Worksport Ltd

NASDAQ:WKSP

Good morning, and welcome to the Oatly Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Brian Kearney, Vice President of Investor Relations. Please go ahead.

Good morning, and thanks for joining us today. On today's call are our Chief Executive Officer, Jean-Christophe Flatin; our Global President and Chief Operating Officer, Daniel Ordonez; and our Chief Financial Officer, Marie-Jose David. Before we begin, please review the disclaimer on Slide 3. During 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 position, industry and business trends, business strategy, 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 documents we have filed with the SEC 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. Also, please note that on today's call, management will refer to certain non-IFRS financial measures, including adjusted EBITDA, constant currency revenue and free cash flow. While the company believes these non-IFRS financial measures will provide useful information, 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 to the most comparable measures prepared in accordance with IFRS. In addition, Oatly has posted a supplemental presentation on its website for reference.

With that, I'd now like to turn the call over to Jean-Christophe.

Thank you, Brian, and good morning, everyone. Slide 5 has the key message I want you to take away from today's presentation. First, let me tackle upfront our 2024 performance versus guidance. Despite a very robust volume growth of plus 8.8% versus 2023, our 2024 top line results came in below our guidance at 4.8% in constant currency revenue growth. At the same time, our profitable growth focus has delivered our adjusted EBITDA at the favorable end of our guidance range. This demonstrates that Oatly is a much stronger company than it has been 2.5 years ago.

Over the past 2 years, we have indeed executed a significant transformation where we now have a much healthier business with clear strategy, clear accountability, stronger margins and significantly improved profitability. Looking ahead to 2025, we expect to drive our first full year of profitable growth. Specifically, we expect constant currency revenue growth in the range of 2% to 4%. As you saw in our press release, we expect an approximately 300 basis point impact to our growth from a change in sourcing decisions at our large U.S. customer. Absence this impact, our guidance range would have likely been 5% to 7%.

We expect adjusted EBITDA in the range of $5 million to $15 million, and we expect capital expenditures in the range of $30 million to $35 million. We expect to drive this profitable growth by leveraging our brand to ignite positive momentum in the category while simultaneously driving additional efficiencies. So let's dig in.

Slide 6 outlines the significant transformation that we have methodically executed over the past 2 years. One area of change has been in our supply chain. Today, we have the most simplified supply chain that has become a strategic asset. In December, we announced we were closing our Singapore facility, and today, we are announcing that we have discontinued construction of our second Chinese facility. With those 2 announcements, we have 5 manufacturing plants globally with no additional plants being built. These 5 plants can produce approximately 900 million liters of product. We are guiding to $30 million to $35 million of CapEx, which is approximately 4% of revenue.

And I am pleased to report that we achieved 99% customer fill rates in 2024 which highlights the significant benefits of increased focus. We have also made significant changes outside of our supply chain. First, we have significantly simplified our overhead structure. Today, we are much leaner with approximately 1,500 employees, down 500 over the past 2 years. When it comes to mindset, as profitable growth is our North Star, we now make deliberate margin-focused decisions about channels, customers and products. We have also augmented our approach to marketing to focus on relevant and integrated brand activations.

Slide 7 shows the financial impact. On our second quarter 2023 earnings call, I said that we must have a stronger business before we have a significantly bigger business. I am pleased to report that we have strengthened the business. Versus 2022, our revenue grew by approximately $100 million or 14%. Our gross margin expanded 18 percentage points. And our adjusted EBITDA improved by over $230 million. We are clearly making good, healthy progress.

Slide 8 further highlights our healthy progress. Each of our 3 operating segments improved the adjusted EBITDA by over $70 million in the past 2 years while we also made good progress in reducing our corporate expenses. Our teams embraced the challenge, made the necessary changes and drove those figures. To be clear, we have executed this transformation in order to enable our mission. Our mission is an important part of our culture and I believe it makes Oatly truly unique. We have maintained our mission and purpose throughout our transformation, and we remain committed to it going forward.

As we look ahead to 2025 on Slide 10, we now expect to enter our profitable growth era by driving top line growth and positive adjusted EBITDA. While our constant currency revenue growth rate is expected to be impacted by approximately 300 basis points from a sourcing decision at our largest U.S. customer, we believe the underlying growth rate of our business remains healthy with further expected distribution gains in all channels and innovation performance that Daniel will detail for us later.

