Greetings, and welcome to Oatly's Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to Katie Turner for opening remarks. Thank you. You may begin.

Good morning, and thank you for joining us on Oatly's third quarter 2021 earnings conference call and webcast. On today's call are Toni Petersson, Chief Executive Officer; Peter Bergh, Chief Operating Officer; and Christian Hanke, Chief Financial Officer. Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. 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 final perspective filed pursuant to Rule 424(b)(3) on May 21, 2021, and other reports filed from time to time with the Securities and Exchange Commission for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note, on today's call, management will refer to certain non-IFRS financial measures, including EBITDA, adjusted EBITDA and adjusted EBITDA margin. While the company believes these non-IFRS financial measures will provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS. Please refer to today's release for a reconciliation of non-IFRS financial measures to the most comparable measures prepared in accordance with IFRS. In addition, Oatly has posted a supplemental presentation on its website for reference. I would now like to turn the call over to Toni Petersson.

Thanks, Katie. Good morning. We appreciate you joining us to discuss our third quarter financial results. On today’s call, I will briefly review our third quarter financial highlights, provide an overview of our business performance, including the continued strong consumer demand for Oatly and the oat category in our key markets, and reiterate the key reasons we believe Oatly is well-positioned for strong growth over the next several years as we benefit from an acceleration to dairy alternatives globally, and we scale our operations to meet this growing demand. Peter will provide an update on the progress we are making to build out our global manufacturing capacity footprint, then Christian will review our financial results in more detail before we open up the call to take your questions. For those that have been following Oatly since our IPO, you know that 2021 is the most transformational year in our company's history. We are adding new production capacity at an unprecedented pace for our company on three continents to meet a robust consumer demand for our market-leading brand and working to execute this during global pandemic is no small feat. We are continuing to prioritize growth investments over profitability to best position Oatly to serve customers and consumers alike to focus on taste, nutrition, sustainability, transparency and trust with a strong emotional connection to our brand. We believe these priorities are critical for accelerating conversion from the global dairy market, which we estimate to be worth approximately US$600 billion in the retail channel alone with a large foodservice footprint and growing e-commerce opportunity. We continue to see tremendous consumer demand for our products across each of our regions as we convert dairy users to plant-based milk consumers. 2019 plant-based new penetration in dairy category has increased anywhere between 35% to 135%,…

Thanks, Toni. I will focus on our global production and capacity build out. As we have previously communicated, production capacity has been a major constraint on our growth. And we have made substantial investments to scale our production capacity and address supply shortages due to the massive demand for our products globally. In the third quarter, our consistent production output in EMEA enabled us to begin to build supply, to meet the consumer demand across the regions for our products. Our expanded [indiscernible] in hybrid facility, we've started full production runs in July. Its progressing well and the facility generated production in line with our expectation for the quarter. As Toni discussed, the main reason for our lower-than-expected total production output was related to mechanical and automation delays at our new self-manufacturing facility in Ogden, Utah, Beginning in late August, as we continue to scale up [indiscernible] produced. As we discussed on our quarter two call, in July, we opened our Singapore hybrid manufacturing facility, representing our first local production available in the region. This is an important corporate milestone. The facility will have 75 million liters of annual finished goods capacity at full production. Since 2018, we have been shipping our products from Europe to support the growth in Asia. And we are excited about the operating and financial efficiency we expect to gain from our new Singapore facility. In addition to Singapore, this month, we will open our second facility in Asia. Maanshan, China will be our first self-manufacturing facility in the region, creating the opportunity for a total of 225 million liters of production capacity in Asia. For the year, we expect little to no financial contribution from Maanshan as they perform initial tests runs required before ramping production. Despite the short-term headwinds we have discussed, October…

