Beyond Meat, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Beyond Meat Incorporated 2020 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star then 1 on your telephone keypad. As a reminder, this conference call is being recorded. If you require any further assistance, please press star then 0. At this time, I would like to turn the conference over to Mr. Lou B. Katua, Vice President of Investor Relations. Sir, please begin.

Thank you. Good afternoon and welcome. On today's call are Ethan Brown, Founder, President, and Chief Executive Officer, and Mark Nelson, Chief Financial Officer and Treasurer. By now, everyone should have access to our third quarter earnings press release and investor presentation filed today after market close. These documents are available on the investor relations section of Beyond Meat's website at www.beyondmeat.com. Before we begin, please note that all the information presented on today's call is unaudited and 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 cause actual results to differ materially from those described in these forward-looking statements. Forward-looking statements in the earnings release that we issued today, along with the comments on this call, are made only as of today and will not be updated as actual events unfold. Please refer to today's press release. Our annual report on Form 10-K for the year ended December 31, 2019. filed with the Securities and Exchange Commission on March 19, 2020. Our quarterly report on Form 10-Q for the quarter ended September 26, 2020, to be filed with the SEC and other filings 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. Please also note that on today's call, management will refer to adjusted EBITDA adjusted gross profit, adjusted gross margin, and adjusted net income or loss, which are non-GAAP financial measures. While we believe these non-GAAP financial measures 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 GAAP. Please refer to today's press release for a reconciliation of adjusted EBITDA, adjusted gross profit, adjusted gross margin, and adjusted net income or loss to their most comparable gap metrics. And now I would like to turn the call over to Ethan Brown, Chief Executive Officer of Beyond Meat.

Thank you, Ruby, and good afternoon, everyone. Our Q3 2020 results warrant careful consideration to capture a full and accurate appreciation of our business today. Let me begin by sharing broad observations on the overall impact of the COVID-19 macro environment from our net revenue results and mix, as well as highlight compelling underlying signs of continued momentum and growth. First, in line with the overall food category across retail, we saw a clear and prodigious pattern of consumer panic buying in Q2, followed by moderation in Q3. Second, the recovery in our food service business has lagged the overall food service sector, given our exposure to certain segments that have been disproportionately affected by COVID-19. And third, We continue to contend with COVID-19-related timing delays with large strategic quick-serve restaurants or QSRs. Above notwithstanding, the fundamental supporting algorithms are alive and well, whether it be our increasing U.S. retail market share, household penetration, buyer rates, purchase frequencies, and repeat rates, our increasing points of domestic and international distribution, our increasing rates of new product introductions, and some promising indications that QSR partners may be emerging from what has been an appropriate and understandable delay in new launches during the pandemic. In light of what we view as transitory COVID-related factors, contrasted with enduring strength of our business, we have not blinked in our focus on the exciting long-term growth path ahead of us. As such, we have neither retracted nor delayed our ambitious expansion agenda. Turning specifically to our Q3 performance, we experienced the full brunt and unpredictability of COVID-19's impact for the first time in Q3, producing net revenues of $94 million, a sequential drop from record net revenues of $113 million in Q2. While the effect of COVID-19 on our food service business was offset by the unprecedented surge in retail grocery demand in the second quarter, our third quarter did not enjoy the same level of benefit and was conversely disadvantaged by consumer stock freezers and subsequent moderation in buying following this run-up in grocery spending in the previous quarter. Accordingly, Q3 reflects our second largest quarter of retail sales ever. Our retail revenue growth did less to offset continued and significant COVID-19-related interruptions for our food service revenues, including delays in launches or expansions with strategic partners. To keep all this in perspective, it's important to note that sales of Beyond Meat products were up 63% year-over-year, while the plant-based meat category as a whole was up 41%, contributing to a 270 basis point year-over-year increase in market share for the Beyond Meat brand. According to SPIN's data for U.S. Multi-Outlet, or MULU, and natural and specialty channel sales, the 12-week period ended October 4, 2020. Further, across Mulu, our sales