Slide 11 shows our priorities for 2025. Our top priority is to ignite category momentum. To do that, we will continue increasing our relevance, aggressively attack the barriers to conversion from dairy and increase the availability of our products to both new and existing consumers. As we are igniting this category momentum, we intend to continue our aggressive pursuit of cost efficiencies. Over the last 2 years, we have built a strong efficiency muscle and we intend to flex that muscle in 2025 again to drive margin expansion, simplify for speed and impact, and provide further fuel for growth-driving reinvestments. Our final 2025 priority is to fulfill our financial commitment of delivering our first full year of profitable goals as a public company.

With that, I turn the call to Daniel.

Thank you, J.C., and good morning, everyone. Slide 13 shows our 2025 priorities as introduced by J.C. I will provide additional color and context on these priorities and how we plan to execute them. So let's start with priority-1, which is creating the second wave of category momentum. First, I would like to highlight that we posted broad based steady growth in 2024, as demonstrated on Slide 14. Europe & International had solid growth in both channels with good contribution from both established and the expansion market. North America reported double-digit revenue growth in Retail and 8% growth in Foodservice.

As we have previously discussed, North America has been aggressively diverifying its Foodservice business proactively balancing growth and margin. Excluding the segment's largest customer, Foodservice sales grew by 22% in 2024, which shows you just how aggressive we have been. North America has been impacted by a change in sourcing decisions at our largest Foodservice customer and while they remain large and important, we will continue to systematically expand our Foodservice customer base with the same balance criteria as the opportunity remains massive. Our Greater China segment posted strong double-digit growth in the second half of this year after it fully lapped its strategic reset. This is driven by our expanded presence in the Foodservice channel.

Slide 15 shows our Barista portfolio. It is second to none in velocities and product performance and it continues to be our largest business and our growth driver. The range continues to expand in breadth and depth including new items that drive relevant annual equity for different occasions, channels and price points.

In North America, for instance, Barista grew by 10% in 2024 aided by the distribution expansion of the original Barista and the addition of the new creamers in the lineup. In Europe & International, Barista grew by 13% in 2024, growing both the original Barista organically and with incremental growth coming from the 1.5 liters lighter taste, the organic range and the jigger.

Slide 15 shows we have driven these without the category wins at our back. Despite these category sluggishness we have seen in both Europe and in the U.S., we have continued to drive growth. In both markets, our retail takeaway grew in the mid-single digits in the last 52 weeks and we have continued to take steady share in nearly every one of our markets. This supports our continued belief that there is a clear difference between plant-based milks versus oat milk and versus Oatly. As I mentioned in the past, we cannot wait for others to grow this category and just take share from less relevant competitors. Oatly has long been the only brand proven to drive category growth, and we intend to use that competitive momentum to do it once again.

Slide 17 shows the household penetration for the U.K. and the U.S. If we show additional countries, the story would be identical. Household penetration for the category has plateaued around 20% to 30%. Considering the health product performance and climate relevance of our products as well as the meaning of our brand to younger generations, we see that 70% to 80% of category said space have an enormous opportunity.

Slide 18 shows the first step in recruiting that remaining 70% to 80%, which is to make oat milk relevant to a broader population. In the U.K., we activated the brand alerting consumers to our semi oatmilk, that is tailored-made addition to the daily cup of tea. There is just a single activation to expand how we think about oat milk, the results have been quite solid. Our base velocities inflected quickly. Interestingly, almost 80% of the volume improvement came from consumers that are new to plant-based milks, showing the power of the brands to increase penetration and convert people away from cow's dairy when the offering is newsworthy and relevant. However, we know a simple change in messaging is not enough.

Slide 19 shows 2 of the biggest factors we believe are preventing the category from breaking through the 20% to 30% penetration level. The first is the frequency of notion on taste. We know that most people who have not considered trying oat milk is because they believe it does not take good even before they try it. The second and more recent barrier is misinformation. Following the rise of social media, we see a rise in misinformation, especially on the nutritional value of oat milk.

Slide 20 shows one of the first steps in conquering the historical barrier of taste preconception. In Germany, we used our unique voice to entice consumers with a very single message based on our local market research that proves that over 1 in 2 German consumers prefer Oatly to cow's milk in a blind test. Imagine that it's phenomenal. After 2 months of this integrated brand activation, our baseline sales increased by over 9%. And this is only the beginning with plenty to come.

