MALMO, SWEDEN – Oatly Group AB aspires to generate gross profit margins of 40% in the long term. In the most recent quarter, the company’s margins moved widely in the wrong direction, despite a strong increase in sales.
In the three months ended March 31, Oatly sustained a loss of $87.5 million, more than double the loss of $38.4 million in the first quarter of 2021. Net sales were $166.2 million, up 19% from $140.1 million a year earlier.
Oatly’s gross profit in the first quarter was $15.8 million, down 62% from $41.9 million in the first quarter of 2021. The company’s gross margin narrowed more than 20 percentage points to 9.5% during the quarter, versus 29.9% in January-March 2021. While a higher share of self-manufacturing gave gross margins a 250-point lift in the quarter, the company cited a raft of reasons margins overall fell sharply. These included underutilization of new facilities because of supply chain problems (970 basis points), mostly due to COVID-19-related effects on labor absenteeism in the Americas and lockdowns in China, together with “logistical constraints delaying the timely supply of raw materials and spare parts,” all of which resulted in a lower production output. Additionally, higher expenses for raw materials, logistics and electricity (760 basis points) and the consolidation of Oatly’s EMEA (Europe, Middle East and Africa) co-packer resulted in an expense (290 basis points). Oatly attributed another 270 basis points to other, unspecified items.
In a May 4 call with investment analysts, chief executive officer Toni Petersson summarized the company’s production by region.
“EMEA production was in line with expectations,” he said. “Americas production was impacted by COVID-19, severe weather conditions and logistical constraints. In Asia, production ramp-up was slowed due to the COVID-19 lockdowns impacting the foodservice demand environment.”
He said self-manufacturing accounted for 25% of total volume, to co-packing at 32% and hybrid at 43%.
“Our target over the long term is to have 50% to 60% of our total volumes from self manufacturing, reducing co-packing to 10% to 20% and hybrid manufacturing to 30% to 40%,” he said.
While the company enjoyed higher sales amid growing global demand for its products, sales fell shy of their potential because of numerous factors, including smaller-than-expected sales in China because of COVID-19 closings.
“The ramp-up of new facilities continued to be impacted by disruption of global supply chain flows and travel restrictions, specifically impacting Asia; Ogden, Utah; as well as the Millville, NJ, expansion, causing longer lead time to acquire production equipment and spare parts, difficulty in moving critical staff at these facilities during their construction and ramp-up phase, and labor absenteeism as a result of the omicron variant,” Oatly said. “In addition, the company’s suppliers experienced longer lead times for equipment and, recently, the situation with truckers in Canada and difficult weather conditions in North America impacted the timing of rail transportation of oat supply for our supplier to our US manufacturing locations.”
Oatly produced 121 million liters (32 million gallons) of finished goods during the first quarter, up 34% from 90 million liters (24 million gallons) in January-March 2021.
The revenue increase primarily was driven by additional supply from the company’s new and existing facilities to meet the growing global demand for its products. This revenue growth was negatively impacted by several factors, including lower-than-expected production output as well as lower-than-expected sales in Asia, primarily in China, as a result of foodservice location closings due to the COVID-19 variants. The ramp-up of the company’s new facilities continued to be impacted by disruption of global supply chain flows and travel restrictions.
“Given the challenging operating environment, we are pleased with our first-quarter revenue results, which exceeded our expectations,” Petersson said. “In March, we saw significant improvements in EMEA and Americas, with record revenue in EMEA and the largest production month ever for the Americas as the manufacturing challenges we experienced at the start of the year due to omicron began to abate.”
Looking forward, the company reiterated its guidance for the year of $880 million to $920 million in sales (up 37% to 43% from 2021), capital expenditures of $400 million to $500 million and a run-rate production capacity of about 900 million liters (238 million gallons) of finished product by the end of 2022.
Longer term, the company believes it will generate a gross profit margin of more than 40% and an adjusted EBITDA margin of near 20% as the company benefits from more manufacturing capacity globally, greater economies of scale and continued strong revenue growth.
Christian Hanke, chief financial officer, said gross margins have bottomed out and predicted sequential improvement beginning in the second quarter of 2022. Additionally, he said the company has secured raw materials going forward in adequate quantities to meet the company’s growth targets.
“We have raw material contracts and supply in place to grow revenue at the rate we expect for 2022 and beyond,” he said.
At the same time, Petersson identified lockdowns in China and the war in Ukraine as posing potential threats.
“We are reiterating our outlook for the year based on the strength of our global brand, increasing consumer demand, and our team’s ability to be agile in the current challenging operating environment while still executing on our growth initiatives,” he said. “However, we are closely monitoring the COVID-19 lockdowns in China, as well as the current war in Ukraine given the uncertainty it creates more broadly. We have taken actions to better position Oatly as these macro headwinds subside and feel confident in our growth trajectory.”
In the Americas regions, Oatly revenue was $47 million in the first quarter, up 40% from $33.5 million the same period in 2021. The region accounted for 28% of Oatly’s total revenues.
“This increase was primarily due to higher production output compared to the prior-year period with growth in both new and existing foodservice and retail channels across primarily oat drink product offerings,” the company said.
EBITDA in the Americas was a $23.3 million loss in the first quarter, a wider loss than the $15.6 million sustained during January-March 2021.
Oatly blamed numerous factors for the larger loss, including channel and customer mix and challenges scaling up production at the company’s plant in Ogden. As a result of the troubles in Utah, co-packing accounted for a larger percentage of production than expected. Operating expenses were elevated in Utah while the company “scales its operations for future growth.”
Petersson said current work on the Ogden facility would be complete by the end of June.
He said the company recently launched frozen novelty bars “with great quarter adoption so far and over 2,500 retail locations confirmed in the first six months of launch.”
He said the frozen business has great potential as a gateway product for consumers to shift from dairy-based products.