Earnings Call
Oatly Group AB (OTLY)
Earnings Call Transcript - OTLY Q2 2022
Operator, Operator
Greetings and welcome to the Oatly Second 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rachel Ulsh. Please go ahead.
Rachel Ulsh, Host
Good morning and thank you for joining us on Oatly's second quarter 2022 earnings conference call and webcast. On today's call are Toni Petersson, Chief Executive Officer; and Christian Hanke, Chief Financial Officer. Peter Bergh, Chief Strategy 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 federal securities laws including financial projections for future periods and fiscal year 2022. 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 31st, 2021 filed with the SEC on April 6th, 2022 and other reports filed from time-to-time with the Securities and Exchange Commission 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, 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 and the most comparable measures presented in accordance with IFRS. Please also note all retail scanner data is based on Nielsen for the 12 weeks ended June 2022. In addition, Oatly has posted supplemental presentation on its website for reference. I'd now like to turn the call over to Toni Petersson.
Toni Petersson, CEO
Thanks Rachel. Good morning. We appreciate you joining us to discuss the second quarter results. Today I will provide an update on our strong business performance. And I'm very pleased to share our new sales production capacity plans. Christian will review our financial results and updated 2022 outlook. Then Peter, Christian, and I will be available for questions. In the second quarter, we delivered strong revenue growth of 22% year-over-year to $178 million or approximately 30% growth to $190 million in constant currency. This strong performance reflects that we have significant growth opportunities ahead of us and we continue to believe Oatly is positioned to become the number one plant-based milk company globally. Scanner data continues to show that the oat category is gaining share and becoming the non-dairy default of other alternatives across our key markets and continues to grow the category. We believe that the combination of the Oatly brand, our strategic foodservice-led multichannel approach, and our proprietary oat-based production process differentiates us to consumers. Our mission of converting more dairy users to Oatly consumers centers around scaling and identifying each of these three factors in each of our regions. Now, moving to our business performance. The consistency globally is that we continue to see tremendous consumer demand and growth momentum even though the macro dynamics that we face in each region are very different. In EMEA, we're seeing a highly uncertain and rapidly changing environment. The current macro context and economic conditions, which include the ripple effects from the war in Ukraine, global inflation, energy prices, changing consumer behavior at retail, and the speed at which we can expand our channel distribution. In spite of these challenges and the risk to consumer spending, the plant-based dairy category has proven to be resilient and continues to grow, reflecting how consumers have adopted our products into their everyday lives. Oatly specifically continues to be the number one selling oat-based brand by retail market share and the number one velocity brand in non-dairy in the UK, Germany, Sweden, Switzerland, Austria, and the Netherlands. Even more importantly, our velocity has remained stable so far despite the macro dynamics and continues to be at similar levels as prior quarters. Building on this performance and market leadership we see significant growth opportunities across our channels with product innovation and in new markets. Within retail, which is 82% of our business in EMEA, we expect to continue expanding and elevating our shelf space with existing partners, but also adapting to the current environment by entering new retail partnerships. For instance, we are seeing that consumers are responding to the new economic environment by changing where they choose to shop for their groceries, which now increasingly includes soft discounters. To better position ourselves for this dynamic, we're growing a presence in soft discount while maintaining virtually the same price point as in our other retail channels. We recently launched with approximately 900 mega stores in the UK and approximately 770 discount locations in Germany. Our loss in March has been very successful to date and we're seeing strong velocity performance. Foodservice represents approximately 80% of our business in EMEA in Q2 and it's a core focus for expansion going forward too. Year-over-year, our foodservice business in EMEA increased 37%. So far this year, we have partnered with Deutsche Bahn, Tchibo, Dunkin and Aramark. I'm excited to announce a partnership with Aral, the biggest German petrol station chain in October. Oatly products will be found at the coffee stations in 1,250 stores, as well as on the convenience store retail shelf in 950 locations. Within innovation, there is a similar runway for further growth in product development, as most of our markets still only have limited SKU ranges due to our historical production capacity constraints. We're starting to accelerate the expansion of our portfolio and recently introduced new formats of our best-selling Barista Chilled. With the launch of Chilled Barista in over 3,000 stores in the UK, Germany and Netherlands, as well as the health leader in universal stores across the same markets. These new formats enable us to reach new consumers and their usage occasions. While it is still early, the initial velocity data looks very promising. Beyond