Earnings Call Transcript - OTLY Q3 2022

Operator, Operator

Ladies and gentlemen, greetings, and welcome to the Oatly Third Quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now pleasure to introduce your host, Rachel Ulsh from Investor Relations. Please go ahead.

Rachel Ulsh, Investor Relations

Good morning, and thank you for joining us on Oatly’s third quarter 2022 earnings conference call and webcast. On today's call are Toni Petersson, Chief Executive Officer; and Christian Hanke, 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 of operations and financial positions, industry and business trends, business strategy and 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 31st, 2021, filed with the SEC on April 6, 2022, our report on Form 6-K for the period ended September 30, 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 in 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 reconciliation, non-IFRS financial measures and the most comparable measures presented 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, Chief Executive Officer

Thanks, Rachel. Good morning. We appreciate you joining us to discuss the third quarter results. Today, I will provide an update on our business performance, address strategic actions we have taken as an organization, and a future growth opportunity. Christian will review our financial results and update our 2022 outlook. Jean-Christophe, Daniel, Christian, and I will be available for questions. As a reminder, our new Global President, Jean-Christophe, and Chief Operating Officer, Daniel Ordonez, joined Oatly in June. These two accomplished industry leaders have over 60 years of combined experience at global and fast-growing consumer brands; since joining, they are focused on activating multiple growth initiatives and positioning Oatly for the next phase of growth. Since our last earnings call in early August, we have faced challenges mainly driven by COVID-19 restrictions in China and ramp-ups that took place due to technical issues in our Ogden facility in the U.S., as well as foreign exchange headwinds. Our third quarter results fell short of our expectations. However, we believe these challenges are transitory, and we are encouraged by our current volume growth, underlying consumer demand, and future growth opportunities. In the third quarter, we saw year-over-year sales volume growth of 16% across all regions and continue to see strong category-leading velocities; the global demand remains resilient. However, I am disappointed with our ability to translate this into third quarter gross profit margin and sequential EBITDA improvement due to our operational execution shortcomings, as well as the worsening macro environment. The gross margin of 2.7% fell well below our expectations. The last two years have taught us the hard way that being a high-growth company in an unprecedented, complex, and volatile environment demands an even sharper allocation of resources and capital. This is why, as shown on slide 5, we have made strategic decisions with immediate action items to achieve three goals: first, prepare for the next phase of continued high growth; second, increase the simplicity and agility of the organization; and third, drive profitability with a more asset-light strategy. With these goals and increased focus on balancing growth with profitability, we expect to be adjusted EBITDA positive exiting Q4 2023. Christian will walk through the path of profitability shortly. Turning to slide 6, this reset plan involves two fundamental strategies: adjusting our supply chain network strategy and simplifying the organizational structure. Starting with our supply chain network strategy, one of our company's core strengths is our proprietary expertise in oat-based technology, which forms the foundation of our product portfolio. Going forward, we will simplify our supply chain strategy by focusing our investment in our oat-based technology and capacity, which will also reduce the capital intensity of our future facilities. As such, we are actively pursuing partnerships with manufacturing partners to create a more hybrid production network across our geographies. We are specifically looking at transitioning the Fort Worth and Peterborough plants to hybrid facilities versus end-to-end. This move towards a more hybrid network is expected to significantly reduce our future capital expenditures and have a positive effect on our cash flow outlook. It will also enable us to support growth and provide us with more flexibility to expand capacity faster in the future. In addition to phasing old capital expenditures projects we laid out last quarter, which has already improved our cash flow in the near to medium term. Moving to the organizational structure, we have been reorganizing our structure to adjust our fixed cost base globally for a more balanced growth and profitability equation. To start, we are executing an overhead and headcount reduction impacting up to 25% of the costs related to the group corporate functions and regional EMEA layers. By doing this, we expect annual savings of up to $25 million from the reorganization, which should take effect starting in Q1, 2023. We have identified incremental opportunities in the rest of the organization, for which we expect up to an additional $25 million in annual savings in the first half of 2023. As part of this review, Jean-Christophe has assumed oversight of the global supply chain network following the departure of our Chief Supply Chain Officer, while Daniel has assumed oversight of EMEA markets following the departure of our EMEA President. We continue to evaluate our global operations and potential opportunities to recalibrate our global organizational structure for the next phase of growth. As shown on slide 7, growth remains a top priority. The strategic actions we are taking are expected to strengthen our positioning entering 2023 and beyond. It's important to remember that we are operating in a category that is still very strong, and this reset is necessary to prepare for the next phase of growth. The plant-based market is growing globally, and oat continues to be the growth driver in the plant-based beverage sector. Our supply remains stable, and we have a strong position. Even when we have not been able to fulfill demand, including in the U.S., we still have the leading velocities despite a higher price