Thanks, Peter, and good morning, everyone. It's nice to speak with you today. Turning to the financials. Revenue for the third quarter of 2021 was $171.1 million, an increase of $56.4 million or 49.2% compared to revenue of $114.7 million in the third quarter of '20. As Toni described, short-term headwinds impacted the rate of growth we delivered in the quarter. There was a minimal foreign exchange benefit to revenue of approximately $4.4 million in the quarter. However, excluding foreign exchange on a current quarter versus prior year quarter comparison, we grew at a faster rate in the third quarter compared to the second quarter of 2021 on a consolidated level in Americas, but also in EMEA. The foodservice channel continued to increase in the third quarter of 2021 compared to the prior year period with the reopening of on-premise outlets from the relaxation of COVID-19 restrictions in our key markets, partially offset by certain COVID related food service location closures in Asia. For the third quarter of 2021, the foodservice channel accounted for 35.8% of revenue compared to 27.3% in the same period last year. The retail channel accounted for 59.4% of third quarter 2021 revenue compared to 69.4% in the third quarter of 2020. Consolidated net sales per liter was $1.55 compared to $1.51 in the third quarter of 2020, primarily driven by positive foreign exchange FX in EMEA and Asia, positive customer and channel mix in Asia, offset by customer and channel effects in EMEA and the Americas. Our highest regional net sales per liter is in Asia followed by the Americas and EMEA. The net sales per liter was in line with our expectation except for in Asia, where it exceeded our expectations driven by channel and customer mix. Gross profit in the third quarter was…

Thanks, Christian. I want to reiterate that our long-term outlook and objectives remain unchanged. Although from time to time, we will experience variability in our top line growth based on our pace of new production coming online. What remains clear is the tremendous opportunity still ahead of us to continue converting dairy users into Oatly consumers. All of the syndicated scanner data continues to highlight our clear velocity outperformance on shelves when we have the supply and the distribution. Although we're currently navigating a more turbulent and COVID driven operating environment, we continue to expect to capture a disproportionate amount of the category growth going forward. I'd like to thank our global employees for the efforts and dedication that continues to advance the reach and impact of Oatly's mission on a global scale. With that overview, Peter, Christian and I are now available for your questions. Operator?

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Andrew Lazar with Barclays. Please proceed with your questions.

Great. Thanks very much, everybody. I guess, I’d just start off, you're still looking for capacity next year of 1.075 billion liters as a run rate for '22. So first off, I'm trying to get a sense of how much leeway you're building into that expectation, just given some of the challenges that you've highlighted in getting capacity up and running on the timeframe that you all would like? And then secondly, if you reach that level, I guess, where I'm getting still a little confused by is how much of what you've highlighted in terms of impacting the third quarter and the fourth quarter of this year. Do you anticipate start to flow into next year? Some of these shelf resets in EMEA sound like there have been delayed a bit. Does that impact along with some other things, your expectation for revenues in '22 based on -- versus what’s your initial expectations a little while back. Thanks so much.

Peter, please maybe you can address Andrew's first question? Hi, Andrew, by the way.

Yes. Hi.

Hi, Andrew. Yes, in terms of 2022, I want to reiterate that our long-term outlook and objectives remains unchanged, although from time to time we experienced variability in our top line growth based on our pace of new production coming online. What remains constant is the robust industry tailwind. We have globally as consumers increasingly using plant-based milk alternative and Oatly. Also, bear in mind, we are moving from a transition year with significantly more volume in 2022 compared to 2021. In terms of 2022, coming back to what I said earlier, we expect to strategically prioritize our oat base for the production of oatmilk versus other products to drive growth and conversion. So, we believe this further speaks to our growth potential we have and makes the tail for our growth trajectory even longer. But the revenue mix, as I said, from these item could impact the revenue in terms of net sales per liter and gross margin in 2022, if we sell less food products and rely more on co-packers and plants. So we are still monitoring the situation because there are many supply chain disruption right now. For example, we are seeing longer lead times for certain equipment and we are closely monitoring the situation and we are working hard to make the impact as little as possible. So, we will have much more volumes in 2022, compared to 2021. We just need to monitor our expansion plans for next year, when expanding Ogden, Millville and the Landskrona facilities. It's a matter of months, maybe delays, but we are still monitoring. So not a huge impact. And we also look at possibility to bring co-packers because of -- to mitigate the risks.