velocity measured in dollars per total distribution points was three and a half times higher than the category average and increased 15% year-over-year in the latest 12-week period, even as our points of distribution grew 55% year-over-year. To understand the significance of these trends, keep in mind that velocities typically decline as you add distribution points, gaining more stores while also seeing higher revenues per store is a very encouraging sign with regard to our value proposition to consumers. More generally, COVID-19's considerable impacts on Q3 retail and food service sales notwithstanding, our year-over-year net revenue growth for the nine months ended September 26, 2020, stands at 52.9%, with our net revenues from retail alone up 116.5% for the same period versus a year ago. The positive metrics underpinning this growth further bolster our determination to resist short-term retraction or delay, even if our insistence on investing in our future during a period of disruption puts pressure on our P&L. An additional look at SPINs and IRI consumer panel data provides a clear picture of progress, where our U.S. household penetration increased to 5.2% compared to 4.9% as of June and just 2.7% a year ago. where repeat rates increased to 51.9% in September versus 49.3% in June, and purchase frequency increased 8% from June to September, while our buyer rate increased 13% from June to September. In other words, despite challenging macroeconomic conditions and highly variable buying patterns, more households are buying our products. They are buying them more frequently, and on average, they are spending more per household on our products over time. Recent distribution wins include, but are not limited to, incremental placement of the Beyond Burger and Beyond Breakfast Sausage Patties at Walmart, and additional distribution gains for Beyond Breakfast Sausage Patties at select Kroger, Super Target, Publix, and Harris Teeter locations across the nation. Further, we have secured distribution authorization and exciting and new avenue of retail outlets for us. We are pleased to announce today that as of January 2021, The Beyond Burger will be available at 7,000 CVS pharmacy locations nationwide, and Beyond Meatballs will be available at 5,000 CVS pharmacy locations across the country. We continue to launch new products to the Beyond Meat Rapid and Relentless Innovation Program, having brought to retail markets Beyond Meatballs and Beyond Saucer links in the last three months to strong retailer acceptance. Lastly, as I mentioned a moment ago, our sales velocity remains well above category average, time when we were seeing an increased focus from our retail customers around shelf space optimization decisions. The ensuing actions are expected to favor brands such as ours that continue to drive overall category growth, further increasing our ability to expand our on-shelf presence even within our existing retailers today. The deceleration caused by intensified Q2 buying of freezer loading, followed by moderation of Q3, was felt across our retail categories. Looking at a time series of rolling 12-week sales for the plant-based meat category as a whole, according to SPIN's data for U.S. Lulu and natural and specialty channels, the category's sequential growth rate peaked at 20% during the height of consumers' panic buying and has since decelerated sharply to a decline of 3% in the 12-week period ended October 4, 2020, for a 23-point negative swing in sequential growth compared to late Q1 and early Q2. This pattern of Q2 freezer loading, followed by Q3 moderation, does not appear to be unique to our category, as evidenced by similar buying patterns elsewhere within retail grocery space. Turning to international retail, we saw deceleration from Q2 to Q3, as we did here in the U.S., as similar dynamics played out at several of our most important markets. Nevertheless, as we saw domestically, net revenues in our international retail channel also increased considerably. growing 27% year-over-year in Q3 2020. During Q3, we increased our international retail outlets from approximately 27,000 to roughly 33,000. In food service, as noted, our Q3 results reflect continued COVID-19 disruption. Total net revenues for our food service business declined 41% year-over-year, with our U.S. and international businesses declining 11% and 65% respectively. As I unpack our performance in food service, let me first address the broader non-quick-serve restaurant portion of our business. Recall that quick-serve restaurants or QSR customers make up roughly one-third of our overall food service sales, while the remaining two-thirds consist of sales to a wide variety of customers, including, but not limited to, independent restaurants, smaller regional chains, bars and pubs, lodging venues, casinos, academic institutions, healthcare facilities, corporate catering services, government institutions, convention centers, movie theaters, sports arenas, and other recreation venues. As you can imagine, many of these customers have been disproportionately affected by COVID-19 and have generally experienced a slower rate of recovery relative to the overall food