Upside needed (OTLY)
Oatly reported an EBITDA loss of $31.9M compared to a consensus of -$37.1M, while revenue $146M was just shy of expectations. Revenue grew 53.3%, with manufacturing delays quantified as $12-14M. Production volume increased 43.2%, and an Fx benefit was quantified as $10.2M. The Americas grew 65%, EMEA grew 32%, and Asia grew 148%. The foodservice channel increased from 21.6% of sales to 33.2% YOY. Gross margins contracted 590bps largely due to higher shipping and co-packing expenses. SG&A expenses increased by 150% due to several growth expenses. Marketing expenses were only $5.3M of the $49.8M increase in SG&A spending. Non-recurring IPO expenses were $7.1M.
Oatly announced plans to increase the oat base capacity in its Utah facility by 75 million liters. By the end of 2022, capacity is expected to reach 1,075 million liters. By the end of 2023, capacity is expected to reach 1,475 million liters. From the end of 2020, capacity is expected to increase by more than 200%. Management expects revenue for the year to exceed $690M, above the consensus of $682M. Production capacity is expected to be 600 million liters at year-end. Management also outlined their long-term plans to have gross margins above 40% and EBITDA margins close to 20%. Based on the company’s pricing and peer margins, we expect long-term upside to both targets.
Oatly has very aggressive and enviable growth plans globally. Management is focused on long-term opportunities and will continue to invest ahead. However, shares have performed poorly in recent weeks, triggered by a short report. One of the challenges for the shares is that the available production capacity limits growth. The upside to sales is difficult to achieve with expectations already set at full production. The announcement of an expansion in Utah is a step towards providing the upward revisions needed. Oatly’s shares trade between 7-8x next year’s sales expectations, which may be difficult to maintain without upside. We continue to believe the best way to invest in the growth of oat milk is SunOpta.
Beyond Milk (STKL)
According to the U.S. Patent and Trademark Office (USPTO), Beyond Meat has filed 108 trademark applications since 2012. The most recent application was filed on August 12 for Beyond Milk. The application was for “categories of food products made of milk substitutes based on vegan substances; milk; milk products; milk-based on or made of plants, nuts, seeds, oat, wheat, or rice; milk products based on or made of plants, nuts, seeds, oat, wheat or rice; milk powders.” A U.K. company filed in early 2019 a trademark registration for Beyond Cheese nearly a year and a half before Beyond Meat field for the same trademark. Beyond Meat has since petitioned the Trademark Trial and Appeal Board to cancel the other Beyond Cheese trademark. Impossible Foods has filed 64 trademark applications for a variety of plant-based meat and dairy substitutes.
Beyond Meat has also previously filed for Beyond Fish and Beyond Lamb, among countless other product ideas. Filing for a trademark does not necessarily indicate any near-term product launch plans. The timing for plant-based milk is likely not in the intermediate future. The barrier to entry for the plant-based milk category is not high; SunOpta can supply countless new entrants. The difficulty is distribution and creating end-demand.
Dairy sales resume decline (STKL)
Dairy sales were $29.6B in the first six months of 2021, down 4.8% YOY according to IRI and the International Dairy Deli Bakery Association. Sales in Q1 of 2021 were only down 0.2%, but in Q2, sales were down 9.2%. Compared to the first six months of 2019, sales were up 10.9%. Each week of June 2021 was up between 8.9% and 13.1% compared to the same week in 2019. In the year ended May 16, natural cheese was the leader in dairy sales at $15.9B, up 9.5% YOY. Dairy milk sales were up 2.8% for the same period to $15.2B. Yogurt sales grew 2.5% to $7.6B, creams/creamers grew 9.2% to $4.7B, and butter decreased 0.6% to $3.6B. Plant-based milk sales have been gaining share at the expense of dairy milk for many years. Dairy sales rebounded in the pandemic with the shift to at-home food consumption. Once the pandemic was lapped, dairy and dairy milk sales have declined again. Notably, oat milk is still exhibiting YOY growth after lapping the pandemic.