Great. Okay. So it sounds like the 1,075 million liters is still sort of the target. But you've got to monitor things as you go, that could be somewhat volatile just based on all the issues that many are facing around the supply chain. And then just the second part would just be -- my second part of my question was just how many of the issues that you highlighted in 4Q, in terms of the revenue shortfall? Do you think flow into next year or to those -- will those be behind you by the time you get to next year? Like, how late are the shelf resets in EMEA? And does that give you some, I guess, some delay in sort of revenue versus your expectations? Aside from the shift to oatmilk versus other oat products, if you get my question.

Absolutely, Andrew, we do. So, we -- so looking at the performance, we feel very, very confident with our business fundamentals, and that is recognized by all the retail partners. It's a very, very dynamic environment that we're working out of right now. But based on the discussions we're having with our retailers across Europe, we feel optimistic about resets and expansion in the first half of 2022.

Thank you.

So we do feel that this is a timing shift and that we feel good about entering 2022. But again, it is a dynamic environment. We have to monitor. There's nothing called normal anymore, but we feel confident we see the performance solid across all our markets, right?

Yes. Thank you.

Yes.

Thank you. Our next question comes from the line of Rupesh Parikh with Oppenheimer. Please proceed with your questions.

Good morning. This is actually Erica Eiler for Rupesh. Thanks for taking our question. So, first, I just wanted to touch on pricing. So, obviously, in light of the inflationary pressures, it sounds like pricing is now a lever, you're putting on the table. So maybe you could just talk a little bit about how you're thinking about pricing power for your business, and what you're seeing from competitors in regards to pricing to date?

Sure, I mean, maybe I'll speak a bit about inflation first, that it's currently -- that it's hitting all our markets. But to date, we only see moderate impact on our results for 2021. But we do expect stepped up levels of inflationary pressures in 2022. So in terms of outlook for the fourth quarter, we see oats and rapeseed oil to be relatively flat versus Q3, except for the U.S where we see a 20% increase in rapeseed oil, we also see some increase in packaging material for the fourth quarter in Europe, 4 to 5 percentage points. Still they’re at moderate and manageable levels in the fourth quarter for us as a company. Now turning to next year, in total, we do expect inflation to hit our total costs by an increase of -- in the range of 5 to 6 percentage points in 2022. And so we see that an impact on several of our key ingredients and cost components driven by a major increase in the cost of oats in the range of 10% to 35% depending on the region and site. We see a further increase for rapeseed oil of 25% and also packaging material between 4% to 10%. But in total core [ph] for material -- input material inflation that will impact our COGS of 3 to 4 percentage points in total 2022 versus 2021. And then we also expect to add another percentage point related to freight and then remaining COGS, another 1%. So that adds to the 5 to 6 percentage point. So most of the inflation effect we expect to compensate by price increases in EMEA and the U.S., together with optimization of channel and product mix and also including savings initiatives within the supply chain. It's important to highlight that we do expect gross margin to improve quarter-by-quarter in 2022, despite the inflationary headwinds, and this is driven by the ramp-up of our new facilities, the localization of production, as we have discussed in the past. That's -- I don't know if that -- I was able to respond to your question there, but a high-level view.

No, I was just -- yes, I was just curious, are you -- what you're seeing from competitors in regards to pricing to date as well? And if there's just any thoughts in terms of how you're thinking about pricing power for your businesses, as you push those price increases through?

Yes, we still believe we in a premium -- have a premium brand, and that we expect our premium to be a premium brand going forward and we expect to maintain price precision, because I think that's what you're asking for. So that's not going to change.

Okay, great. Thank you guys so much.

Thank you.

Thank you. Our next question is coming from the line of Kaumil Gajrawala with Crédit Suisse. Please proceed with your questions.

Hi, guys. Good morning, or good afternoon, I guess depending on where you are. I want to make sure I understood something from the prepared remarks properly, it sounded like there were some shelf space losses. And while I understand that production may not be ramping up at the pace at which you had anticipated. It almost sounded like unless I heard it wrong, that maybe shelf space went the other way in that. Maybe there are some areas, I think this might be specific to EMEA where production actually has gone -- has declined as opposed to not growing at the rate at which you had expected. So can you just clarify that for me a little bit.

