Oatly’s best turnaround recipe is dollops of cash

Oatly oat milk is seen for sale in a store in Manhattan, New York City, U.S., June 29, 2022. REUTERS/Andrew Kelly

LONDON, Nov 25 (Reuters Breakingviews) - Oatly (OTLY.O) has lost its froth. Shares in the Swedish plant-based milk maker have slumped 80% so far in 2022, leaving its equity worth $950 million, down from over $10 billion when it listed last year. Chief Executive Toni Petersson will struggle to stop the company from burning cash, which means he’ll soon have to ask investors for an awful lot more of it.

A sour mixture of manufacturing hiccups, Chinese Covid lockdowns and other issues have watered down Oatly’s once-heady growth rates. The company expects sales to rise by roughly one-fifth this year, excluding currency moves, compared with a 76% compound annual growth rate from 2018 to 2021. Analysts reckon it will burn roughly $70 million of cash in the final three months of 2022 and a further $80 million or so in the first quarter of 2023, using consensus estimates from data provider Visible Alpha. On that basis, the company could exhaust its $116 million cash pile early next year.

Petersson has announced layoffs and other cost-cutting measures, which he hopes will save $50 million in annual terms. And Oatly is switching its manufacturing strategy to involve more outsourcing, which should reduce capital expenditures. But Petersson hasn’t yet announced a firm deal. And even if he finds a manufacturing partner soon, it’s unlikely to stop the company burning cash. Outsourcing means handing over a chunk of revenue, denting an already meagre gross profit margin, which hit a new low of 2.7% in the third quarter partly because of some one-off hits.

That leaves Petersson two options: sell the company, or raise cash. He’s ruled out the first, which is just as well since rivals like Nestlé (NESN.S) may balk at buying a loss-making brand with manufacturing problems. It might be cheaper for consumer giants to invest in marketing their own oat milk. A capital raise is therefore inevitable. Petersson seems to have accepted as much: the company said in November that its new bank credit line stipulated that it must either have positive EBITDA next year or raise $200 million of debt or equity by the middle of 2023.

That’s not enough. Analysts reckon Oatly will burn around $500 million across 2023 and 2024, which implies Petersson needs to raise more than half his company’s market value. That sounds like a tall order. But 46% shareholder Nativus, a joint venture between investment fund Verlinvest and conglomerate China Resources, has reason to play ball. Refusing to participate would effectively mean sentencing Oatly to death. It’s been a painful year for their investment, but Petersson is insistent that underlying demand for his product is still strong. There’s no point crying over spilt milk.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

CONTEXT NEWS

Oatly’s share price fell by 80% between the start of 2022 and Nov. 24.

On Nov. 14, the faux-milk maker lowered its annual revenue forecast and announced plans to cut roughly $50 million of annual costs, partly through layoffs.

The Swedish company is also trying to boost outsourcing at some manufacturing sites, with the aim of reducing capital expenditures.

Editing by Liam Proud and Oliver Taslic

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Thomson Reuters

Columnist covering technology companies with a focus on the food delivery and fintech sectors as well as plant-based food and M&A. Raised in Hong Kong and fluent in Mandarin and Cantonese with previous experience at S&P Global Platts, the Press Association, China Daily Europe and Bloomberg.