point and lower promotional spending. Turning to slide 8, we see a significant whitespace opportunity as we work to convert dairy users to Oatly consumers globally. We expect to drive conversion by increasing our brand reach, pioneering through new product innovation, driving assets like production capacity expansion to support demand, expanding our presence across channels, and entering new markets. Now moving to our business performance, on slide 10, third quarter revenue was $183 million, a 7% increase compared to $171.1 million in the prior year period. However, FX was a significant headwind; the revaluation of the dollar against all European currencies and the RMB impacted our results by $16.6 million in the third quarter. In constant currency, revenue increased 16.7% year-over-year to $199.7 million. We saw volume growth across regions, and we still have the number one selling oat mix SKU and highest velocities across key markets. We have also successfully rolled out new product launches across geographies and continued channel expansion. Turning to the region, starting with EMEA on slide 11. EMEA's third quarter revenue was $82.6 million, with strong FX headwinds impacting revenue by $14.5 million in the third quarter. In constant currency, EMEA revenue increased 11% year-over-year to $97.1 million. Sales volumes increased approximately 7% with steady performance across different markets in Europe; it is in line with our expectations but also reflects the difficult macro environment. We saw our continued ability to drive category growth, proving the resilience of our brand and business model with improving velocities and market shares across the board. Turning to slide 12, which shows the results of driving growth in our existing markets through one, the synchronization of our brand portfolio and in-store activations; two, disruptive brand events with the unique deployment of ARAL home activation; three, focused distribution and execution on new product development with Chilled Barista, as well as the ice cream launch in DACH; and four, distribution gains, both retail and food service. Going forward, we still have a significant international expansion opportunity in EMEA; our current key markets consist only of the UK, DACH, The Nordics, and the Netherlands. This quarter, continued macro conditions in EMEA slowed our new market and channel expansion. We incurred one-time charges related to the highest scrap and co-packer volume adjustments. Turning to the Americas on slide 13. Americas' third quarter revenue increased 22.7% year-over-year to $60.7 million, although it was below our expectations. Demand for the Oatly brand in the U.S. remains strong, with minimal signs of elasticity to our recent pricing action and number one velocity in the total dairy and plant-based milk categories. Our ACV is still limited by supply in the U.S. at only 36%, with significant upside once we have sufficient supply to meet demand. The increase in third quarter sales was driven by the progress we have been making; however, we are still limited by supply. Turning to slide 14. We ran into production challenges in Ogden at the end of August and into September that disrupted this progress. The technical issue led to one of the two Ogden oat baselines being down for approximately three weeks. It has since been resolved; our production is stabilizing, allowing us to start rebuilding inventory. But it did have an impact on Q3 and will also affect the volumes we can sell in the fourth quarter, which is the main driver of the guidance update Christian will touch on shortly. With Ogden production back on track and our second oat baseline expansion ahead of expectations, we expect production volumes to improve in Q4 and into 2023. With more volumes, we expect to close the fill rate gap and drive distribution and market share gains with our leading velocities. We also anticipate accelerated revenue and margin performance in 2023 based on production improvements. Turning to Asia on slide 15. Asia's third quarter revenue was $39.8 million. In constant currency, Asia revenue increased 22.5% year-over-year to $41.9 million, which is below our expectations. We are seeing that the zero-tolerance COVID policy is having a sustained impact on changing consumer behavior. A number of businesses have shortened their hours, consumers are traveling less, and preventative health measures have been tightened with resurgence outbreaks. The restrictions not only impacted our top-line performance but also our profitability, which Christian will expand on later in this presentation. Our Asia team has been resilient and will continue to adapt as effectively as possible in this restrictive environment, including accelerating our expansion into retail and e-commerce. Retail and e-commerce sales represented 13% to 24% of total Asia sales this quarter, respectively, and continue to be an essential growth driver going forward. Turning to slide 16. We continue to see the power of the Oatly brand across Asia. Oatly has been nominated as the star pop brand by E-magazine for being a leader in the food industry and named a leading brand by several other outlets. We continue to have the number one plant-based brand on TMALL with 48% market share in the new plant-based category and 24% market share in the overall plant-based category year-to-date through September. Our innovations are performing well; the team is expected to be in 25,000 stores by the end of Q4. We also recently partnered with a food company to develop pre-packaged plant-based drinks under the Langfang Jen and Oatly brands; we have two ready-to-drink co-branded products available today at convenience stores such as Family Mart and e-commerce platforms including TMALL and JD.com. From a production standpoint in September, our facility in Singapore started producing at full ramp capacity, and Maanshan is continuing to increase production. The localized production will enable us to expand to other international markets across Asia as well. The COVID-19 situation weighs heavily on our results for the third quarter and our outlook for the remainder of the year; underlying demand remains strong, and we continue to be excited about the growth opportunities across Asia as these external pressures subside. With that, I would like to turn the call over to Christian to walk through the financials and guidance.