Yes. So we did not lose shelf space. We did expect to have the greatest space and more distribution in Q4. And that is due to many, many different reasons. And if I just -- let me just walk you through what's happened here from Q1 to Q4 to better -- to give you better colors on what's going on here. So during Q1, Q2, we were on a great pressure due to supply constraints leading to lower growth rate, lower fill rates, strained relationship with retailers, lost market shares, consequences for losing 12 markets in 2020. Now during Q3, the supply output was greater leading to high sales and growth, regaining velocities, market shares. And in Q4, this being very turbulent, the retail environment is really, really turbulent -- turbulent here in Europe. So we’ve seen pandemic related events, such as general softer food at home, more consumption out of home and we had trucker shortage in U.K., we had pandemic in the U.K. So going to Q4, we're not getting the facing distribution as expected post summer. And it's because we still are navigating these turbulent COVID environment, they're not able to make material changes to the grocery shelves for the remainder of this year, even though velocity levels clearly significantly are better than competitors. And just as an example, in one of the premium retailers in U.K., we drive 27% sales from 7% shelf space. And that was negotiated back in 2020, when we were under really, really heavy constraints in terms of supply. So normally, you do see changes after summer in Europe that we did not see. So it's all pushed. It's a timing thing that is happening here right now.

Got it. Thank you. It's useful. And then if I could ask at least your best guess on what your supply condition in the United States looks like versus the competition? Or some of these -- some of the domestic folks may be just in a better position, or are they suffering from similar sort of constraints. Can you just give your best guess on what you're seeing competitively in terms of your ability to supply versus their ability to split [ph]?

Well, as far as we know, we haven't heard about supply issues. We do know that we are balancing our system of demand building across multiple channels, and that's all we know. And we know that we ship every case that we produce in the U.S. We even know that demand is stronger than ever and it's growing and that we are bringing more capacity on board here in the coming months and especially entering 2022.

Okay, great. Thank you.

Thanks.

Thank you. Our next question is coming from the line of Bryan Spillane with Bank of America. Please proceed with your questions.

Hi. Thanks for taking the question and good afternoon, morning to everyone. So my question is just around co-manufacturing capacity. And maybe could you talk a little bit about -- it sounds like you may be wanting to retain a little bit more co-packing manufacturing capacity than you originally expected. And so, I guess my question is twofold. One, is there actually enough -- is there actually co-man capacity out there to retain? And then second, is it becoming more competitive to retain co-man capacity, because there are certainly competitors come into the market. So just trying to understand really how viable that pathway is? And how much of that capacity has been soaked up by competitors? And maybe if you could add to that just are co-man adding more oat capacity?

Peter, is there anything?

Yes. Hi, Bryan. As said before …

Hi, Bryan.

… I would it is our core technology, and we will always produce that in-house. So it's about formulation and filling co-packing that we are looking at. And we are constantly reviewing our co-packing network, and our supply chain operations team constantly evaluate new opportunities in all regions. And we will most likely enter new partnership deals linked to -- mostly linked to we are opening new facilities. And then we get oat base in other areas. And that opens up new co-packing opportunities. So this is something we constantly reviewing. What's most efficient, how do we get the fastest way to market.

Okay. And then just two. Is there more available capacity? I guess what's underneath my question is we just hear a lot from investors about the concern about just how many entrants coming into the market, especially in EMEA and the U.S., and third-party capacity ramping up. And I just -- I guess the question is really just is that actually true? Is there more capacity coming into the market that will present a risk?

Yes, it's more that we now, for example, U.S have outpaced production, both on the West Coast and East Coast. And that opened up co-packing opportunities on the West Coast, as we now have Ogden. And in China, now we have outpaced production in China and then we can utilize more co-packing if we want to and need to. So it's mainly about that. We have been constrained from an oat base capacity because of where it's localized. Now we open up new facilities and get into more regions.