On to misinformation then on Slide 21. We are increasingly seeing noise on social and in legacy media disparaging the nutritional facts of oat milk. As the most recognizable brand, we often find Oatly is the poster child of these attacks. Many of these false claims are at best misguided and at worst, deliberately misleading. Fortified plant-based meals like Oatly are recommended in dietary guidelines around the world. We are a company rooted in science, and we stand behind the nutritional makeup of our products. So we refused to sit by and let consumers continue to fall victim to this misinformation.

We have been and will continue to work with and partner with health care professionals, journalists, influences and registered dietitians to debunk this information and to ensure the correct science-backed true facts get to consumers without us adding to the noise. In short, we will continue to set the record straight in a very Oatly way, of course. We are infused to see the welcoming initial reactions from these relevant key opinion leaders and their commitment to advocate for science and for facts.

Turning now to Slide 22. The final piece of the plan is to continue increasing our distribution and ensure products are more available, be it in new spaces, channels or customers. We continue to believe there is vast opportunity in the European Foodservice channel, and we continue to make progress in creating new moments of consumption. For example, many European airlines are showcasing our jiggers on their in-flight menus, replicating the success we have had across the railway networks.

These intentional choices on spaces and customers continue to stimulate the oat milk consumption habits. In U.S. retail, we already have our highest-ever weighted distribution and our highest-ever share of the plant-based milk category and we have secured additional distribution gains in both chilled and ambient. This new distribution is already coming online just as we lap last year's range reviews.

Our teams will be aggressively pursuing additional opportunities in all channels with customers of all sizes. And in Greater China, we're excited to announce that we will be entering the club channel in 2025. The Chinese retail channel is very large, and we're very excited to partner with this great club stores to start capturing the opportunity in a disciplined way and more actively diversifying our channel footprint.

Now turning to the next 2025 priority, which is aggressively driving cost efficiencies to simplify and create more fuel for growth. On Slide 24, you can see that we have reduced the cost per liter by 19% over the past 2 years. We have driven these great results through delivered actions and streamlining our supply chain processes, procurement as well as forecasting and planning accuracy. While we are pleased with our progress, we believe plenty of opportunity remains. In 2025, we expect to drive additional efficiencies from the closure of our Singapore plant as well as recently negotiated input cost contracts in North America business.

As we have done in Europe, all productive initiatives where the largest mall have clearly identified project owners, resources and time lines attached to them. We are pleased to have built truly a culture of productivity and efficiency obsession. And of course, we expect that volume growth will continue to help with fixed cost absorption.

Slide 25 shows we have driven efficiencies in our overhead structure as well. Over the past 2 years, we have reduced our total SG&A and R&D by $80 million. There is an $8 million increase of branding and advertising, so the reduction would have been $88 million, if not for the reinvestment. We did this while growing our revenue by over $100 million driving the SG&A margin down by 17 percentage points.

Just like with the supply chain, we have built a muscle of finding leverage and eliminating waste. In early 2025, we have already executed additional SG&A efficiencies to further simplify and provide fuel for growth driving investments, and we will always look for more. So as we enter 2025, you can see that we have a track record of simultaneously improving profitability and driving broad-based growth even in a challenging environment. We have a plan to reignite category momentum. We have early traction on the execution of our plans, and we have additional efficiency programs that will provide more fuel for that growth.

I will now like to turn the call over to Marie-Jose.

Thank you, Daniel, and good morning, everyone. Slide 27 shows an overview of the quarterly and full year P&L. For the full year, we reported 5.1% revenue growth and constant currency revenue growth of 4.8%. This was slightly below the guidance we provided last quarter as category growth remains sluggish. We continue to drive strong gross margin expansion with the fourth quarter margin expanding 540 basis points year-over-year, bringing the full year margin expansion to 930 basis points. Adjusted EBITDA was a loss of $6.1 million in the quarter and was a loss of $35.3 million which is at the favorable end of our guidance range.

Slide 28 shows the bridging items of our total company revenue growth. As you can see, both our fourth quarter and full year revenue growth was driven primarily by volume growth. We grew volume by 9.9% in the fourth quarter and 8.8% for the full year.

Slide 29 shows the drivers of our strong year-over-year gross market expansion. In both, the fourth quarter and full year, the biggest driver of our margin expansion was absorption and supply chain improvements. Our supply chain has become a strategic asset as the teams have maintained high customer service levels to support our growth while also embracing an efficiency mindset to drive out waste, renegotiate contracts and reduce cost.