Christian Hanke, Chief Financial Officer

Thanks, Toni. And good morning, everyone. It's nice to speak with you today. Turning to the financials on slide 18. Revenue for the third quarter of 2022 was $183 million, an increase of $11.9 million, or 7% compared to revenue of $171.1 million in the third quarter of 2021. Excluding a significant foreign currency exchange headwind of $16.6 million, revenue for the third quarter would have been $199.7 million, or an increase of 16.7% in constant currency compared to the prior year period. As Toni mentioned, third quarter revenue results were below our expectations, primarily due to production challenges in Ogden and continued market restrictions in Asia due to COVID-19. However, we experienced growth across retail, food service, and e-commerce channels. Moving to slide 19, the sold volume for the third quarter of 2022 amounted to 126 million liters compared to 110 million liters last year, an increase of 14.5%. We experienced broad-based growth with 7% sales volume growth in EMEA, 17% growth in the Americas, and 38% volume growth in Asia. Consolidated net sales per liter was $1.45 in the third quarter of 2022, compared to $1.55 in the third quarter of 2021, mainly driven by foreign exchange and promotional activities in Asia, offset by pricing actions in the Americas and EMEA. Our highest regional net sales per liter are typically in Asia, followed by the Americas and EMEA. Gross profit in the third quarter was $5 million, or a 2.7% gross margin, compared to $44.9 million, a 26.2% margin in the prior year period, well below our expectations. Compared to the second quarter of 2022, which had a gross profit margin of 16.8%, we experienced a 1,310 basis point sequential margin decline as shown on slide 20. We did not achieve sequential improvement as we anticipated, primarily due to the previously mentioned production issues at our Ogden facilities and continued COVID-19 restrictions in Asia. The decline was mainly driven by continued pricing actions of 390 basis points to offset higher cost inflation of 380 basis points. Continued COVID-19 restrictions in Asia resulted in short-term underutilization of our facilities, higher promotional activities, co-packer charges, and inventory positions of 490 basis points. Unexpected production challenges at our Ogden facility impacted our margin by 110 basis points. Continued macro headwinds in EMEA slowed our new market and channel expansion, which impacted production costs and resulted in charges related to high scraps and co-packer volume adjustments of 630 basis points, most of which are expected to be non-recurring, with other items contributing net approximately 90 basis points. We have seen improvement in October gross margin already, which gives us confidence in our ability to achieve higher gross margins in the fourth quarter. The gross profit margin improvement in Q4 2022 and into 2023 is expected to be driven by alleviating these transitory, largely macro-related challenges, as well as by a select number of key actions that we are executing. First, continued pricing actions to combat inflation; second, driving steady production progress at Ogden and our new Millville oat baseline; third, optimizing the utilization of our supply chain network to drive cost and production efficiencies; fourth, expanding our channel footprint and product portfolio in Asia to navigate the COVID-19 uncertainty, and lastly, improving our operational execution with a simplified organizational structure. Some improvements in utilization are already taking place; in Asia, Singapore is now at full capacity, and in the Americas, Millville’s oat-based line expansion has commenced commercial runs in November. We expect that the continued and improved ramp-up of our production facilities in the fourth quarter of 2022 should result in improved fixed cost absorption as well as a better sales mix. The implementation of pricing actions will drive gross profit margin expansion. Moving to slide 21, the third quarter of 2022 EBITDA loss was $92.2 million compared to an EBITDA loss of $36.5 million in the third quarter of ‘21. The adjusted EBITDA loss for the quarter was $82.7 million, primarily related to the lower gross profit of $39.9 million and to a lesser extent, driven by higher employee branding and customer distribution expenses, offset by lower consultant expenses and a positive impact from foreign exchange rates. In the third quarter, total operating expenses as a percent of revenue increased to 59.7%, compared to 57.6% in the second quarter of 2022, due to the lower-than-expected revenue. We expect operating expenses as a percent of revenue to improve in the fourth quarter as