Understood. Understood. And then just one clarification. On the reduction in CapEx for this year, did you say that it's down because of cash flow? Or I didn't quite understand or maybe hear completely why the reason for capital spending to come down in '21.

Hey, Bryan, it's Christian here. No -- so just to clarify that point. On a full year basis, we expect the range to be between $280 million and $320 million compared to the previously communicated low end of the range of $350 million to $400 million. So that is a cash flow timing effect of the actually cash outflow shifting to 2022. And this is mainly due to timing of payments related to our 2023 capacity expansion projects in the U.K., the third plant in U.S and the third plant in Asia. But on an overall level compared to what we communicated to you as part of the roadshow process, that total is still remains.

Okay. Understood. Thank you.

Bryan, can I just clarify also? Within our network today that we have in the U.S., for instance, we know that our co-packing network in the ecosystem capacity are built out, and that is something we are going to benefit from going forward.

Understood. Thanks, Toni. Thanks, guys.

Thanks.

Thank you. Our next question is coming from the line of Ken Goldman with JPMorgan. Please proceed with your questions.

Hi. Thank you. I wanted to build a little bit on one of the first questions from Andrew. I appreciate that visibility is limited. I think you use the word dynamic, which is, of course, totally understandable given the situation right now. But the street is currently looking for one huge sales of next year of over $250 million. I think it's safe to say that will come down. But I'm trying to get a sense for how far down that needs to go. And again, I realize your visibility is limited, but you are almost at 2022 already. I guess the specific question I would ask is, do you think it's smart, prudent, whatever word we want to use for investors to kind of model below $200 million in that first quarter of next year, just given that a lot of these headwinds are not going to sort of dissipate, maybe till -- closer to the back half of the year. So just trying to get a sense for where that number needs to go.

So, Ken, I appreciate your question. So we can't give quarterly guidance. We don't do that. We are really, really -- we feel positive about 2022, I want to say that. And we're focusing on really, really do what we can control, which is to bring more products on the market, work with velocity, work with distribution. And right now, we feel good where we are. So the humming concede, considering the circumstances, right. But we can't give any guidance quarterly.

And I think the one thing that Peter I guess said, he said that we might have more milk drinks, than will be originally had communicated and that might have an impact on the top line for 2022. So I think that is out there.

Okay. And some companies are electing even though it's their policy long-term, not to give quarterly guidance to sort of make an exception or at least give some directional activity right now, just given the situation. But I respect that. And then my second question very quickly. I think you said you expect to increase price in certain products and regions. I assume that means not all products and regions. So which products, which regions are you not taking pricing and why?

No, I think it's something that we have to evaluate strategically across EMEA and U.S by the regional finance teams. With the purpose of offsetting the inflationary headwinds that we're seeing on COGS level to neutralize that impact for 2022.

Thank you.

Thanks, Ken.

Thank you. Our next question is coming from the line of Michael Lavery with Piper Sandler. Please proceed with your questions.

Good morning. Thank you. I just want to come back to this shelf resets in EMEA, and understand that a little bit better. And I know you're clearly saying that, that you had ones you thought would have happened by now or in the fourth quarter that are getting pushed out. But are those now specifically set? Do you have confirmation in timing? Or is it just indefinitely sometime to be determined so?

Hi, Michael. Hope you're doing well. Well, we have ongoing discussions with our retailers across Europe for resets in between January and May. But what you can see, I mean, all these performance data is available for everybody to see. And we're drawing significant growth from disproportionate less shelf space in all our key markets in Europe, for instance. And definitely you're going to see some changes there on the shelf in the beginning of next year. So it's an ongoing discussion. It's in nobody's favor, that we have less shelf space than what we deserve, given how much growth we are driving across these regions.

Okay, that's helpful. And then just one on the foodservice side. You put -- you called out the Blue Bottle partnership as well and highlighted that on the slide. It's only America's page and so I understand that's certainly where it's focused. But could that expand outside of the United States and at least also work in Hong Kong or potentially springboard, given the entry for you into Korea or Japan?

Do you mean Blue Bottle specifically?

Yes, because that's obviously a partner that you have in one geography at least.

