Oatly Group AB
- Spruce Point has assembled significant evidence to suggest that the walls are collapsing on Oatly’s (Nasdaq: OTLY or “the Company”) ambitions to dominate the oat milk market. While investors are enamored with its sales growth in the plant-based food fad, and its commitment to ESG practices, we believe they should be focused on its loss of market share in Sweden and the U.S., minimal barriers to entry, lack of competitive advantages, rising commodity input costs, and supply challenges created partly through poorly planned production facilities. As such, we believe Oatly will sorely disappoint investors and will never achieve profitability. Spruce Point believes investors should be focused on Oatly’s ESG practices, and our extensive FOIAs and research which exposes so-called “proprietary” aspects of its production process (e.g. key ingredients and formulations, specific machinery, and warehousing plans). In addition, we believe investors are not focused on multiple accounting and financial control weakness which we believe have manifested in revenue and gross margin overstatement of 640bps. Our concerns are documented by former employee interviews and glaring signs of projected capex inflation running 77% higher than historical costs after Oatly has churned through three auditors in six years. Investors should also be concerned that its CFO and Audit Chair both obscure their roles at prior corporate accounting scandals. Oatly’s valuation has mysteriously ballooned nearly 6x since a $200m investment by Blackstone in July 2020 despite our evidence pointing to market share loss. Oatly is trading at 17x ‘21E sales and 75x adjusted gross profit and a $12bn valuation (57% of the 2025 total projected non-dairy milk market). We believe its valuation is unsustainable and will end poorly for new investors. Spruce Point is calling for the Board to hire an independent forensic accountant to open an investigation to evaluate our claims. We see 30%-70% intermediate downside risk as it fails to achieve lofty targets baked into its valuation. There is long-term potential that Oatly faces insolvency when investors realize that the oat milk food fad has matured and interest in funding money losing businesses wanes.
- Spruce Point has unearthed Oatly’s first detailed sustainability report and takes issue with how Oatly presents its progress to investors as the first slide of its Investor Presentation (June 2021). The analysis is based on a 2013 study (updated in 2016) which doesn’t include its recent expansion into the U.S. and Asia, which we believe have been poorly planned and executed. In addition, we believe Oatly has “cherry-picked” the study’s results by failing to show that its impact on water consumption is worse than dairy milk. Through a FOIA request, we learned that Oatly’s production process also generates dangerous volumes of wastewater that requires it to build its own treatment facilities. Oatly is even out of compliance with EPA regulations in NJ. Oatly’s first study discusses the importance of transportation costs, accounting for nearly 1/3rd of its environmental impact. Yet, in Oatly’s quest for rapid business growth and its race to IPO, we believe it has recklessly disregarded these costs, and also sought to obscure the impact of shipping costs in its financial statements. Oatly also says 49% of its current climate impact comes from ingredients, with 73% of this ingredient impact tied to oats. It stands to reason that Oatly should be locating its facilities as close as possible to its oat supply. However, we find evidence that Oatly has not only located production facilities thousands of miles from its oat sources, but also massively overpaid and run wildly overbudget in its capital planning. Now as a public company, we believe Oatly is asking investors to pour nearly $1.0 billion into existing and expansionary capex to fix management’s blunders. We estimate cost per liter of new capacity will cost upwards of 77% more than Oatly’s historical cost and continue to make its business non-economical. Oatly took flack for the investment it received from Blackstone in 2020 when an activist pointed out a connection to the deforestation of the Amazon. However, Spruce Point also points out the Oatly uses Olam International for its supply of Cocoa. Olam has often been criticized for not being transparent and contributing to deforestation and endangerment of species in Africa.
- Oatly promises to be a good company, putting people ahead of the reckless pursuit of profits. It also strives to provide transparency about its products and suppliers to the consumer. However, we find it has taken a different approach to investors. Oatly’s CFO Christian Hanke provides an incomplete biography that obscures his role as Manager of Financial Reporting at Stratus Technologies (1999 – 2005). During his time at Stratus, it restated financials over a multi-year period related to revenue recognition and lease accounting. In addition, Oatly appointed Frances Rathke as Chair of its Audit Committee. In the past, Ms. Rathke misrepresented her CPA status. In addition, while she was the CFO, Treasurer and Chief Accounting Officer (she omits her Chief Accounting Officer role from her biography) of Green Mountain Coffee Roasters (Nasdaq: GMCR), it was investigated by the SEC for its accounting practices and restated financials related to incentives (that hit revenue) and inventory. Ironically, Oatly fails to disclose revenue incentives and we find issues with its inventory accounting methods. Lastly, Oatly’s Chairman of the Board fails to disclose his role at Genius Foods, a struggling food company that chased the once hot gluten-free fad.
- We interviewed a former U.S. manager and accounting professional of its North American business. When we asked the accountant about the #1 risk of investing, the response was “are the financial statements accurate?” Concerns were raised about the plant-by-plant capex and depreciation. In addition, concerns were raised about capex inflation at its NJ and Utah production facilities. “My jaw dropped” was the reaction from the manager about the $10m paid for a former plumbing station in rural southern NJ that would become its East Coast production hub. Our FOIA uncovered that location was inspected by local environmental health experts and cited for excessive trash dumping. In addition, FOIAs reveal that Oatly has struggled with expansion plans since the property is acreage constrained, and its neighbor, the local Board of Education, has generally been reluctant to sell its property to Oatly. In 2019 Oatly announced that Utah would be its West Coast hub, with a budget of $40 – $50m. The plant was described by a former executive as “not optimal and chasing short-term tax incentives”. Two former employees agreed that Utah’s actual capex is running more than 100% over budget at $100m, and a recent facility inspection report Spruce Point uncovered shows it is still not complete in Q1 2021.