Oatly(US:OTLY)2023-04-20 01:35PART I This section encompasses key company information, operational and financial performance, and governance details Item 3. Key Information This section details significant risks and uncertainties, covering financial performance, macroeconomic impacts, supply chain dependencies, and operational challenges Risk Factors This subsection outlines various risks, including financial losses, macroeconomic effects, supply chain vulnerabilities, and internal control weaknesses - The company has a history of net losses, with a net loss of $392.6 million in 2022, an increase from $212.4 million in 2021 Operating expenses and capital expenditures are expected to increase, driven by investments to meet demand and expansion efforts43 - Macroeconomic factors, including the COVID-19 pandemic (especially in China) and the Russian invasion of Ukraine, have led to elevated inflation, increased costs for transportation, energy, and materials, and disruptions to the supply chain and capacity expansion projects4345 - The company relies on a limited number of suppliers for high-quality oats and a single supplier for a key enzyme used in its Barista Edition oatmilk, creating a risk of supply disruption5457 - A strategic partnership with Ya YA Foods (YYF) for manufacturing facilities in Utah and Texas is integral to the company's shift to a hybrid production network Failure of this partnership could harm operations and manufacturing strategy65 - Oatmilk sales constitute a significant portion of revenue, accounting for approximately 89% in 2022 A reduction in sales of oatmilk varieties would adversely affect the company's financial condition92 - Material weaknesses in internal control over financial reporting were identified, relating to technology access, lack of documented policies and procedures, and inadequate segregation of duties These weaknesses could affect the accuracy and timeliness of financial reporting204206 - The company's largest shareholder, Nativus Company Limited (affiliated with CRVV), holds approximately 45.9% of the voting power, giving it significant influence over corporate matters212 Item 4. Information on the Company This section provides a comprehensive overview of Oatly's business, including its history, global operations, product portfolio, and market strategy History and Development of the Company This subsection traces Oatly's origins, its proprietary oatmilk process, and significant production capacity expansions - Oatly was founded based on research from Lund University in the early 1990s, leading to the launch of the world's first oatmilk in 1995 using a proprietary, patented enzyme-based process268 - The company has expanded its production capacity significantly, opening facilities in the U.S. and the Netherlands in 2019, and in Utah, Singapore, and China in 2021 A strategic partnership with Ya YA Foods (YYF) was established for its Utah and Texas facilities to shift towards a more asset-light, hybrid manufacturing model270 Business Overview This subsection provides an overview of Oatly's global operations, market disruption strategy, and key growth initiatives - Oatly is the world's original and largest oatmilk company, operating in over 20 countries and disrupting a global dairy industry estimated at $631 billion in retail sales in 2022275276285 - The company employs a foodservice-led expansion strategy, using channels like coffee shops to build brand awareness and drive sales in retail As of December 31, 2022, products were available in over 200,000 retail and foodservice locations globally280281 - Key growth strategies include expanding the consumer base, increasing presence across channels, innovating new products, entering new international markets, and driving an asset-light production capacity expansion300 Revenue by Channel (FY 2022) | Channel | Revenue Percentage | | :--- | :--- | | Retail | 58.4% | | Foodservice | 36.0% | | E-commerce & Other | 5.6% | - The company utilizes three production models: co-packing, hybrid, and end-to-end self-manufacturing For the year ended December 31, 2022, approximately 27% of products were co-packed, 43% hybrid, and 30% end-to-end The long-term strategy is to shift more towards hybrid and end-to-end models337338 Organizational Structure This subsection describes Oatly Group AB's corporate structure, including its wholly-owned subsidiaries across key geographies - Oatly Group AB is a Swedish public limited company with 29 wholly-owned subsidiaries as of December 31, 2022 Key subsidiaries are located in Sweden, the UK, Germany, the Netherlands, the US, Singapore, and China372 Property, Plants and Equipment This subsection details the company's production facilities, future capital expenditure plans, and targeted oat base capacity - As of December 2022, the company operated six production facilities across EMEA, the Americas, and Asia, with three