service sector. Although we did see a sequential improvement in overall demand from these customers relative to Q2, their total sales contribution remained well below year-ago levels. With COVID-19 infection rates beginning to pick up again in many parts of the U.S. and abroad, uncertainty around the shape of the recovery in this portion of our business remains elevated. To provide further context, I'd like to focus a bit more on trends within this broader two-thirds of our U.S. food service business, as captured in NPD data, and then turn them to our QSR partners. As a reminder, NPD tracks broad-line distribution to U.S. food service outlets. It generally excludes major QSRs, which often utilize direct delivery systems. According to NPD data for Q3, sales at Beyond Meat products declined 34.7% on a year-over-year basis compared to a 37.5% decline for the overall category. In other words, we achieved a slight gain in market share of this NPD tracks channel even as the entire category remains significantly challenged. Although our outperformance relative to the overall NPD category narrowed in the third quarter versus our recent history, we do believe our results are uniquely impacted by our segment mix, which I alluded to earlier. Unfortunately, several of our highest share segments within NPD track channels, including lodging, recreation, full-service restaurants, and business and industry, for example, have been hardest hit by COVID-19. Here, as is the case with our large strategic QSRs, we continue to provide both support and patience as our customers adapt to the changing realities of COVID-19. Turning to the remaining one-third of our food service business, the large QSRs, we saw a sequential improvement from Q2 to Q3 from this portion of our business. However, total sales contribution from these customers also remained well below Euroville levels. The prevailing dynamic defining our work with large QSR customers since the onset of COVID-19 has been a delay in plans to initiate tests or expansions of plant-based meat menu items. Despite the near-term impact on our business, we fully understand and respect the propensity of large customers to maintain menu status quo or streamline offerings during the pandemic. Here again, it is important not to interpret this near-term pandemic-induced drop in activity as a weakening in our long-term value proposition in this critically important space. We certainly do not, and despite the potential for another round of sustained stay-at-home orders, we are seeing strong signs that certain large QSRs are planning for menu additions. As always, we cannot promise any launches for a variety of reasons, including an inability to predict the course of COVID-19 and its impact on launch for expansion strategies within the QSR space. Looking abroad to Asia, we are proudly continuing our partnership with Young China, which recently conducted a new test of the Beyond Burger across 210 KFC locations in six major Chinese cities for a three-week trial. And as I will discuss in a moment, we continue to invest in personnel and production capabilities in China. Throughout our operations, we continue to invest in the business to support current and future growth. First, we recently completed the acquisition of one of our former co-manufacturing facilities in Pennsylvania. The capability to produce a certain portion of our finished goods completely in-house is a key part of our longer-term strategy to reach price parity with that of animal protein. We intend to use our new Pennsylvania facility to not only reduce production costs, but to pilot processes and products, including our newly designed continuous production lines, and perform initial scale-up trials of new products. With the addition of this wholly-owned production capacity, we are also welcoming some 180 employees to the Beyond Meat families. I should note that we will continue to align ourselves with best-in-class co-packing partners here and abroad and expect the acquisition of our new Pennsylvania facility to only strengthen these relationships as we'll be able to do important product scaling work in-house before transferring certain downstream activities to these partners. Internationally, we continue to invest in production capacity in China and in the EU. As you know, in early September, we announced our signing of an agreement with Yaxin Economic and Technological Development Zone to develop two manufacturing facilities in China, including a state-of-the-art production facility of which the size, sophistication, and sole dedication to plant-based meat we believe will be unique. This larger facility was preceded by our first production plant, where work is well underway to get it ready for production trials for the end of this year. The second facility is expected to be a significantly larger, purpose-built plant, and once completed, is expected to be one of the largest dedicated plant-based meat factories in the world. Similarly, work is well underway at our recently acquired manufacturing facility in the Netherlands, which also remains on track to begin production trials before year end. And we are continuing to build out strong teams