our current geographic footprint in EMEA, which is limited to four markets, we have a long runway to expand into neighboring markets that are ripe for disruption. We have a proven model to launch in new markets that drive category growth and has led to a leading market position. The most recent case studies of this success are increase into the Netherlands, Switzerland and Austria. In Italy, the retail demand with Esselunga, Kona and Despa in June. Overall, we are very excited about this whitespace opportunity in driving more conversion globally. Turning to the Americas, demand for Oatly products remains very strong. We are the number one oat milk brand based on net sales according to the Nielsen data for the four weeks ended June 18, 2022. We remain the fastest-growing brand in total dairy, plant-based dairy, and oat milk in the Americas. The oat milk category continues to hold market share of 22% as of June 2022, while almond and soya milk both declined year-over-year. Starting yesterday, August 1, double-digit price increases went into effect across our channels. We expect to see a positive margin contribution impact in Q3 and expect to realize the full benefit in Q4. From a production standpoint, we achieved record-level production volumes during the second quarter, with the continued ramp-up of Ogden and our new oat-based plant expansion on track to start initial production runs in the fall. As we increase our production capacity with significant distribution upside in the US, where we only had 38% ACV in retail. However, the focus currently is to close the existing fill rate gaps with current customers. In Asia, I'd like to report on our teams and efforts this quarter in a net operating environment under COVID-19 lockdown. Despite this adversity and the impact, it had on our future channel, the team managed to achieve record revenue of $44 million in the second quarter, over 70% year-over-year growth in constant currency and a 52% increase compared to the first quarter. Perspective shows that at the height of lockdown, more than 7,000 coffee shops, 10,000 mid-tea shops, and 1,000 tea shops were closed. However, the team used the lockdown to sharpen our multichannel growth strategy to better position us both in the near term and long term. In aggregate, e-commerce community volume sales accounted for 30% of total tea-shop sales in Q2, up from 14% in Q1, driven by the COVID-19 lockdowns. We also successfully launched new products at the plant, including 260 million in Prisma, tea master, and iced tea products. The tea channel is estimated to be at least twice the size of the specialty coffee channel, which is a huge opportunity for growth. We continue to maintain our number one position on Tmall with Oatly at 53% market share in the new plant-based category. During the 618 promotion which is one of the largest shopping festivals in China, Oatly ranked number one in the plant-based category and second in beverage on Tmall. We are also the top seller in the beverage category on JD.com. With the capacity from the new production line in Singapore, we have started expanding to new countries such as Malaysia, Indonesia, Vietnam, Cambodia, and Mongolia in the first half of the year and expect to launch in additional countries in the back half of the year. While COVID-19 has not completely dissipated, a new variant of the virus continues to break out in many cities and we are navigating as best as we can. We plan to further diversify and expand our channel and geographic reach. Now, turning to production. In the second quarter self-manufacturing increased to 34% of our total volume compared to the co-packing of 27% and hybrid at 39%. Total production volume was 124 million liters, up 17% in the first quarter. We are pleased with the recent performance in our Ogden Utah facility and have successfully increased output in line with our expectations. We're now taking continuous steps to further improve output in the back half of this year. In Asia, Singapore is on track to be fully ramped during the second half of the year in Maanshan and we continue to ramp throughout the year. We expect to produce between 135 million to 145 million liters of finished milk in the third quarter, driven primarily by improved production output in Ogden and our two Asia facilities. As we look towards our future capacity expansion, I'm happy to share we have adjusted our capacity phasing plan that will reduce our 2022 CapEx guidance from the lower end of the $400 million to $500 million range to $220 million and $240 million without compromising our growth. We believe investing in our growth is critical to establish the infrastructure necessary for a high-growth global company and that will drive the conversion of dairy users into plant-based milk consumers. In light of the unprecedented changing world around us we are adapting like any fast-growing company would and should do taking into consideration, longer supply chain lead time, higher cost of construction, and uncertainty in Europe. Our focus is on investing in our growth, and we are being tactical with our CapEx project management in order to balance speed to market with supply chain execution and cash flow management. We will continue to prioritize our investments in the regions where our fill rate caps are the highest and therefore where need for additional production volumes is the most pressing in the Americas and Asia. We are prioritizing opening new facilities first. The expansion in Landskrona of the additional oat-based plant is now targeted for 2023. Peterborough is now planned to open in 2024 to align with timing when we need the volumes. The Millville expansion project also continues to be a near-term priority that