Slide 30 shows the year-over-year improvement in our adjusted EBITDA. In both the fourth quarter and full year, our improvement was primarily driven by a very good increase in gross profit. In the fourth quarter, we had a slight year-over-year headwind in SG&A as we increased our advertising investment to drive growth.

Slide 31 shows segment level detail. There are 3 big takeaways on this slide. First, this is our second quarter of all 3 segments reporting profitable growth. Second, 2 of our segments drove profitable growth on a full year basis. Third, each segment drove solid volume growth in both the fourth quarter and full year. Our strategic initiatives and growth plans clearly continue to work.

Turning to our balance sheet and cash flow on Slide 32. Our balance sheet remains solid. At the end of the quarter, we had $99 million of cash and $186 million of our credit facilities. Note that our revolving credit facility is completely undrawn, and the quarterly changes in its value has been driven by foreign exchange rates. We continue to believe that our business plan remains fully funded with our path to profitable growth. Our profitability continues to improve, we continue to optimize our capital expenditures and working capital and cash impact of our exited and discontinued factories remain on track.

The middle of the slide shows our free cash flow improvement. Our 2024 free cash flow was $156 million use of cash, which is our best performance since the IPO and the $319 million improvement in 2022. In the fourth quarter, free cash flow was $23 million use of cash, which was our best quarterly performance since the IPO and an improvement versus Q3. On the right side, you can see our progress on working capital. We have reduced trade working capital by $23 million over the past 2 years. We have done this while growing revenue which has resulted in our trade working capital as a percentage of revenue falling by over 500 basis points. I have repeatedly said that improving our cash flow is a top priority for me and we're clearly making good progress. Our third priority for 2025 is to deliver our first full year of profitable growth as a public company.

Slide 34 shows the detail of what we expect. We expect constant currency revenue growth in the range of 2% to 4%. Our largest U.S. customer has made a change in how we will source oat milk. While they remain a large customer, we currently expect the change to cause an approximately 300 basis point headwind to our total company growth. For adjusted EBITDA, we expect to report in the round of positive $5 million to $15 million. We expect the year-over-year adjusted EBITDA improvement to be primarily driven by gross profit. While we continue to monitor and evaluate the tariff situations in our North America segment and our teams are preparing for possible scenarios, we have not included any potential expected impact for our guidance.

We expect adjusted EBITDA to improve as we move through 2025, driven by a combination of the business continuing to strengthen higher brand investments early in the year, and Q1 naturally being a lower sales due to Chinese New Year. We expect CapEx to be in the range of $30 million to $35 million for the full year. This reflects our now simplified supply chain network of 5 plants with no additional plants under construction.

Slide 35 shows the building block of our expected improvement in adjusted EBITDA. We expect the biggest improvement to come from efficiencies in our supply chain and SG&A. We have already taken the appropriate actions to achieve the majority of the savings, and we have clear plans and time lines to achieve the reminder. We will continue to regularly evaluate our entire cost structure to seek out additional efficiencies. For example, in December, we announced the closure of our Singapore plant which we expect will save us nearly $10 million annually. We have also recently renegotiated many contracts that will lower our input costs as well as internally communicate some changes that will lead to additional SG&A savings as we move through the year. We are controlling the controllables and have clear plans to deliver on our guidance. This concludes our prepared remarks.

Operator, we are now prepared to take questions.

[Operator Instructions] The first question comes from Kaumil Gajrawala with Jefferies.

I guess let's dig into the goal for profitability in '25 being driven by gross margin. Maybe if you could talk a bit about breaking down what the drivers within that gross margin will be? I see some of the details you provide on supply chain. But is there a pricing component, a mix component, regional pieces, some of those types of things? Any more details in that what looks like sort of the flat piece of the thing that will swing you to profitability, I think that would be useful?

This is Marie-Jose. I hope you are well. Thank you for the questions. Let me double click on the answer on top of what we already said in the prepared remarks. So in the prepared remarks, we said that we expect the improvement of gross profit as you mentioned, coming from, let me explain a little bit more. First, optimizing our production footprint. We have already announced a few things on that front, maximizing our global sourcing resources, that's the second piece. And third piece is managing our product mix.

On that front, there are obviously several variables that could influence where we will exactly land such as our sales guidance range, such as the customer mix, but also potentially the foreign exchange, as I called as well out already. So the take away on that for 2025, we will make progress on our path towards our long-term gross margin target of 35% to 40%. So I hope that answers the question.

