efficiency programs, and entering new markets. Turning to our guidance on Slide 24, fiscal year 2023 is expected to set us up for fiscal 2024 to have a positive full year adjusted EBITDA. In 2023, revenue growth of 23% to 28% on a constant currency basis compared to the full year 2022 driven by the actions Toni outlined earlier. We currently expect foreign currency to be a headwind of approximately 250 basis points for the year with the first quarter being slightly below the Q4 impact and then moderating thereafter. Please refer to the last slide in the appendix of the earnings presentation for additional details on exchange rates. From a gross margin perspective, we expect sequential quarter-over-quarter improvement reaching the high 20s in the fourth quarter of 2023.

For fiscal 2023, we expect capital expenditures to be in the range of $180 million to $200 million, which is below fiscal 2022’s level given the phasing of certain projects and our shift to a more asset-lite production model in the U.S. Capex investments in 2023 will be primarily linked to the ongoing construction and purchasing of equipment for Peterborough, Fort Worth and Asia 3, as well as maintenance capex at our existing facilities. Consistent with what we communicated last quarter, we believe that our progress in 2023 will set us up for fiscal year 2024 to deliver positive adjusted EBITDA on a full year basis. Slide 25 shows our expectations for the major drivers of our 2023 gross margin expansion. As you see, we have a clear line of sight to improved margins.

Walking from fourth quarter 2022 to the fourth quarter of 2023, we expect improvement to come from four key buckets: fewer COVID-19 related one-offs in Asia, which we expect to more fully flow through starting in the second quarter as the first quarter is expected to still have some lingering COVID-19 impacts; EMEA price increases which have already been implemented; third, improving Americas channel mix as we expand distribution; and finally, an improvement in our cost per liter driven by improving utilization and co-packer consolidation net of mid single digit inflation. With this, we expect to have the gross margin in the high 20s in the fourth quarter of 2023. Additionally, we have also started to make good progress against our $50 million cost savings program.

We have taken action on over half of the expected savings and we have clear plans on actions to be taken to deliver the remaining portion. Recall that we intend to reinvest the savings into growth driving investments and the benefits are captured in the accelerated sales growth. Turning to Slide 26 for our longer term targets, we expect gross margin in the 35% to 40% range and an adjusted EBITDA margin in the mid to high teens. It is important to note that we believe we can achieve these targets across a range of production mixes. On the right side of the page, you’ll see a production model mix post Ya YA Foods transaction. You will also see that we’ve noted that this chart assumes that both Peterborough and Asia 3 facilities will be end-to-end.

We are still evaluating whether these plans will ultimately be end-to-end or hybrid. Whichever way we decide, we believe we will still be able to achieve these longer term margin targets. The map on Slide 27 reflects our current and planned manufacturing facilities to support our future growth. With the closing of the Ya YA Foods transaction on March 1, America is now converted to a hybrid footprint whereas EMEA and Asia are currently split between hybrid and self-manufacturing. Due to the phasing of projects and ongoing evaluation, Asia 3 is now expected to commence production in ’24-’25 and Peterborough U.K. in ’25-’26. We believe that our current capacity plans are adequate to achieve our near to medium term growth ambitions. With that, we are now ready to take your questions.

Operator?

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Q&A Session

Operator: Thank you. Our first question is from Ken Goldman with JP Morgan. Please proceed.

Ken Goldman: Hi, thank you. I wanted to ask a little bit about the cadence of EBITDA. You talked about where you think it will be, at least a minimum, in 2024. You’ve talked about the gross margin improvement coming this year but also spending a little more. Just wanted to get a little bit of a better sense of how we should think about that EBITDA dollar cadence as we run through 2023 and if there’s any kind of parameters you might be able to give us in terms of actual dollars for that number.

Christian Hanke: Hi Ken, it’s Christian here. Good question. The key indicators to keep track of is the gross profit margin sequential improvement that you will see throughout the year, starting from the first quarter and ending in the high 20s, as we talked through in our opening remarks. We are managing our SG&A cost base to grow at a much lower rate than our top line growth, and that will drive and support and resulting us to sort of set up for a positive adjusted EBITDA on a full year basis in 2024.

Ken Goldman: Got it, thank you. Then a follow-up question, Ogden’s been stable for over four months, as you mentioned. At least what we can see in scanner data, we haven’t seen necessarily yet an uptick in your share. I know that doesn’t show every channel and certainly not food service, but I was just curious, given that you haven’t leaned into marketing yet as much as you’d like, is there any concern at all yet that some of the numbers that we’re seeing out there are more demand-driven than supply-driven, or are you still very confident that as supply continues to stabilize, marketing picks up, that maybe we’ll see a little bit of a share improvement, in the U.S. I’m talking about? Thank you.