we expect to produce initial routes in the fall of this year. We continue to expect run rate capacity of approximately 900 million liters, exiting 2022 and now approximately 1.2 billion liters exiting 2022 which would support our growth through 2024. We want to make it very clear that although the world has changed, the fundamentals and the strength of our winning model and therefore our ambition and confidence have not. We expect to have enough liquidity to support the global growth and expansion of our business for at least the next 12 months. We are updating our revenue guidance to $800 million to $830 million for the year over the previous $835 million to $865 million in constant currency. In light of the uncertain operating environment and network factors especially in EMEA and Asia that we cannot ignore. Christian will review our annual guidance in more detail momentarily, but we continue to expect accelerated revenue growth in the back half of this year. In closing, I want to reiterate how strong the global demand opportunity is. We are in the early innings of the societal shift. The majority of plant-based new consumers joined the category in the last few years. We believe that we are driving a plant-based movement in the markets we enter with expectations that it's better for people and the planet and will continue to drive this global conversion from dairy to plant-based. That has not changed. It's as important today as it ever was. What has changed is the global macro environment. We're adjusting our projections and plans accordingly but not deviating from our mission to make it easier for people to eat better and eat healthier, life without excessively taxing the planet's resources. With that, I would now like to turn the call over to Christian.
Christian Hanke, CFO
Thanks Toni and good morning everyone. It's nice to speak to you today. Turning to the financials, revenue for the second quarter of 2022 was $178 million, an increase of $31.8 million or 21.8% compared to revenue of $146.2 million in the second quarter of 2021. Excluding a significant foreign currency exchange headwind of $11.7 million, revenue for the second quarter would have been $189.6 million or an increase of 29.7% in constant currency compared to the prior year period. In the second quarter of 2022, we experienced broad-based growth across retail and improved service channels as well as strong growth in e-commerce sales in China despite COVID-19 restrictions. The foodservice channel accounted for 35% of revenue for the second quarter of 2022, compared to 33.2% in the same period last year. As reported on a year-over-year basis, the foodservice channel was up 28.3% compared to Q2 of last year which reflects the significant focus that we are placing on expanding this channel. The retail channel accounted for 56.8% of the second quarter of 2022 revenue compared to 61.5% in the prior-year period. As reported on a year-over-year basis, the retail channel was up 12.5% compared to Q2 of last year. Consolidated net sales per liter was $1.47 in the second quarter of 2022, compared to $1.54 in the second quarter of 2021, mainly driven by a foreign exchange headwind in EMEA and customer and channel mix effects. As a reminder, our highest regional net sale per liter is typically in Asia, followed by the Americas and then EMEA. Gross profit in the second quarter was $28.1 million or 15.8% gross profit margin compared to $38.6 million or 26.4% in the prior year period. Compared to the first quarter of 2022 gross profit margin of 9.5% we had a 630 basis point sequential margin improvement. This sequential improvement was primarily driven by improving our production model mix as well as increased in-house and localized production, reducing reliance on co-packers, and the implementation of the EMEA price increase. As we had indicated in the past, it usually takes at least three to four quarters and now longer due to COVID-19 impact before a new facility reaches steady state utilization of the production lines. During the ramp-up phase, we carry a full fixed and variable cost structure but have not yet reached the steady-state levels of production output that fully utilizes the capacity of the facilities. We continue to expect that the localization and expansion of our production capacity within the region should improve our production economics over time. With increased production volumes out of Ogden, Singapore, and Ma'anshan we expect gross profit margin to continue to improve sequentially throughout the remainder of 2022. The positive impact of a higher share of self-manufacturing will unlock multiple margin accretive benefits at the same time. Additionally, we have executed on broad-based price increases in both EMEA and the U.S. to offset a portion of the inflation we are experiencing for raw materials, logistics, energy, and labor globally. In EMEA, the price increases were completed in May. And in the U.S., double-digit price increases went into effect yesterday, August 1st, across our channels. Based on the impact of supply chain challenges, inflation, timing of new capacity coming online, mix of the production model as well as mix by sales channel and region, we continue to expect variability in our gross profit margin quarter-to-quarter. Additionally, we continue to monitor the geopolitical impacts of the war in Ukraine as well as COVID-19 restrictions based on the impact these events have on commercial execution and consumer demand. The second quarter of 2022 EBITDA loss was $62.6 million compared to an EBITDA loss of $43.5 million in the second quarter of 2021. Adjusted EBITDA loss for the second quarter of 2022 was $53.4 million. The adjusted EBITDA loss was primarily related