It does. And then maybe if we could just talk about the U.S. a bit and this might be a very short term, but just in sort of very recent results, it looks like promo activity has really sort of spiked at least in the Nielsen data that we're looking at. Is there something going on in the industry that we should be aware of as we're sort of starting 2025?

Kaumil, Daniel here. Yes, you're spot on. There's been some volatility in the last day if you're looking at the scanner data in the last 4 weeks. But if we look at a bit more 12 weeks, this is how we see things in the U.S., right, apart from the category dynamics that you see them by yourself. So the biggest driver we see moving forward would continue to be new distribution. And the new ones here in the very short term is that this year's new distribution will hit little bit later than last year. So expect a brief blip in the lapping periods between one year and the other. That would be one.

The second one that you see in terms of our own performance is a little bit of a drag from the discontinued older innovation and the ones that have been diverging a little bit our focus like frozen novelties or green cheese. That erodes in the short term 400 to 500 basis points of our growth. But this is short term, and we expect this to be lapped in the coming months, right? So those are the, let's say, mechanical ones.

Importantly, this is how we look at things, Kaumil. We see solid consistent velocities of our core portfolio, milks and creamers in both units and dollars. So all these, while we register highest-ever dollar shares in plant-based milk and oat milk in the recent period and in the longer term. So we expect that with the upcoming incremental ACV that you saw in the prepared remarks and in the main banners, we should be maintaining the steady growth trajectory that we have posted so far.

Okay. Great. And if I could sneak in maybe a third on the sort of the headwind from your largest customer. Was that maybe a business that was operating at a loss anyways and that perhaps could be a -- what are the contributors to higher gross margins? Or is it -- is there something else going on there?

No. You've seen the consistent way in which we have handled the Foodservice channel in the U.S. and everywhere, in fact, balancing growth decisions with -- volume growth decisions with margin -- balancing the margin, right? So -- and we will continue to make these decisions as we move forward, growth and margin. So in this context, it's important for you to -- I think if I understand the question behind the question, Kaumil, these customers in the U.S. is now only over 20% of the 2024 U.S. sales and only 7% of total company, right? So well only -- any volume we lose means less cost absorption. In fact, your question is spot on, we expect to keep tracking on our relentless journey of gross margin improvement we said, of course, 2 years ago. So you see, we maintain controlling the controllables. And as we said, this large customer continues to be large and super important to us as it is the continued growth in the Foodservice channel overall.

The next question comes from Max Gumport with BNP Paribas.

I thought you gave a very helpful update on the category sluggishness that we're seeing right now, and it's encouraging to hear you aren't waiting for others and you've got plans in place to the category moving in the right direction. I also recognize that you regardless are posting differentiated performance versus the category. But can you just expand on how much you think is in your control with regard to improving the category this year? And then also, how much of the pressure right now is simply the lack of ability to bring in new households? And then how much are you seeing in terms of existing households maybe leaving the oat milk category because of some of the headwinds you announced in terms of the misinformation on nutrition?

Thanks. There is a lot in that question I would like to unpack, Max, but it's super helpful. Thank you for appreciating the efforts. I will start with the headline which is, Oatly did it once, and we are decisively going to and willing to do it again. In fact, we don't see anything that impairs our ability to start the second wave of momentum, right? If you allow me to start at the high level approaching your question, any of these paradigm shift have never been a linear growth trend, right?

There are ways of growth that have to do with the adoption by different consumer groups, you going to stereotype them as Millennials and Gen Z, they are different and they respond to different changing context, right? When it comes to sustainability tailwinds, less sustainability tailwinds, say no more about the context today, it's dramatically different. There are 2 -- potentially 3 elements to your question.

The first one is mechanical growth. And I would like to stress the fact that the current performance that you have seen with no tailwinds or very, very light tailwinds will remain. We see opportunities for us to continue to post steady solid growth by gaining distribution, by increasing penetration with the new portfolio you have seen, which is wide in formats and deep in new concepts, and we are encouraged to see that portfolio as well as the addition to the new markets to the mix.

Then new markets in E&I, in Europe & International are starting to gain critical [mass]. We started this journey 2 years ago, and we like what we see, right? So the mechanical, I wouldn't underestimate the mechanical growth components for starters. And second of that, you would have heard us talking about our significant shift in marketing approach. And that is not by changing the model, which is what makes us unique, but it's changing the way in which we allocate resources in a much more precise manner.