Daniel Ordonez: Good morning Ken, it’s Daniel here. No, we are not concerned. We see steady dollar sales growth since we resolved, as you said, the supply issues. We’re now at the moment, and we have been for the last couple of months, committing to the fill rates that are steadily back up above 95%, and now what you see is the catch-up game of customer orders, our inventories build taking place at the customers, and that takes time, so that’s why we are not concerned. In fact, Ken, we see the very good first signs of that–those fill rates and thus customer orders filling in with velocities and a significant increase in the last two periods of about 10%. That is something we have not seen for the last six months in the U.S., right, and then I will leave you there because of course with capacity and availability, we are going to come back.

The brand will come back. Imagine this velocity increase has been without promotions, and you know what’s happening out there is heavy promotion from the competitive set, so as we are able to supply, we’re able to promote, and we are planning a big comeback for the brand for the quarter two, that gives us confidence of the sequential improvement we want to see in net sales, volumes and market share.

Ken Goldman: Great, thank you.

Operator: Our next question is from John Baumgartner with Mizuho Securities. Please proceed.

John Baumgartner: Good morning, thanks for the question. I guess first off, just building on that comment with the supply chain coming back, the opportunity to recover distribution points, you mentioned in your comments a ramp in brand building in the Americas here in the first half, and I’m wondering if you’d talk more about that. Where do you see the largest opportunities? Is it coming to the consumer saying, hey, oat milk performs better than almond milk or soy milk as a coffee creamer, is it prioritizing oat milk as an ingredient? What’s sort of your view for the largest opportunities to increase that consumption frequency at home, and how do you go about that? Do you co-promote other categories? What does the brand building look like in the first half of this year?

Daniel Ordonez: Thank you for the question – Daniel here again. I think what you saw is us being silent out there for more than a year, in fact 18 months, so we are coming back. We believe–we trust our playbook as we have seen in Europe in the second half of the year, so we are coming back. That’s what we’re orchestrating. Apologies if it sounds a bit mechanic, but what you will see us is concentrated in execution and resource allocation. Just to name a few examples, we have a lot of distribution to be gotten out of existing doors, new items in existing doors. Imagine we average two items per door at the moment with a range of four. Imagine now with available capacity what we can achieve, and new doors incremental. We’re normally in 70% of the doors in existing customers, so all of that inertia, now with available capacity and brand building is what you’re going to see from quarter two.

We want to remain simple. We are a simple brand and a super attractive brand, and that is what you see in the velocities, which are the highest that possibly can be here in the U.S. but also in Europe.

John Baumgartner: Okay, and then just a follow-up on Asia, volume was pretty good for the quarter, price mix was pretty weak. Can you speak to the price-mix evolution in Asia in 2023, and then as China comes out of these COVID lockdowns, is it fair to think food service still stays about two-thirds of sales there or should we see more of a retail rollout in 2023? Thank you.

Daniel Ordonez: I can start first with the price mix. Essentially that is the result of the COVID-19 restrictions and the impact that has had on the market in China, so we’ve had to use heavier levels of promotions to offload inventory.

Toni Petersson: And just to build on that expansion, yes, as I said in my opening remarks here, our customer base has increased significantly throughout the year. We’re also putting investments behind the branding to position us for the acceleration that is going to happen in China, and yes, we’re going to enter with the new local production we have, new formats, new innovation that we can bring. We can target consumers in a completely different way than we have done before, and that is just a matter of time. So yes, you’re going to see us diversifying to more channels in China.

John Baumgartner: Thank you.

Operator: Our next question is from Rob Dickerson with Jefferies. Please proceed.

Rob Dickerson: Great, thanks so much. I guess just first question in terms of the top line revenue guidance, clearly there’s some pricing in there, so maybe if you could just help us understand maybe the delta between pricing and volume that’s implied in the guide, and then secondly kind of within that, just given the shift, positive momentum hopefully that’s expected to come with the capacity and probably improved culture, I’d assume internally in the Americas, how are you thinking about volume growth potential in ’23 in the Americas? Then I have a quick follow-up, thanks.