to the lower gross profit, higher branding and customer distribution expenses, public company costs, and other operating expenses at the scale of our global operations to support growth across three continents offset by positive impact from foreign exchange rates. As we stated on our last earnings call, we expected operating expenses as a share of net revenue to improve – in the second quarter, total operating expenses as a percentage of revenue improved to 57.6%, compared to 65% in the first quarter of 2022. We expect this trend to continue in the second half of this year, as we closely manage costs, given the uncertain operating environment today and drive to achieve profitable growth. Now focusing on our balance sheet and cash flow. As of June 30, 2022, we had cash and cash equivalents and short-term investments of $275.1 million and total outstanding debt to credit institutions of $4.5 million. We also have a fully unutilized revolving credit facility of approximately $432 million including an accordion. Net cash in operating activities was $127.3 million for the six months ended June 30, 2022, compared to $72.5 million during the prior-year period. Capital expenditures were $111.3 million for the six months ended June 30, 2022, compared to $134.4 million in the prior-year period. CapEx spend was lower than expected in the first half of 2022, due to the phasing of our facility investment. Net cash used in financing activities was $6.9 million for the six months ended June 30, 2022, primarily reflecting the repayment of lease liabilities and repayment of liabilities to credit institutions. Turning to guidance, in the third quarter, we expect production volume in the range of 135 million to 145 million liters, which is typically a leading indicator of our revenue expectation and reflects that our growth is a function of our production output. As I stated a few moments ago, compared to the second quarter of 2022, we expect gross margin improvement and operating expenses as a share of net revenue to improve sequentially in the second half of this year. We are highly focused on achieving profitability. As Toni mentioned, for fiscal year 2022, we are updating our outlook and now expect revenue of $835 million to $865 million based on constant currency, an increase of 30% to 34% compared to fiscal year 2021 at the midpoint. Expect accelerated revenue growth in Q3 and Q4, primarily coming from the Americas and Asia. At the prevailing FX rates, this implies a revenue guidance range of $800 million to $830 million, an increase of 24% to 29% compared to fiscal year 2021. As you know, currency exchange rates are volatile and difficult to predict. Our previous guidance was based on exchange rates as of March 30, 2022 at the time we originally provided guidance. Our updated guidance is now based on spot rates as of June 30, 2022, accounting for approximately $35 million of the change versus our previous revenue guidance. The update to our guidance range is driven by our assessment of the overall macro environment. Although our second-quarter performance was strong on a constant currency basis and in line with the full-year guidance, we reiterated at our first-quarter earnings that our outlook for the second half reflects a range of outcomes where there are several external factors that could impact our business performance. To provide more context, in EMEA, oat milk clearly continues to take market share within the plant-based category and establish itself as the non-dairy default. Household penetration in the category is also proving to remain resilient, which reinforces that consumers have adopted plant-based dairy into their day-to-day routine. Across our key markets, we remain a market leader with clear velocity outperformance against our competitors. That being said, given the many uncertainties in the macro environment in EMEA, ranging from the war in Ukraine to rising inflation and interest rates and changing retail dynamics, we are taking a more cautious approach in our outlook for the remainder of the year. More specifically, it is impacting the speed at which we are able to expand our distribution footprint in 2022, particularly in foodservice and new markets. We are also taking longer to recruit new consumers at the pace we had hoped for. However, we are still highly confident in our ability to accelerate growth in all these areas going forward. In Asia, COVID-19-related restrictions remain in place and the new COVID sub-variant of the virus continues to break out in many cities. During our Q1 earnings call, we communicated that our guidance assumed lockdowns in China would ease by the beginning of the third quarter. However, the recovery in the foodservice channel so far has been slower than we expected because of lasting concerns over lockdown. As a result, we feel it's prudent to reflect the slower foodservice recovery into our expectations for the balance of 2022. Turning to CapEx. As Toni stated, we are strategically managing spend in order to balance speed, execution, growth, and cash flow management in this uncertain environment, as well as focusing on the geographic regions that need more supply sooner. Given the pacing of certain projects and prioritizing Americas and Asia, we now expect capital expenditures to be in the range of $220 million to $240 million for fiscal 2022. With the phasing of the CapEx projects, we believe that our sources of liquidity and capital will be sufficient to meet our existing business needs for at least the next 12 months. We continue to expect run rate production capacity to be approximately 900 million liters of finished goods by the end of fiscal 2022. With that review, we are now ready to take your questions.