additional facilities under construction or in planning stages374 - The company estimates capital expenditures of approximately $180-200 million in 2023 for facilities under construction and maintenance of existing ones It aims to achieve an annualized run-rate output of approximately 900 million liters of finished goods equivalent of oat base capacity by the end of 2023376 Operating and Financial Review and Prospects This section details the company's financial performance, liquidity, and capital resources, covering revenue, profitability, and strategic financing Operating Results This subsection analyzes the company's financial performance, including revenue growth, gross margin decline, and expense trends Consolidated Statement of Operations Highlights (FY 2022 vs FY 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Revenue | $722,238 | $643,190 | 12.3% | | Gross Profit | $80,027 | $155,013 | -48.4% | | Gross Margin | 11.1% | 24.1% | -13.0 p.p. | | Operating Loss | ($395,985) | ($213,743) | 85.3% | | Loss for the year | ($392,567) | ($212,393) | 84.8% | - Revenue for FY2022 increased by 12.3% to $722.2 million, driven by volume growth and price increases On a constant currency basis, revenue would have increased by 20.1%419 - Gross margin declined significantly from 24.1% in 2021 to 11.1% in 2022 The decline was attributed to higher inflation (4.5 p.p.), COVID-19 impacts in China (4.5 p.p.), production ramp-up challenges at the Ogden facility (2.6 p.p.), and higher inventory provisions in Europe (2.3 p.p.)426427 - Selling, general and administrative (SG&A) expenses increased by 16.6% to $412.8 million, primarily due to higher employee-related expenses from increased headcount, share-based compensation, and severance charges430 - An asset impairment charge of $39.6 million was recorded in Q4 2022 related to the strategic transaction with Ya YA Foods (YYF)431 Liquidity and Capital Resources This subsection outlines the company's cash position, available facilities, and recent significant refinancing activities - As of December 31, 2022, the company had cash and cash equivalents of $82.6 million and access to $315.6 million in undrawn bank facilities451452 - In March and April 2023, the company completed a significant refinancing, issuing $300 million in 9.25% Convertible Senior PIK Notes due 2028 and securing a new $130 million Term Loan B facility453455458 Consolidated Cash Flow Summary (FY 2022 vs FY 2021) | Cash Flow Activity | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | ($268,946) | ($213,832) | | Net cash from/(used in) investing activities | $34,794 | ($544,328) | | Net cash from financing activities | $35,919 | $955,797 | - Net cash used in operating activities increased to $268.9 million in 2022 from $213.8 million in 2021, primarily driven by a larger loss from operations465 Item 6. Directors, Senior Management and Employees This section details the company's leadership, board structure, compensation practices, and employee base Compensation This subsection details the compensation of the CEO and non-executive directors, including base salary and share-based awards CEO and Non-Executive Director Compensation (FY 2022) | Name | Position | Total Remuneration 2022 (USD) | | :--- | :--- | :--- | | Toni Petersson | CEO and Director | $6,858,356 | | Frances Rathke | Non-Executive Director | $159,514 | | Steven Chu | Non-Executive Director | $159,514 | | Hannah Jones | Non-Executive Director | $147,014 | | Bernard Hours | Non-Executive Director | $137,014 | - The total remuneration for the CEO, Toni Petersson, in 2022 was approximately $6.86 million, which includes a base salary of $751,742 and share-based compensation expense of $5,662,140494 - The company adopted the 2021 Incentive Award Plan in connection with its IPO, reserving 69,496,515 shares for various share-based awards Significant grants of stock options and RSUs were made in May and November 2022502503504 Employees This subsection provides an overview of the company's employee headcount, growth trends, and functional distribution Employee Headcount by Geography | Geography | As of Dec 31, 2022 | As of Dec 31, 2021 | | :--- | :--- | :--- | | EMEA | 929 | 826 | | United States | 439 | 379 | | Asia | 641 | 410 | | Total | 2,009 | 1,615 | - Total employee count increased from 1,615 at the end of 2021 to 2,009 at the end of 2022 The largest functional group is Production, supply chain and operations, with 900 employees536540 Item 7. Major Shareholders and Related Party Transactions This section details the company's ownership structure, identifying major shareholders and outlining related party transactions Major Shareholders This subsection identifies the company's major shareholders and their beneficial ownership percentages Beneficial Ownership of Major Shareholders (as of April 19, 2023) | Name of Beneficial Owner | Percentage Ownership | | :--- | :--- | | Nativus Company Limited | 46.9% | | Blackstone Funds | 8.1% | | Baillie Gifford | 6.2% | - Nativus Company Limited, a subsidiary of a joint venture between Verlinvest S.A. and an entity wholly owned by China Resources, is the largest shareholder with 46.9% beneficial ownership545 Item 11. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to market risks, including foreign exchange, interest rate, credit, and commodity price - The company is primarily exposed to foreign exchange risk from transactions in USD, GBP, EUR, and CNY against the SEK It uses derivatives to hedge between 0% and 100% of the net cash flow exposure for the following 18 months615616 - Interest rate risk arises from long-term liabilities with variable rates As of December 31, 2022, the nominal amount of variable-rate debt was $4.0 million617618 - The company faces commodity price risk for its main ingredient, oats A general 5% increase in commodity costs in 2022 would have increased costs by $11.2 million624842 - Regarding credit risk, one customer in the foodservice channel accounted for 14% of total revenue for the year ended December 31, 2022621 PART II This section details the company's internal controls and procedures, including identified weaknesses and remediation efforts Controls and Procedures This section details the ineffectiveness of disclosure controls and procedures due to material weaknesses in internal financial reporting controls - Management concluded that disclosure controls and procedures were not effective as of December 31, 2022, due to material weaknesses in internal control over financial reporting648649 - The identified material weaknesses relate to: (i) technology access and change control processes, (ii) lack of documented policies, procedures, and evidence of performing controls, and (iii) inadequate segregation of duties652 - The company has initiated a remediation plan, which includes implementing IT general controls, hiring additional resources, documenting business processes, and engaging external resources to improve the control environment653 - The independent registered public accounting firm, Ernst & Young AB, issued an adverse report on the company's internal control over financial reporting as of December 31, 2022655703 PART III This section presents the audited consolidated financial statements, including the independent auditor's report and detailed notes Financial Statements This section presents the audited consolidated financial statements, including the independent auditor's report and detailed notes Report of Independent Registered Public Accounting Firm This subsection presents the independent auditor's opinion on financial statements and internal controls, noting critical audit matters - The independent auditor, Ernst & Young AB, issued an unqualified opinion, stating that the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021693 - The auditor issued an adverse opinion on the Company's internal control over financial reporting as of December 31, 2022, due to material weaknesses related to IT access controls, lack of documented policies, and inadequate segregation of duties694703704 - Critical Audit Matters identified were (1) Revenue recognition related to variable consideration, due to the subjective management assumptions involved, and (2) Impairment of non-financial assets, including goodwill, due to the significant estimation required in determining recoverable amounts697698701 Notes to the consolidated financial statements This subsection provides detailed disclosures on accounting policies, segment performance, and significant post-year-end events Segment Revenue and Adjusted EBITDA (FY 2022) | Segment | Total Segment Revenue (in thousands) | Adjusted EBITDA (in thousands) | | :--- | :--- | :--- | | EMEA | $380,449 | ($10,298) | | Americas | $224,700 | ($62,837) | | Asia | $156,508 | ($75,183) | | Corporate | — | ($119,605) | | Total | $722,238 | ($267,923) | - The company recognized share-based payment expenses of $35.5 million for FY2022, up from $23.6 million in FY2021, primarily related to its 2021 Incentive Award Plan910918 - As of December 31, 2022, the company had unrecognized deferred tax assets of $115.0 million, primarily related to tax loss carry-forwards of $113.0 million, mostly in Sweden928 - On December 30, 2022, the company entered into an asset purchase agreement with Ya YA Foods (YYF) to sell its manufacturing facilities in Ogden, Utah, and Dallas-Fort Worth, Texas Assets and liabilities related to this transaction were classified as held for sale, resulting in an impairment charge of $38.3 million10181019 - Subsequent to year-end, in March/April 2023, the company completed significant financing activities, including the closing of the YYF transaction, issuing $300 million in convertible notes, entering a new $130 million Term Loan B, and amending its revolving credit facility102310271030