Yes. So we are working regionally with the bigger accounts. They normally do have different organizations across the regions here. Blue Bottle is a premium chain. We have a very good collaboration with them. And we don't have anything that is planned for in 2022 with Blue Bottle specifically. But of course, we do have ongoing discussions, as we do with all the different partners that we have. And, of course, also given that coming from supply chain situation for a long period of time, we are now bringing more capacity on board, which will allow us to open up all these discussions across all the different regions, right? So if you look at Europe, for instance, we don't have -- we haven't been able to approach the QSRs [ph] properly, the biggest change in food service due to the supply constraints, right. Now we're going to be in different situation, pursuing an open up -- opening up those discussions, and that goes for Asia as well, right. Two factories in Asia, giving us more volumes to be more broad and go -- be more on the offence going forward.

Okay, great. That's helpful.

Thank you. Our next question is coming from the line of Laurent Grandet with Guggenheim. Please proceed with your questions.

Hey, good morning, afternoon, everyone. I hope you're doing well. So I'd like to come back to EMEA, actually. Two questions. So the first one is despite entering new countries, as you mentioned in last quarter, you lower by about $31 million, if I'm correct. I mean, our revenue in the fourth quarter, that's about I mean, 30% lower than that significant. So if you were to back at the gap, what would be coming from the shelf set with reset, packaging supply, potentially the quality issue you mentioned. So if you were to break it down. And then in the shelf space reset, I mean, what are you losing? Is it you're not getting as many SKUs expansion as you expected? Or do you get more out-of-stock at your velocity you mentioned, I mean, it's grime [ph]. So I would like to understand what's the consequence of not having as much of natural [ph] shelf space as you expected?

Yes, I mean, the shelf space is significant thing. Again, like we do have disproportionate shelf space across all our key regions. And again, the example that I mentioned is quite extreme driving 27% and that is one of the biggest retailers in U.K., and U.K being our second biggest markets, right? So it's substantial. So, we were driving again 27% of the sales from 7% shelf space. You see the same disproportionate numbers in Germany and other countries that has significant impact. So, nothing happened during -- we know that nothing will happen during Q4, right, and which will eventually will happen during the first half of 2022. And yes, we do have supply, so we can build more put more offence behind our sales in terms of building more velocity continue extremely solid velocity performance that we see, we increase from the lows in the summer in all our key markets, very positive performance from summer to where we are today in terms of velocity. And we will increase branding as well. We haven't done anything in terms of branding, right. So that is an opportunity that we have going forward as well. And then also that there's a timing thing with opening up the new markets that the old markets that we closed back in 2020, which is taking longer due to this environment that the retailers are operating in related to the COVID-19 situation and that's the reality. So multiple -- on multiple levels we can bridge, we look into jumping to higher sales. And also, Laurent, I just want to say a distribution -- increased distribution with existing partners as well is also a major point.

Thanks, Toni. And one more thing [indiscernible]. You said in your prepared remarks, I mean you're investigating a quality issue in one of your precious facility in Europe and you will destroy some inventory. So how big it is and what it is? And is this something that is [indiscernible] we should expect I mean time to time?

Yes, we're running a food company, things like this is always present frequently not too frequently, historically. But these things it's just part of running a food company, right. And during a plant maintenance stop in -- at our Landskrona facility this weekend, we self identified a potential quality issue. And we, as you know, we always put safety and product quality first and immediately initiated a quality assessment and activated the relevant procedures. We have full traceability for all our products, and as precaution are conducting the assessment. There is the potential that this assessment may result in the destruction of inventory and corresponding loss. Lost sales in EMEA region. However, we do not expect this will limit our ability to achieve our 2021 outlook.

Thank you.

And we can -- we will provide more information when we have more.

Thank you very much. Thank you very much. I will pass it on.

Thank you. Thank you.

Thank you. Our next question is coming from the line of Dara Mohsenian with Morgan Stanley. Please proceed with your questions.