we closely manage costs with the actions Toni mentioned earlier; however, we will not see the full benefit until 2023. Now focusing on our balance sheet and cash flow: as of September 30, 2022, we had cash and cash equivalents and short-term investments of $120.3 million and total outstanding debt to credit institutions of $4.4 million. We have not drawn any loans on our revolving credit facility of approximately $320 million, excluding the accordion of an additional $76 million. Net cash used in operating activities increased by $66.6 million to $215.2 million for the nine months ended September 30, 2022, compared to $148.6 million during the prior year period, driven by our higher loss from operations. Capital expenditures were $170.5 million for the nine months ended September 30, 2022, compared to $186.7 million in the prior year period. CapEx was lower than last year due to the phasing of our facility investment. Net cash used in financing activities was $10 million for the nine months ended September 30, 2022, primarily reflecting the repayment of lease liabilities and repayment of availabilities to credit institutions. Turning to the guidance on slide 22 for fiscal year 2022, we are updating our revenue outlook and now expect revenue of $755 million to $775 million, based on 2021 exchange rates or constant currency, an increase of 17% to 20% compared to fiscal year ’21. At the prevailing FX rates, this implies revenue guidance of $700 million to $720 million, an increase of 9% to 12% compared to fiscal year 2021. Our previous guidance implied accelerated revenue growth in Q3 and Q4 primarily coming from the Americas and Asia; given the lower-than-expected revenue in Q3 and our current outlook for Q4, we have reduced our forecasts. $53 million to $58 million of the reduction is driven by operational challenges in the Americas, which limit our ability to accelerate sales momentum, and $32 million to $37 million is driven by COVID-19 pressures negatively impacting sales in Asia. We believe these challenges are transitory; as COVID-19 restrictions ease in Asia and we have more stable production in the Americas, we have significant opportunities for growth. As you know, currency exchange rates are volatile and difficult to predict. Our updated guidance is now based on spot rates as of September 30, 2022, accounting for approximately $50 million of the change versus the previous revenue guidance. Please refer to the last slide in the appendix of the earnings presentations for details on exchange rates. As I stated a few moments ago, compared to the third quarter of 2022, we expect the gross margin improvement and operating expenses as a share of net revenue to improve sequentially in the fourth quarter. Moving to slide 23, we continue to expect capital expenditures to be in the range of $220 million to $240 million for fiscal 2022, given the phasing of certain projects. We continue to expect run rate production capacity to be approximately 900 million liters of finished goods by the end of fiscal 2022. With the phasing of CapEx projects, we believe that our current sources of liquidity and capital will be sufficient to meet our existing business needs through the end of 2023. In terms of our funding plan, first, we are simplifying our organizational structure, which is expected to result in total annual savings of up to $50 million. Second, we have reshaped CapEx projects and are working to adjust our supply chain network to a more asset-light model. These measures support our actions to achieve future growth and profitability and will significantly reduce our capital needs. We have lowered the capital raise requirements to $200 million and extended the capital raise period until June 30, 2023, in our RCF amendments to reflect these actions. With this refined clarity on our capital needs, we are actively working on multiple financing tracks. Turning to slide 24, we are not in a position to provide 2023 guidance until our fourth quarter earnings call in March; however, we expect higher revenue growth in 2023 than in 2022 and to be adjusted EBITDA positive exiting Q4, 2023. In order to achieve this, we plan to expand our distribution footprint with new geographies and within existing channels, improve gross margins and leverage our improved cost structure with the organizational changes Toni outlined. We see a path to improving gross profit margins with the actions I discussed earlier. Regarding our long-term guidance, we are currently evaluating the impact of the strategic actions we are taking, especially as it relates to a more asset-light, less capital-intensive operating model. Now I'll turn the call back to Toni for closing comments.