Toni Petersson: Sure, I’ll start off with some high level, and then maybe the team, if you guys want to chime in. But we expect constant currency revenue growth in the second half to be stronger than the first half, and in the first half of the year price mix growth will be higher than volume growth as you’ve seen in our prepared remarks that we will have the full impact of the EMEA pricing actions that we executed in December of last year and then January of this year. Then in the second half with the anniversary of the Americas pricing actions and our expansion strategies will be taking hold, which will cause volume growth to outpace price mix in the second half.

Daniel Ordonez: My build on that will be simple – there is a significant mechanical growth to be gotten in the Americas when it comes to distribution, so think about three buckets: distribution within existing doors, as I said to one of your colleagues before, new doors, but also food service. Now with available capacity, we are going to expand ambitiously as well in that channel, and those three things combined should drive volume growth.

Rob Dickerson: Okay, super. Then I guess the follow-up then, clearly the past couple years in the U.S., you’ve been kind of operating with your hands tied behind your back, others have been able to enter the market a little more quickly and take share but consumer demand still seems high, so as we think about this progression on the margin side, specifically in the Americas, is there an opportunity here such that you’re really just kind of in-filling demand, you’re kind of working with those retailers that have probably been asking for product for two years, like you can finally give them that product, but maybe there isn’t such a need to really promote and increase materially trade spend, what have you. I’m just trying to figure out, is there a nice little margin upside potential given you’ve been lagging demand, and now you’re just in-filling without necessarily having to push on the brand as much as we might think you need? That’s it, thanks.

Daniel Ordonez: Thank you – Daniel again. Well yes, the reality is, as you said, now we can unleash the power of the brand and the velocities that you see now picking up in the Americas had no help from promotions, right, so we managed that equalizer very wisely and in a very disciplined manner, so what you will see as of quarter two in that uptake of TDPs, because we are going to be focused in existing doors and existing customers first, in a disciplined manner will be more on brand building, so you will see the voice of the brand heard again in the U.S. That’s our priority, more than be heavy hitting on promotions.

Rob Dickerson: Super, thank you.

Operator: Our next question is from Kaumil Gajrawala with Credit Suisse. Please proceed.

Kaumil Gajrawala: Hi, good morning. I want to talk a bit more about distribution and velocity, I think. First from a distribution perspective, it’s the middle of March, maybe anything you can add on April shelf space resets and perhaps some of what you’re talking about, maybe you can give some more color because these–or at least some context on how those resets have gone. On velocity, I just want to make sure as maybe the year goes by, or as time goes by, we’re thinking about it appropriately in that typically what we see when there’s notable expansion of distribution, we often also see a slowdown in velocity which is normal, because you’re selling over a much wider base. A lot of the conversation so far has been on accelerating velocity – I get that, given where we’re coming from, but I just want to make sure as we’re thinking maybe a little bit further along, is that something we should watch for or, perhaps said differently, something we shouldn’t worry about if we start to see it in the data.

Thanks.

Daniel Ordonez: Thank you how you phrase that, as we. Of course we will be looking at that, and we–just to give you some color on the first part of your question, we have significant total distribution points to be gained in existing doors, so let me ask you–give you some color there. As of quarter two, we believe that more than 10% of our current distribution base can be increased in the Americas in the existing doors. We have–let me repeat, we have a range of four and we have two units per store in average today, and that will enhance also our share of shelf physically, our muscle on shelf, and then the second bucket of distribution gains will be on new doors within existing customers. What you describe obviously in the resets is new customers, and that will be coming.

We will leave that for future earnings calls. Of course, we’re working on increasing ACV, but at the moment, you’ll see our growth is very mechanical and our teams are executing more TDPs and in existing customers, and new doors within existing customers.

Kaumil Gajrawala: Then on how velocity should trend as you get those distribution gains?

Daniel Ordonez: Yes, of course. That’s what I noted – you’re absolutely right, we will keep on track on that, as we are.

Kaumil Gajrawala: Got it, thank you.

Operator: Our next question is from Michael Lavery with Piper Sandler. Please proceed.

Michael Lavery: Thank you, good morning. Can you just help us understand, when you talk about the production mix and the potential for Peterborough or Asia 3 to even still be maybe converted to hybrid, what’s changed that that wouldn’t have an impact on overall margins versus where you had initially characterized end-to-end production as pretty significantly more attractive margins?