And that is the intentionality that you see behind the 2 examples and this is just quoting 2, not random, but 2 examples with key integrated activation in the U.K. with the taste experience example in Germany. And you will, of course, see more in this direction, which are precisely directed to breaking down the #1 barrier to penetration for that 70%, which is taste.

Whenever and wherever you taste plant-based milks, before trying, the #1 barrier to consumption is taste and has always been the case, and it's proven today. And I'm encouraged to see that the first examples that you have seen in Germany are proving our ability to bring new consumers to the category, let alone Oatly. And so the rest, we continue to believe in the power of these brands. I'm always amazed by the power of this brand. The latest one, Max, has to do with -- you would have seen the recent announcement of the collaboration with Nespresso all around the world, and we'll start seeing the -- in 2 weeks, the impact of the Oatly pots selling out and being top of the list of the Nespresso pots.

And that's something that gives me confidence that in a few quarters, we would be able to articulate to you the precision of how well we bring in new households into the Oatly franchise and starting to see the early innings of new category penetration, but it's early days. What I would like to say to you is for us internally, we are adding category growth in our list of controllables, if that helps.

Yes. Very helpful. And then as I look at your plans for '25, it strikes me that much of the EBITDA progress you're targeting is actually completely unrelated to sales and to category growth and it's much more related to supply chain improvements that are completely in your own control regardless of where the category goes. So I was hoping if you could just give us an update on where you are in that supply chain journey longer term as we think about the continued progress you could make on that front beyond '25?

Thank you so much, Max, Jean-Christophe speaking, and thank you for the question. As you've noticed, lever -- strategic lever #1 to answer your question is the very significant recalibration of our supply chain. As you have seen, we have taken the decision to discontinue 3 new factory projects. So previously, the U.S. and U.K. and now in China, as well as the closure of our Singapore plant. This allows us to focus all our execution and expertise power as well as our CapEx, of course, in only 5 existing sites around the world. So that's super important. We believe that recalibration drove focus and focus drives performance. That's the belief that drives this business.

The second strategic lever is our permanent quest for supply chain efficiency and an asset-light supply chain. This is what contributes to the gross margin progress that you have seen. We just posted a full year gross margin of 28.7%, which is 9.3 full percentage points higher than just one year ago. And as you very well noted, this represents again the bulk of the 2025 EBITDA progress because we continue to relentlessly work on additional efficiencies, but we now do that on a much tighter compact fit-for-purpose network. So that's what you can expect from us.

The next question comes from Ken Goldman with JPMorgan.

It's Elsa on for Ken. So it does seem like the majority of the year-over-year improvement in adjusted EBITDA for 2025 is expected to be driven by increases in gross profit tied to supply chain productivity. How should we think about the cadence of that improvement as we go throughout the year?

I will take it. Thank you for the question. So as we said, adjusted EBITDA and you just mentioned it again, will improve as we move through 2025, driven by the combination of the business continuing to improve, higher brand investment as well early in the year and Q1 naturally being a lower sales quarter due to the Chinese Year. Now with that said, let me tell you that we have 3 things that are happening in 2025. First and how you need to look at the sequence of the year. First, the expansion markets continued their growth rate and will improve the segment growth rate as we move through the year.

Second, in the second half of 2024, we increased our promotional activity in Europe, which has impacted our constant currency revenue growth, and we expect that to be less of a headwind as we enter in the second half of 2025. And the third point is that we expect our new integrated brand activation investment of the first half to drive accelerated growth in the second half. So the way to look at the segment within the year is really driven by these major 3 things that I just called out.

The next question comes from Michael Lavery with Piper Sandler.

Just wanted to come back to the largest customer in the U.S. I realize it's not unprofitable. But like to your point, it helps cost absorption even if it may be lower margin than retail. Can you give us a sense of what, if any, risk to the remaining business there you anticipated? It sounds like there's been a couple of times now the footprint that you represent there has been cut back. Any look ahead of how maybe stable that is go forward? Or what should we expect there?

Thanks a lot, Michael. Good to hear from you. Daniel here. If you allow me, I will perhaps double-click in a couple of remarks we made I think to Kaumil at the beginning. So because that's -- unfortunately, it falls into one of those questions, which is I cannot give you a full answer to, yes or no answer to that, right?

However, color and context first, we'd like to underline again the exposure we have to this very large and important customer. In the U.S. today, it is only 20% of the 2024 sales, last year's and 7% of the total company, right? That gives you an impression of the size and the decisions that were made under why.