Hey, guys. So first, just that quality issue in EMEA, is it a significant portion of revenues? Obviously, it's early to sort of specifically quantify it, but just trying to understand, is it across product categories? Is it more of an isolated issue? And are you comfortable that it's related to that one plant and not something that could be an issue elsewhere? And then the broader question is more just as we look at the implied Q4 guidance, it does seem like the disappointments sort of versus what you originally expected is much larger than what we saw in Q3. But conceptually, Ogden is in better shape. Perhaps there's not as much foodservice pressure in Asia, as they're not as many closures. It seems like some of these issues should be getting better relative to Q3. So just sort of trying to understand why the magnitude of impact seems greater in Q4 relative to Q3, as you run through these various issues where it seems like there might be some progress conceptually.

Yes. Hi, Dara. So just on the quality thing here, yes, it's the same, it's one facility. So that is clearly identified and we are still assessing the situation. And we will provide more information as soon as possible, if necessary. So we're still in assessing the situation.

Dara, I mean, I think currently we can say that we do not expect that this will limit our ability to achieve our '21 outlook.

Yes, correct. That is correct. In terms of …

Okay.

… and, Dara, in terms of the magnitude, 4Q there may be three components here, right? Yes, Europe, definitely bigger, because it's the biggest region with 51% of our sales. But if you look at the regions here, in the U.S., it's related to the Ogden production output, and that it was slowed down by the COVID driven delays, in delivery of manufacturing equipment. And for Q4, we're being conservative to ensure we deliver on what we've updated you on today. I think we have more consistent output from Ogden over multiple months, we want to see more stability there. And in China, we were aware of the COVID situation during the summer, but we weren't aware of the magnitude and the durance of the COVID related issues. And it resurfaced again in China. And remember that, foodservice is a major portion of our business there. And we only have one SKU basically in China business to consumer with the [indiscernible] addition, because of our supply constraints. And last year, we were able to redirect sales quickly to e-comms during the height of the pandemic, which was less developed for us at that time. And now we're quickly shifting to expand our offering with new SKUs and formats to further develop the e-comms business and retail both with massive potential for growth starting in 2022. And I think we mentioned everything we can about Europe. We saw -- we see and the thing is that the retail is working in a very dynamic and turbulent environment and just trying to navigate what's going on there in terms of out-of-home consumption, in terms of resets, in rebuilding the planograms and all that We are relying on our performance. We are aligning our velocity on market share gains. And that we are bringing a massive amount of growth into the categories, each of our key markets. It won't happen until beginning of 2022.

[Indiscernible] the navigating the pandemic environment, we see shutdowns in Germany, again, the closing down societies and that's kind of what we're sort of navigating through as well as a company. But fundamentally, we have high beliefs in our business.

You're right, Christian. We believe the majority maybe all of our EMEA key markets will continue to have certain level lockdown and Netherland just recently locked down again. And we know that Germany is heavily impacted by COVID-19 and we see our neighbors in the Nordics. And which makes us -- well, if it doesn't make us think we know that the recalibration on the retail shelf won't happen until the first half of 2022.

Okay, thanks.

Thanks, Dara.

Thank you. Our next question is coming from the line of Brian Holland with Cowen. Please proceed with your questions.

Yes, thanks. Hello. I'll start -- I want to focus on the U.S. A lot of conversation around the distribution dynamics at retail in EMEA, but obviously the data points that investors are looking at every other week are primarily trained in the U.S. Again, completely appreciate that this is a fairly small part of your business. But as you are navigating channel initiatives, as you referenced earlier, initiatives across multiple channels, are you still in a situation where you're shorting maybe retailers? And I'm curious, if you think you're going to get back to a better position in the first half of 2022, what's the timing for maybe improving your in-stock situation in the U.S such that we might see some share stabilization in the tracked conventional grocery channels, which mind you exclude SPINS data?

Yes, so a couple of things here. Hi, Brian. So on the fill rate, it's improved significantly since the lows we had in pre-summer here, and we are continuously increasing that volume. And we also see that the velocity is still growing in a very positive direction. So, again, what we said last time, like how do we get -- how do we close that gap, fill rate gap, when demand continues to accelerate? Well, we feel very positive going into 2022, that we can do that. And also serve -- more brought into other channels. Again, for us, it's about the system of demand that we want to build and we need to balance strategically between the various channels here. But the fill rate, we are not at full fill rate. We're not at full fill rate anywhere. But we improved the fill rates considerably since summer.