Toni Petersson, Chief Executive Officer

In conclusion, we are disappointed in the quarterly results. I remain confident in our strategy and the strength and uniqueness of our brand, which have continued to demonstrate the ability to generate demand and grow revenue. At the same time, we’ve taken decisive action to address the operational issues to prepare for the next phase of growth. With that review, we are now ready to take your questions. Operator?

Operator, Operator

Our first question comes from Andrew Lazar from Barclays.

Andrew Lazar, Analyst

Great, thanks very much. Maybe to start off, I think your initial target for self-manufacturing was 50% to 60%. Do you have a new longer-term target for what self-manufacturing would look like, given some of the actions you're taking? And is this move around a more asset-light model targeted to a more specific geographic region? And then as part of that, obviously, the shift to self-manufacturing was a key factor in the longer-term margin improvement story. So I guess how does this margin improvement come about now? And aren't some of these sort of self-manufacturing facilities already under various states of construction or completion?

Toni Petersson, Chief Executive Officer

Hi, Andrew, this is Toni here. Thanks for your question. Let me start with the gross margin. I will let Christian double-click on the rest of the questions here. Now, in terms of gross margin, transitioning into hybrid will potentially have a small concession on margins. But we are not ready at this time to provide guidance, as we are still discussing with various parties. The small concession, however, is modest and is outweighed by simplifying supply chain operations and execution. So I can't give you any clear updates on the margin. Let's revisit that once we finalize all the discussions.

Christian Hanke, Chief Financial Officer

I don't think there's anything more to add there, Toni. We will follow up.

Andrew Lazar, Analyst

Got it. Yes. I just didn't know how significant the magnitude of that change would be. And then any specific geographic region that that's focused on? Or do we not know that yet either?

Christian Hanke, Chief Financial Officer

Well, we're working across all the various regions. I mean, we're specifically looking at one facility in the U.S.: Dallas Fort Worth and the U.K.

Andrew Lazar, Analyst

Got it, and then just a quick clarification. I think you had mentioned in Q4 you expect gross margins to improve sequentially. And then Christian, earlier in the prepared remarks, you mentioned Q4 gross margin expansion. So I didn't know if that meant year-over-year expansion or not. I was hoping you could clarify that. Thank you.

Christian Hanke, Chief Financial Officer

Sequential improvement compared to the third quarter is what we meant.

Toni Petersson, Chief Executive Officer

Andrew, can I just clarify again because you mentioned magnitude? What we see is potentially a small concession of the margins, but not much.

Operator, Operator

Our next question comes from the line of Ken Goldman from JPMorgan.

Ken Goldman, Analyst

Hi, thank you. I wanted to build on Andrew's line of questioning about the pivot towards a more hybrid strategy. Obviously, to his point in your point, there were better economics that you had laid out for the NTN manufacturing. But you had also talked about some others, some other tailwinds, right, in terms of having more control over the process. I think you had mentioned some flexibility to maybe build some value-added processes when you control the entire supply chain. So I do appreciate the need to conserve cash right now. I do understand that companies can pivot. But I'm just curious how comfortable you are with some of the choices you have to make. I don't want to use the word sacrifices, but choices as you kind of veer away from end to end on a more permanent basis.