However, to go straight to your question and the outlook, when we speak with consumers and Baristas across our customer base in Foodservice and in coffee, they consistently tell us that they can't tell the difference in quality and in performance in coffee between Oatly and all other competitors, right? And I would like to pause there because that already gives you a view about what can happen in the U.S. market. That gives me confidence and gives us confidence that we will continue to aggressively pursue the customers, drive incremental distribution and increase penetration and as you can see, we keep tracking on growth outside this large customer.

You see in the recent quarter, we saw 22% of growth outside this customer. So the exposure continues to reduce and that's exactly what we're doing. So we will continue to control the controllables, continue to drive this good relationship with this large and important customer and driving the business moving forward.

Okay. Yes, that's helpful color to add. And then just on Asia with your decision to discontinue the second China plant, you said that Maanshan can support the current business and growth. Had your expectations for the market opportunity there changed? How much is there maybe an influence of the current macro environment in China versus a longer-term view? Maybe just help us understand what if anything changed in your outlook for demand and how that impacted this decision?

Thank you so much, Michael. J. C. here. I'll take it. First of all, let me confirm that Oatly business in Greater China is showing robust development trends at the moment. We have reported profitable growth in this market since Q3 of 2024, and we see that as a direct result of the reset strategy that our China team has executed with excellence. I could also comment on the fact that our relationships with our key customers and partners there are stable, and we see them as being highly productive.

So overall, what do we see in China? On the Foodservice side, which is the majority of our business in China, we really see promising systemic momentum across all our important customer base. It's a very vivid vibrant environment there, and we have great relationship with the key customers there. Beyond this, as you have heard from Daniel, we are excited to announce that we will be entering the club channel in 2025. And this Chinese retail channel is extremely large and we are very excited to partner with these great club stores to start capturing the opportunity in a very [indiscernible] way and more actively diversifying our China footprint. So overall, what you hear from us is we continue to see a lot of opportunities in China.

[Operator Instructions] The next question comes from John Baumgartner with Mizuho.

Maybe first off, it's nice to see the guidance for positive EBITDA in 2025 and that milestone. And I'm curious if you could walk through that in a bit more detail? But this past year, there was some flexibility in the model where you invested at a healthy level for trade and support to coincide with increased distribution. And you actually even incorporated some year-on-year drag in 2025 from larger brand building as well. But I'm curious, given the plan to build more distribution again this year, the comments you've made around challenge to household penetration. What's your confidence you've adequately built in enough reinvestment into the guide, whether for marketing, for trade, for pricing? I'm just curious as to your confidence level in at least the low end of the EBITDA guidance for this year?

Thank you so much, John. Jean-Christophe here. I'll start, and I'll probably get the complement from my friend, Daniel here to answer your question. So thank you for achieving profitable growth, as you know, it is, has been and will remain being our North Star and I have to say, it's a very important moment today for our teams, for ourselves marking the moment to guide in 2025 a kind of a new era, which is the first full year of profitable both as a public company. It's an important moment for us. We are pleased with the significant structural progresses we have made so far, mainly the gross margin increase and the SG&A recalibration that we highlighted, and you spotted it very well.

These 2 levers have significantly changed the P&L shape of this business over the past 2 years. And because we continue and we'll continue to work on them, they will continue to explain the vast majority of our EBITDA improvement between '24 and the '25 guidance. Attached to that, what we will remain extremely disciplined on is both the cost and the capital. So what we have applied so far is a very strong turnaround mindset, and we are turning it into an ongoing efficiency obsession mindset.

And with this mindset, and this is exactly this mindset that will drive us to make deliberate margin-focused decisions when it comes to new channels, new customers, new markets and new products. So that's the way overall, I wanted to start there by saying what will fuel and drive the vast majority of the EBITDA improvement and what's the mindset with which we will make these decisions. Now over to Daniel to give more color.

That's a great question, John. As you can imagine, we have been all hands on deck for a while, reassessing our choices here. So long story short, it's not about allocating more investments into the brand. It's about how are we allocating investment into the brand to drive and bringing down these barriers of further conversion, right? So in one hand, your question was about our confidence levels, I believe that our plans are fully resourced when it comes to the confidence levels to deliver what we are guiding for today, not more. And all the efficiencies that J.C. was referring to are blended into the resource we are allocating. And I would like to mention again what I was referring to a couple of remarks ago, which is, what do we mean by this, the how, right?