Okay, appreciate the color. And then last question for me. I think you said last quarter, you expected to be back at 100% supply at Starbucks. Their commentary a few weeks back suggested they'll continue to call on secondary sources. So just curious, maybe if anything's changed in the -- in that relationship, is there now an expectation on your end, that they will call on secondary sources of supply to meet the full demand and just any update there would be appreciated? Thanks.

Yes. Again, the relationship with Starbucks is just excellent. And we're both excited and thrilled about the success of our opening launch there. We will serve 100 service -- 100% of the Starbucks network December and January. And White Label will enter in February and stay through the end of calendar 2022. So during 2022, we will serve -- we will service around approximately 85% to 90% of the total Starbucks network after White Label returning. And that said, as we increase production, we're constantly thinking about our supply allocation and how we can balance our channel needs to drive our sales growth and profitability. But off to expand our reach and brand awareness, this is a very strategic topic for us internally since we also generate great unit [ph] economics from our retail and coffee channels. But we feel more confident as we bring more capacity in the U.S., for sure.

Thanks, Toni. Best of luck everyone.

Thank you.

Thank you. Our next question is coming from the line of Jon Andersen with William Blair. Please proceed with your questions.

Oh, hi, everybody. Thanks for the question. I wanted to ask, I know, you're limited in what you're able to say about 2022. But there were pretty significant, or expectations for pretty significant gross margin improvement in 2022. And just hearing some of the commentary today around focusing the production capacity that you have on milk, more so maybe than other food, some manufacturing delays, perhaps the use of co-packers for a longer period of time, how should we think about that in the context of the margin improvement you originally anticipated in 2022? Does that get pushed out? Is the rate of improvement more moderate than original plan?

Hi, Jon, it's Christian here. Yes, so I think, first of all, fundamentally, we do believe and this is sort of the case as well, that gross margin is expected to improve quarter-by-quarter in 2022, despite the inflationary headwinds, despite what we were experiencing in Ogden, and the ramp up complications over there. And that improvement is driven by the new facilities, the localization of -- in the -- each of the region, making them self sufficient on their own production volumes and sales volumes, increasing the share of self-manufacturing and a general improvement in freight and distribution costs coming from the localization of our production capacity in each of the region. Now, will the gross margin improvement in terms of what we might have indicated before be slightly less? I would say that's probably a fair assessment. But we will come back to that when we are doing our fourth quarter earnings call.

Okay, thanks. One quick follow-up. This was I guess, kind of addressed earlier, but in the U.S., your ACV or distribution at retail, I guess, half maybe the number one brand at retail by market share. And I'm just wondering, if you have kind of a visibility or plan to try and narrow that gap and bring your ACV up from I think high 30s now to a much more broader distribution and what that timeframe might look like? One of the concerns I hear is that this window of time is giving competitors an opportunity to generate trial and perhaps brand preference, while you're working to kind of scale up. So your thoughts there would be helpful. Thanks.

Absolutely. So you're absolutely right there. Hi, Jon. ACV today in U.S is 34% and the biggest brand has 89% ACV, right. If you look at total distribution points, like 10 times more distribution points. So number one priority for us is to close the fill rate gaps, work with the retailers that we have. That is number one, because the demand is -- continues to increase and which is very, very positive for us. And in terms of retail, there's always room for the best performing brands like our performance data is so -- it's so over indexing versus competition. That I think that we have flexibility in terms of timing or working our distribution in ACV over time as we bring more capacity on board. So it just speaks about the runway, we have Jon, more than anything because of the solid performance we have, especially in the U.S.

Thank you.

Thank you.

Thank you. There are no further questions at this time. I'd like to turn the call back over to management for closing remarks.

So thank you for your questions. We really appreciate it and appreciate our discussions with you today and look forward to continuing our dialogue here. So have a great day everybody.

This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Have a great day.