Operator, Operator
Thank you. At this time, we will be conducting a question-and-answer session. Our first question is from Andrew Lazar of Barclays. Please go ahead.
Andrew Lazar, Analyst
Great. Thanks very much. So first I wanted to get a little bit of a better handle on the significant CapEx cut for the year. I guess in the release, in your remarks, you talked about a reduction in CapEx due to the current operating environment. And I guess there are some concerns that this move could be driven by sort of closer-in liquidity issues. You also mentioned a more difficult time converting dairy to plant-based users. So, I guess, there's a concern that some of this could be a demand-driven decision as well. In the past, you've always taken much more of a growth at almost any cost mentality. So, I was hoping you could just address this a little bit. Which one of those is it, or is it simply, as you mentioned, just a closer-in level of conservatism given the macro environment? That would be the first question.
Toni Petersson, CEO
Hi, Andrew. This is Toni. Thank you so much for the question. Hope you're doing well. So to your question, this is about discipline. And adjusting to unprecedented changes that we've seen in the world, we are pairing with powerful demand dynamics, which relates to focused capacity expansion, execution, and optimizing the timing of production capacity additions to when we need the volumes. So we're still investing in all projects, but we are phasing them differently. I think that's what you would expect from any business leader from a global high-growth company. We just have to be smarter and work harder to optimize our capital use without compromising growth. So this has absolutely nothing to do with our fundraising capital and the timing of that, which is us adapting to unprecedented changes that are happening in the world.
Andrew Lazar, Analyst
One quick follow-up: considering your production volume expectations for 2023 are similar at 1.2 billion compared to the previous 1.3 billion, I'm curious if this still indicates a goal of reaching 1.8 billion liters in 2024. That might seem a bit distant for perspective now. What I'm trying to understand is whether capital expenditures will increase significantly in 2023 to achieve comparable production levels in 2024, or if this implies a more gradual production ramp over the next couple of years in relation to how we should view capital expenditures.
Christian Hanke, CFO
I think like we said Andrew, we are still exiting this year with 900 million liters as we've indicated. We're close to 1.2 billion as we exit 2023. So it's all about demand matching the supply accordingly. So it's not more dramatic than that from our perspective. We're still investing for future growth.
Andrew Lazar, Analyst
Got you. Last thing is just we've not really seen how plant-based products like this would perform in a tougher consumer environment given some of the newness of the category. I guess are you suggesting the consumer is yet fading away from plant-based products as the environment weakens, but I wanted to make sure I'm hearing you right.
Toni Petersson, CEO
Thank you. No, that's absolutely right, Andrew. Plant-based nutrition is very sticky. This is not about demand. This is about the pace of growth and how fast you can recruit consumers into the space. So it's pace, not demand.
Andrew Lazar, Analyst
Thank you.
Ken Goldman, Analyst
Hi, thank you. Just to clarify or build on that last point, Toni, you say it's not about demand. But I think there was some implication in your words today that it's a little more difficult to attract newer consumers to the product. Just given the challenging environment, maybe the implication is that in EMEA for example there will be some consumers that are, obviously, just trying to pay the bills this year. But is there any implication or any read-through we can have about the pricing or the price level of your product whether that's a little bit more of a hindrance to some people coming in than what we thought. I'm just trying to square your comments about the ability to attract new consumers right now with your comment that it's not really about demand?
Toni Petersson, CEO
Absolutely, that's a great question. We don’t see any increased sensitivity to prices from our customers. Our sales performance remains strong and stable. We're gaining market share across Europe and successfully expanding our distribution with recent product launches. The initial performance looks promising, with foodservice growing by about 30%. However, there are significant challenges for retailers in Europe as they navigate this unprecedented change, and consumers are closely monitoring their household budgets. This also affects our future projections. There are three main factors related to timing and pace. Expanding into new markets and foodservice is taking longer than anticipated, and both are facing the same challenges as retail. It seems to be slower to attract new consumers to our category than we had planned, which is largely due to the unique and challenging situation we are all navigating. Fundamentally, this is about pace. One positive note amid the decline in retail is that plant-based milk is growing, which is important as we have a strong position in that market. So, it really comes down to timing rather than demand.