in both regions. Finally, a word of appreciation for all our talented team members working in operations around the globe. These essential employees work tirelessly to meet demand within a difficult operating environment, replete with strict mandates around social distancing, masks, and sanitation requirements related to COVID-19. Add to these conditions the highly variable fulfillment requirements given unusual consumer buying patterns in their presence in the COVID-19 economy, and it should become clear why we are so grateful for their work ethic and sacrifice. We continue to make strong progress in research and development, despite the continued impact of COVID-19 on our ability to operate at full scale at the Manhattan Beach Project, our innovation center here in Los Angeles. Our scientists, engineers, and technicians continue to work a two-shift model that better supports social distancing. I can't emphasize enough how proud I am of the team's productivity, despite myriad pandemic-related impositions. In addition to the new retail innovations we recently launched, the team continues to make great progress on our next iteration of Beyond Burgers, and I'll have more to share with you about that soon. Moreover, these talented women and men continue to work in deep partnerships with our QSR partners. Until you've worked a full shift with masks, it's hard to fully grasp the difficulty of performing challenging research and development day after day in these conditions. As with our operations team, my hat's off to them. In keeping with our strategies to make our products as widely accessible as possible, we launched a direct-to-consumer, or DTC, e-commerce site in late August Consumers across the contiguous United States can now order a variety of our products with a click of a button, enjoying two-day shipping on each order. We're proud to utilize recyclable shipping boxes and UPS carbon neutral shipping as part of this initiative. While BTC will likely remain a negligible portion of our overall sales in the near term, we are nonetheless pleased with the effort as it symbolizes our commitment to meeting the consumer wherever they prefer to shop. Overall, with regard to our availability, The on-meet is now available in approximately 122,000 retail and food service outlets globally, up approximately 10,000 locations, or 9% since the end of June, with the majority of that increase coming from our international retail outlets. The products are now also available in over 80 countries across the U.S., up from over 50 a year ago. I would like to now comment briefly on our margin performance, which Mark will expand on in greater detail shortly. The results reflect a combination of ongoing COVID-19 challenges as well as deliberate decisions we made for the benefit of our long-term strategy, despite the understanding that these would negatively impact our profitability metrics in the near term. On a year-over-year basis, our adjusted gross margin of 28.9% in the third quarter of 2020 was down 670 basis points as compared to Q3 2019. Of this variance, over 500 basis points were attributed to price and mix, largely driven by increased trade discounts primarily, but not exclusively, in retail. The decision to opportunistically increase our promotional intensity holds strategic importance as we've communicated in the past and is aimed at driving increased household penetration for our brand. According to the SPIN's IRI consumer panel data I referenced earlier, these tactical actions appear to be working, with our latest U.S. household penetration nearly doubling versus a year ago and increasing roughly 23% just over the last two quarters. Our above-referencing systems on continuing to serve long-term growth ambitions naturally impacted our P&L during this period of disruption, where our operating margins suffered in the face of lighter net revenues. We believe seizing on the immense global opportunity within plant-based meats over the years to come requires a clear focus on long-term strategy and a willingness to make near-term sacrifices in order to establish a much stronger position for our brand over the long run. Finally, and before I turn the call over to Mark, I'll provide some thoughts from the competitive environments. We watch entries carefully and see the level of investment and interest in the category as a generally positive development in the long-term growth of the plant-based meat category. In this environment of significant spend by new and incumbent players, we are seeing, as mentioned, our velocity increase, our key panel and data metrics moving in the right direction, including, as noted, the number of households buying our products, the spend per household, frequency of purchase and repeat rates all increasing, strong retailer and consumer interest in our new SKUs, and continued expansion of our points of distribution both domestically and abroad. Lastly, we continue to see solid growth in the plant-based meat category, above and beyond that of animal protein, and importantly, our brand continues to outpace the category growth. With that, I'd like to now turn the call over to Mark Nelson, our Chief Financial Officer,