And this new marketing approach is simply being more precise and more intentional in how we articulate the brand activities against this new category context, which is focused on barriers to penetration and we're deploying that in a much more integrated manner. Early days, we are very encouraged with the results. So precise resource allocation while protecting the brand and the uniqueness of the model of this brand and the teams behind, which is what sets us apart. This may sound like a bit parochial and not very different to us. Trust us, for us at Oatly it's a paradigm shift which is protecting the brand model and being super precise in how we allocate resources.

Okay. That's helpful. And then coming back to Kaumil's question on margins, just to focus more on the OpEx line. You made quite a bit of progress in the last few years reducing expenses, and you've got another benefit coming through in 2025 guidance. But bigger picture, how do we think about incremental OpEx reductions from here? Are there more reductions to be had following what you achieve in 2025? Or at this point, are the incremental gains just more about leveraging the existing base from volume growth?

Thank you so much for the follow-up, John. We will always be looking for efficiencies. In other words, we don't think we are done. We will continue. And what we are -- what I was explaining is what has served us well as a turnaround mindset is now a culture of efficiency obsession and mindset that will be ongoing, and we keep that with us. So we will be turning these mindsets into continued improvements both on the supply chain and on the SG&A.

You heard also M.J. in the prepared remarks said we are actively working on SG&A further reduction as we speak in the beginning of 2025, and they are being brought to life. Perhaps 1 or 2 additional points because that's a very important topic. When you benchmark us versus peers, it's important to keep in mind that our total SG&A includes both advertising as well as distribution costs. And we know it's not the case for every company. So sometimes, it can impact the comparison with some others.

And finally, some of our SG&A reflects strategic profitable growth choices, as explained by Daniel, like investment in new markets to create category and stimulate growth. So as we continue to work to grow our sales, here is what you can expect. We continue to work actively on SG&A improvement. There is a part of our more sales-related portion of the SG&A that will continue to grow alongside our volume growth, but not longer than that. But at the same time, of course, beyond our continued improvement work, we expect to see leverage on the fixed portion of our SG&A. So never done, we are on it, and we know this is what is needed to fuel the growth.

And maybe last one from me real quick. You highlight the degree of incrementality for new consumers into the plant-based beverages category in the U.K. And I'm curious, tying back to some of the softness in consumption growth, what's your opportunity? If you look more at capturing existing plant-based beverage buyers who already have overcome the hurdles of maybe taste concerns and nutritional misinformation, looking back in the U.S. evolution where almond came into the category about 10 years ago and so quite a bit of share from soy milk. Thinking about the ability to take share from soy or almond from better functionality, whether it's on creamers, ingredients, recipes, how do you think about the ability to maximize that taking share of the existing plant-based beverage consumer base in addition to just getting more households and incrementality?

Very good. Thanks, John. Daniel again. I will take that. Listen, you'll see one of those charts where we talk about the portfolio. That's exactly -- I would tackle your question twofold, right? The North Star, our North Star is to continue to convert and make this category bigger, right? That is not just because we're mission-led, but that's the North Star for us. And we want to do it again. As we do that, what you have seen us doing for the last couple of years, well, how we are steadily gaining market share, which, by definition, we are taking share not only by our oat milk competitors but also by the other crops.

If you look at the other crops development in both the U.S. and in Europe, you will see that they are all in decline. And that is happening already as we continue to pursue our mission and to pursue conversion. That -- if you go back to that chart, John, that talks about portfolio with the Barista, all things coffee portfolio, you could dissect that portfolio in 2, which does precisely what you're doing. We're going wide in formats by being ubiquitous in different channels, occasions, moments of consumptions and price points, that's exactly what we're doing.

We're taking share and taking space from all different competitors outside plant-based milks, but within plant-based milks. And if you were looking at the different concepts in that portfolio, like, for instance, the organic Barista, the lighter taste Barista that is also not just attracting new consumers into the category, but taking share from the plant-based milks as well.

So you see -- I don't want to give you a half-hearted answer, which is we do both because you know that strategy is about choices. So doing both doesn't work. We go for conversion, and we have proven to ourselves and to you guys that for the last 2 years by taking share on other crops and other competitors, we do that in the making.

This concludes our question-and-answer session. I would like to turn the conference back over to Brian Kearney for any closing remarks.

Great. Thanks a lot, everyone, for joining us. Feel free to reach out to me if you have any follow-up questions. Everybody, have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.