Ken Goldman, Analyst
Okay. Thank you for that. And then, for my follow-up, you mentioned that there was clearly not a liquidity issue for the next 12 months, I believe is how it was phrased. Is the messaging there that maybe you won't be doing a capital raise in the near term? I think a lot of observers may have expected that and some may have even hoped for it just to get that overhang behind us. So can you talk a little bit about how that comment reflects sort of your desire or need to raise capital right now? And how you balance that with sort of what may be overriding investor desire to focus on the fundamentals rather than maybe some shorter-term balance sheet questions?
Christian Hanke, CFO
Hi Ken, it's Christian here. As you said, with these adjustments, we have sufficient liquidity to fund the business now for the next 12 months. What we have done is provide ourselves with more flexibility in terms of timing to fund our growth, and we're still confident that we have multiple options to access capital. We are still looking to raise the capital to fund our growth. This $400 million amount that we put out there is a good estimate of how much capital is required to fund all of the CapEx projects through 2024. That's also the reason why we stated it earlier this year. We made some capacity phasing adjustments. We no longer need to raise the entire amount in a single transaction this year, and we have the flexibility to match the phasing of the capital raise with the CapEx schedule while minimizing corporate capital as well.
Ken Goldman, Analyst
Great. Thank you.
Kaumil Gajrawala, Analyst
Hi. Thank you. When I think about some of your commentary on macro and your answer to Ken's question on how conversions may be getting a little harder and stuff. Can you just talk about what your expectations are for that going forward in that we might just be at the beginning of these macro issues, particularly as we get into the winter in Europe. So can you just talk about what you're expecting versus what you're observing? Is the adjustment to the top line just more about what you're observing so far, or do you have expectations for the chance that things might get materially worse in the next six months or so?
Toni Petersson, CEO
Yes, the revised guidance reflects what we see in the back end of this year, especially in Europe and then Asia that is not opening up the way we would hope for. The run rate is absolutely massive. If anyone here in Europe understands that it is very shaky. People are monitoring the household budget and the living costs are definitely increasing. But Oatly's performance in that environment is stable and has proven to be resilient even with the price increases. We also see that people are moving more into soft discount. Our launches in Ogden, Utah show massive velocity performance. It's more about sentiment that consumers have, and I want to add the runway that we have in expanding. That hasn't changed. None of the fundamentals of the business have changed. There’s an enormous whitespace for us to take in expanding into new markets with more foodservice discounts. What we're saying is it just takes longer to close those deals. People are distracted with everything else happening in the world. This is about the remainder of 2022; nothing more than that according to us.
Kaumil Gajrawala, Analyst
Okay. Thank you.
Rupesh Parikh, Analyst
Good morning. Thanks for taking my question. So on the cost side, I was hoping to get an update on the cost pressures that you're facing. Just curious to the level of cost inflation you're seeing right now versus I think the 8% to 9% expectations you had last quarter?
Christian Hanke, CFO
Hi, Rupesh, it's Christian here. I understand, of course, it's an interesting topic in today's world. Last year, we didn't speak about inflation at all, but now it’s more relevant. In total, we expect inflation to increase our total costs, and we'll get another 5% to 6% in the coming quarters compared to where we are today in the second quarter. We've slightly increased inflation levels or expectations for 2022 versus 2021 compared to where we were when we reported in our first earnings call. Now, we expect on a consolidated level low double digits globally, whereas previously we were expecting high single digits. This is primarily a consequence of the macroeconomic situation, with the war in Ukraine leading to elevated energy costs here in Europe, but it's also impacting the cost of materials.
Rupesh Parikh, Analyst
And do your pricing actions contemplated so far incorporate these additional cost pressures, or would you expect to make more adjustments later in the year or next year?
Christian Hanke, CFO
We are evaluating additional price increases in Europe.
Rupesh Parikh, Analyst
Okay. Great. And then maybe one follow-up question. Just on the gross margin front. So obviously, we saw some sequential improvement from Q1. But last year, you did have gross margins in the 20%-plus range for the full year. Any way to frame how where we could shake out at an exit rate for Q4 on the gross margin line?
Christian Hanke, CFO
I think compared to what we have communicated in the past, we sort of remain in the range of mid-20s exiting Q4.