Toni Petersson, Chief Executive Officer

No. Thanks, Ken. I think that's a great question. Let me just elaborate a little bit. We are continuously adapting to our environment, and this is just one example of that. Fundamentally, we will need more capacity to support growth. This gives us flexibility to add capacity faster. There are a number of reasons why we're taking this course. If you allow me, let me bring forward three of them. First, resource allocation decisions. Building multiple end-to-end factories is just a heavy lift, especially now. A hybrid model enables us to focus more on our proprietary oat-based production and other value-driving items such as innovation, branding, and sales. So we simplify and remove complexity. Second, the availability of strategic co-packers is easier to find now than before since we have both scale and growth. This means that we have more qualified partners to work with in terms of food safety, quality, and security of supply. Regarding financing, we are confident in our ability to raise capital going forward, but this does not drive the decision. This is a business strategic decision considering the macro environment. We want to drive innovation and sales aggressively, and we want to be focused about it. It was difficult to do everything before, and it's even harder now. So we just want to make things easier on ourselves to simplify execution. I know it was a long answer, but I just wanted to provide the context.

Ken Goldman, Analyst

That's helpful. Thank you. And then I wanted to ask about the departures of the Chief Supply Chain and EMEA head. Can you give us a little more color about the circumstances around that, please?

Toni Petersson, Chief Executive Officer

We are continuously evaluating the skill set. As we grow, we're a high-growth company. The capabilities of both JC Daniel and especially combined are adding a lot of value to the company. Jean-Christophe has a very solid background in building other companies rapidly, including complete supply chain networks on a global scale. That is, of course, something that we want to benefit from. And besides that, Jean-Christophe is also overseeing innovation in food science, supply chain, and people transformation functions. Daniel is focusing on supporting and leading the regional businesses here. But to your point, we are just an organization that is continuously evaluating various aspects across the organization.

Operator, Operator

Our next question comes from the line of Rupesh Parikh from Oppenheimer.

Erica Eiler, Analyst

Good morning. This is actually Erica Eiler on behalf of Rupesh. Thanks for taking our questions. I just wanted to hit on cost pressures really quickly. What's the latest you’re seeing here? Curious what remains the biggest pressure at this point and maybe where you see some things starting to ease? And then along those lines, some of your CPG peers have given some early reads in terms of what they're expecting next year. If there's any color you can provide there, that would also be helpful.

Christian Hanke, Chief Financial Officer

In terms of inflationary pressure, what we're expecting in the fourth quarter compared to the third quarter is an increase of around 3% to 4% across direct materials, converting costs, electricity, and labor. So that's what we're seeing. Going into 2023, it's not at the same levels we've experienced this year, which has been in the high double digits. Currently, we're seeing expectations in the range of 6% to 7% on a consolidated level in 2023. I also want to add that we will continuously combat inflation with pricing actions.

Erica Eiler, Analyst

Okay, great. And then, given the macro impacts on your business, you've talked about some of the slower conversion to plant-based that you've seen in recent quarters. Can you provide an update in terms of consumer behavior and the slower conversion that you've been seeing and how that looks lately?

Toni Petersson, Chief Executive Officer

Thanks, Erica. This is Toni. I want to make it clear that the guidance down has nothing to do with the brand or demand; the underlying demand for our product is still strong. We are starting to see signs of growth in Europe that Daniel can elaborate on. In Asia, we are strengthening our positioning despite COVID-19 by adding doors and partnerships in food service and retail channels. In the U.S., we still have the highest velocities in the dairy universe. Daniel, perhaps you can share more details.

Daniel Ordonez, Chief Operating Officer

Of course. Thank you, Toni, and thank you for the question. It is indeed a pretty extraordinary environment, and that's why we’re experiencing challenges. However, our velocities remain strong, and the penetration levels continue to be stable, so we don't see any wavering on that. We also see specifically in relation to the last earnings call that with improved execution, we have started to shift category dynamics, exhibiting volume growth in EMEA countries like The Netherlands and Germany, where we are growing ahead of private labels. Improved execution is the path to converting dairy consumers into plant-based consumers, and we see that outlook intact. As you're well aware, in the U.S., it's all about capacity and ensuring supply meets service levels, which are improving.