Jean-Christophe Flatin: Hi Michael, it’s Jean-Christophe. First of all, I think the direction is very consistent with what we announced in the last quarter, but we want to focus on the foreseeable future on more hybrid solutions because they allow us to focus our resources and be simpler. Now when it comes to these two factories and all the options that we are exploring, we are committed to getting the business to those margin targets over time, the ones we shared in the deck this morning. We need to keep in mind that the evolution of the production mix is just one lever that impacts the margins. We have many other levers in our hands – pricing, product mix, channel mix, customer mix, promotional levels, etc., so ultimately we will make the right decisions for the business while delivering on our commitment to our shareholders.

Michael Lavery: Okay, that’s helpful. Can you just touch a little bit on–you’ve got the capital raise in hand, which is significantly more than you’ve expressed that you need, so it seems like a pretty clear positive there. But as far as–you touched on your expectations for 2024, EBITDA positive on the full year, sorry if I might have missed this, but can you give a sense of when you think you become self sustaining from a cash flow perspective, and recognizing that this amount of capital sets you up quite well, but as far as how we think about the modeling and maybe your expectations, at least, when does that cash flow positive run rate start to kick in?

Christian Hanke: Hi Mike, it’s Christian here. Essentially this capital of $425 million that we have now brought in will be self sufficient until we are generating positive free cash flow. It will bridge us until we get to that point. We expect to be, as we have said in our prepared remarks, to be adjusted positive EBITDA in 2024, operating cash flow should then also be moving in the right direction, and then we are managing our capex accordingly based on the plans that we have in terms of the facilities that are coming online.

Michael Lavery: And so is free cash flow position like a second half 2024–when is your expectation for that?

Christian Hanke: It’s beyond that. If you think about the capex investments that we’re planning for next year, it’s between $180 million and $200 million. We are improving operating cash flow in ’24, so it’s more moving into ’25.

Michael Lavery: Okay, thanks so much.

Operator: This will conclude our–actually, we do have one more question from John Anderson from William Blair. Please proceed.

John Anderson: Thanks for taking my questions. Good morning. I was wondering if you could just, housekeeping-wise, talk about where you finished 2022 from a finished goods production standpoint in liters, capacity, and then where you’d expect to finish 2023 given the work you’re doing on the supply chain and with Ya YA.

Jean-Christophe Flatin: Thank you, so I think the–Jean-Christophe speaking. We finished the year at the 9 million liters we were planning to get to, so fully in line with our expectations. I think Ya YA Foods will provide us visibility and predictability on the cost side, which is helpful for us. In terms of capacity, what we will gain in 2023 is the full year impact of the second oat-based line we have implemented in the Millville plant in the second part of the year, so that’s what you can expect in terms of major change in 2023 versus 2022.

John Anderson: Okay, great. Then I’m wondering if you could talk a little bit about EMEA. You’ve dug into the Americas and Asia, but could you talk about what you’re seeing from a category perspective in EMEA, your brand’s shelf positioning – I think there was quite a bit of reset activity that happened through 2022, and just kind of the overall tenor of the category and the business in that region and what you’re expecting for ’23. Thanks.

Daniel Ordonez: Thank you for the question, Daniel again. I will take that. Thanks for acknowledging what happened in the second part of the year. I think we see sustained momentum in Europe. We see–as we disclosed in the last earnings call, we continue to hit record market shares across the core markets – U.K., Germany, the Netherlands with double-digit volume growth, so we feel good about that. In countries like Netherlands, Austria, Switzerland, we are really narrowing the gap to become market leaders with only one crop, and we are outpacing competition significantly in some markets, including private label, so the momentum hasn’t changed and we’re carrying that momentum into 2023. 2023, as we explained in the U.S., in Europe will be even more so important.

You will see three elements there, three buckets of incremental growth that will continue to dynamize and stimulate growth of the category. The first, we will enhance our portfolio, as it is in the deck, across dairy milk occasions. In Europe in particular, we have been extremely focused on coffee occasions and now we’re going to hack across the board, and that’s important because it’s going to give us muscle in the retail space to grow share of shelf – that’s number one. Number two, we are expanding. We are expanding–long due, you would say, we are expanding with existing capacity and existing teams into neighboring markets, so those are two very mechanical ways that will add up to the momentum that we have built in the second part of 2022, so we are very confident about EMEA into 2023.

John Anderson: Thank you so much.

Operator: We have now reached the end of our question and answer session. I would like to turn the conference back over to management for closing comments.

Brian Kearney: Great, thanks everybody for joining us today. Feel free to reach out to the Investor Relations team if you have any follow-up questions. Have a great day.

Operator: Thank you. This will conclude today’s conference. You may disconnect your lines at this time and thank you for your participation.