Michael Lavery, Analyst
Good morning. Thank you. I just want to come back to the revenue guidance, and I understand – so you're calling out a reduction on some of the macro environment and you've given that color, but you're also capacity constrained or have been and you're holding your capacity expectations for the year. So, how do we reconcile those? Should we expect 100% customer service levels for the rest of the year and just a weaker demand profile? How do I tie that all together?
Peter Bergh, CSO
Mike, I think Toni will definitely jump in here. It's not a demand issue. It's all about us increasing the output from our new facilities in the second half of the year and that will be converted into revenue. I think what we have talked about is the pace of growth in Europe, driven by the macro environment. It's a bit different. But we still expect, solid and strong growth on a consolidated level, but more specifically in Americas and Asia. We're prioritizing the U.S. and Asia from a CapEx phasing point of view, which we have spoken to during earnings calls.
Toni Petersson, CEO
Yes. Michael, just to clarify on the fill rate. We're at 96% in Europe, and we still have gaps spread out throughout the whole product range. There's more to do in some specific products there. In the U.S., we increased the fill-rate gaps from 60% up to plus 70% and that's going to continue to increase over time. But again, since it's not a demand thing, it's going to be a catch-up gain for us. As we always mentioned, if demand continues to increase for our product, it's going to be more difficult for us to close the gap. But production is definitely coming on board. We hope for great progress in the next quarter. So, the last part of the year.
Michael Lavery, Analyst
If someone tells me maybe one more try, I don't mean to be dense, but if there's no supply issue in terms of change, and if you're saying there's no demand issue is it just a conservatism update then to lower the guidance?
Toni Petersson, CEO
There are different natures to this situation. In the U.S., we are completely right on getting the output from Ogden at full capacity. Also, we have Millville coming on board not to forget right at the end of this year. So that's completely driven by our ability to supply there.
Rupesh Parikh, Analyst
Okay. Great. Thank you.
John Baumgartner, Analyst
Good morning. Thanks for the question. I wanted to focus on the middle of the P&L on the SG&A line. It's still a pretty big number relative to the size of the business. I'm wondering how you think about discretionary costs and adjustments within that. I mean as revenue growth is more moderate, obviously your leverage is more moderate as well. How do we think about the ability and timing for outright cost reductions in that line, whether it's external consultants or anything else? When do you think you can really begin to see compression there in those costs?
Christian Hanke, CFO
Hi, John. It's Christian here. We're already more disciplined in our spending related to our day-to-day activities and business operations. We're also being strategic as we look towards the second half of this year on how to best manage that cost pool. We believe over time that this is an area that we are looking at to ensure that we are finding the right level in relation to how we're growing as a company. But then, you also have part of our SG&A that is growing as our revenue grows. So if you take customer distribution expenses, just to keep that in mind as our top-line is growing in the second half of the year, our SG&A will grow as well. That is sort of a direct link to revenue growth.
John Baumgartner, Analyst
Thanks, Christian. And just a follow-up. When we think about the macro pressures delaying consumption increases, I'm curious just given how long the company has been around. I look at per capita consumption in North America, it's higher than a lot of places in Europe and lower than places like Spain. Have you ever seen over the years sort of a period where the rate of consumption sort of levels off even independent of the macro environment in some of your countries in Europe? What sort of prompted that sort of reinvigorated growth going forward? Because it feels like some of this may just be growing pains for the category where you get a moderation of new consumers coming in maybe even independent of the macro backdrop. I'm just curious your thoughts there. Thank you.
Toni Petersson, CEO
No, we don't see that. We have been driving the category, and we're still in the very early stages. If you look at the household penetration from a volume perspective, it's very low still. Yes, this data shows that once we try to get into the space, it is very sticky. You don't go back. That’s what we see across all our markets. Now it’s about the pace, especially in Europe, and how fast you can drive new consumers into the space given everything else that is happening in the world. The fundamentals have changed, but we are still very optimistic about the opportunity as the importance of plant-based nutrition increases over time.
John Baumgartner, Analyst
Okay. Thank you very much.
Toni Petersson, CEO
I just want to thank everybody for joining us today and we look forward to speaking with you on our next earnings call in November. We certainly hope everyone has a great rest of the summer.
Operator, Operator
This concludes today's conference. Thank you for joining us. You may now disconnect your lines.