Operator, Operator

Our next question comes from the line of Brian Holland from Cowen & Company.

Brian Holland, Analyst

Yes, thanks. Good morning. I wanted to follow up on Andrew Lazar's question. I think you mentioned, Toni, during your prepared remarks, that Texas is particularly important when discussing the pivot to a more hybrid production network. Could you provide a little more color around that? Is the Texas facility under construction yet? And what could a manufacturing partnership look like? Would that be leaseback? I think Andrew was asking how this sort of evolves given some of these facilities are under construction, so trying to get a sense of the capacity situation sort of shifts from Oatly to co-manufacturers or, in essence, if you're still building all these plants and maybe just working with partners from there?

Toni Petersson, Chief Executive Officer

Hi there. That's a good question. Thank you. First of all, what we do here is protect growth, balancing and calibrating growth and costs. It will not impact volumes or the growth rate going forward. Regarding Texas, yes, we are building there but are now thinking about turning Fort Worth into a hybrid model, like we had in Singapore, and that also goes for Peterborough. JC, maybe you want to add a little more?

Jean-Christophe Flatin, Global President

Thank you, Toni. Hi, Brian. Scope-wise, of course, Talaris in the U.S. and Peterborough in the U.K. are both in the scope. We are actively working to find the right strategic partners. To answer your second question, we are seeking what we call our hybrid model, where we take ownership and responsibility for proprietary oat-based processes, and then we partner with other strategic partners for filling aspects. We intend to follow the same model; it has served us well and is a great way forward.

Brian Holland, Analyst

Great. I appreciate the color there. I wanted to discuss the U.S. total distribution points in the tracked channels, which appear to decelerate meaningfully commensurate with the recent shelf resets, several of your oat milk competitors accelerated simultaneously. How much of that dynamic that we're seeing is just your inability to supply at this point versus customers now opting to give space to peers? Is it fair to say you are being penalized by customers for lack of a better term?

Daniel Ordonez, Chief Operating Officer

I'll take that, Brian, Daniel here again. Demand and velocities remain very resilient in the U.S., and we don't see any impact on that based on recent market share development. We're gaining share despite the service level issues. The impact on some of the total distribution points is related to service levels, which are already improving. We look forward to sharing more details with you in the next earnings call.

Toni Petersson, Chief Executive Officer

Brian, to clarify, it is related to supply, and remember that we are balancing supply between retail and food service channels.

Operator, Operator

Our next question comes from the line of Rob Dickerson from Jefferies.

Rob Dickerson, Analyst

Great, thanks. Just a question for you, Christian. I thought I heard you say in the prepared remarks that you’re looking into other financing tracks over time for incremental capital, maybe you could expand on that.

Christian Hanke, Chief Financial Officer

We are actively working on multiple financing tracks and will provide more clarity when we have more to share. One example is we signed a local credit facility in Asia for $25 million, which provides more flexibility. We're very confident; we also have support from our shareholders.

Rob Dickerson, Analyst

Okay, fair enough. It sounds like it's really the two facilities that are shifting more to hybrid vs the end-to-end. When we think about the capital needs, I think at some point you had estimated roughly $400 million to complete all the CapEx projects. However, based on what you mentioned, it doesn’t sound like those reductions will result in lowering your CapEx further from that amount.

Christian Hanke, Chief Financial Officer

The lower capital requirement is primarily related to the strategic direction that we laid out in the call, transitioning to a more asset-light model. We discussed the CapEx phasing in our previous earnings call when we reduced our annual CapEx by $200 million in 2022, which combined reduced the total capital funding requirements.

Rob Dickerson, Analyst

Right. Okay. But I mean this next phase that we're discussing today doesn’t sound like it was the lion’s share. It seems more like the previous changes were much more significant.

Christian Hanke, Chief Financial Officer

Yes, but also looking ahead, moving toward an asset-light model will drive lower capital needs over time.

Operator, Operator

Our next question comes from the line of Bryan Spillane from Bank of America.

Bryan Spillane, Analyst

Thanks, operator. Good morning, everyone. Just two questions on my end. The first one, in Ogden, you described technical issues. Can you provide more color on what those technical issues are? Is it equipment failures, or a lack of training? I'm trying to understand what exactly isn't working.

Jean-Christophe Flatin, Global President

Thank you, Brian. Regarding Ogden, we need to address two different aspects; one is the continued ramp-up of the factory. We've said last quarter that we were in the last mile improvement to ramp-up production. We are still improving and stabilizing production. Daniel and I have been on-site three times and have a clear root cause analysis of what's driving the long ramp-up. Last August's technical incident kept one of our two oat-based lines down until mid-September due to an issue with a fire suppression system, which required significant time to address. However, I am happy to report that over the last six to eight weeks, we are seeing stable production.

Bryan Spillane, Analyst

That's very helpful. Thank you for that detail. And I guess maybe to follow up on the earlier question around multiple financing tracks. Toni, have you thought about merging with a larger company with more scale? It feels like, given the growth, you're having difficult scaling up to service that growth. Have you considered that as an option?

Toni Petersson, Chief Executive Officer

The answer is no. We're not exploring that path.

Bryan Spillane, Analyst

And why not?

Toni Petersson, Chief Executive Officer

We believe that our runway is absolutely massive. The hurdles we've experienced are very much related to the macro environment combined with supporting the high growth that we have. We have so much confidence in the decisive strategic actions we are taking to prepare this company for growth. Again, we have no demand issues; we have strong velocity, market share gains, and we are expanding across regions. This has been an executional challenge that we are addressing with decisive action, which is the reason for our confidence.

Operator, Operator

Our next question comes from the line of John Baumgartner from Mizuho.

John Baumgartner, Analyst

Good morning, thanks for the question. I wanted to come back to the reorganization and your reductions for operating expenses. Relative to sales, your OpEx is a multiple of your peers with similar revenue levels. I guess a big part of that gap can be explained by the infrastructure to support your geographic breadth, and that gets leveraged over time with sales. Given the business has been reassessed, what costs have you identified as discretionary versus what was previously viewed as more structural in nature? How should we think about the risk of reducing costs excessively or prematurely?

Jean-Christophe Flatin, Global President

First of all, John, it's Jean-Christophe speaking. Technically, within our SG&A costs, we have customer distribution costs, which is important for comparison purposes. Regarding your second question about the potential risks, we conducted a very bottom-up analysis, leveraging team insights, to reset our costs with three key intentions that Toni outlined earlier. The questions we focused on were about the necessary capabilities to drive growth. By diminishing our fixed cost structure, we aim to accelerate our path to profitability, which both Toni and Christian have referred to. The specific areas we evaluated were the intersection of corporate and regional resources where we identified significant opportunities for optimization.

John Baumgartner, Analyst

Thanks for that. Just a follow-up on the European environment. From the slide deck, it looks like velocity in the U.K. and Germany was down about high single digits sequentially versus Q2, which was still better than the category. How much of that was due to seasonality versus the overall macro environment, and what's your confidence level for seeing velocities and demand stabilize given the macro uncertainty in Europe?

Daniel Ordonez, Chief Operating Officer

Thanks for the question. It’s Daniel taking this. We've seen signs of restoration in volume growth with better execution, synchronization, and resource allocation reflected in some early signs of growth across the markets in Europe. We've experienced consistent market share gains, specifically in Germany and the U.K. with growth ahead of private label offerings. So with our improved execution, we are on the path to converting dairy consumers into plant-based consumers, and we are optimistic about this trend.

Operator, Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And now I would like to turn the conference to Toni Petersson, CEO, for closing comments.

Toni Petersson, Chief Executive Officer

Thanks, everybody, for joining us today. We look forward to speaking with many of you over the coming weeks and on our next earnings call in March. Have a safe and happy holiday season. Thank you, everybody.

Operator, Operator

Thank you. The conference has now concluded. Thank you for your participation. You may now disconnect your lines.