Beyond Meat, Inc.

Welcome to the Beyond Meat, Inc. 2021 Second Quarter Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star and zero. As a reminder, this conference is being recorded. I would now like to turn the call over to Luby Pitua, VP FP&A and Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome. Joining me on today's call are Ethan Brown, founder, president, and chief executive officer, and Phil Harden, chief financial officer and treasurer. By now, everyone should have access to the company's second 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, the company's annual report on Form 10-K for the fiscal year ended December 31st, 2020. The company's quarterly report on Form 10-Q for the quarter ended July 3rd, 2021, to be filed with the SEC. and other filings of 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, and adjusted net 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 or the investor presentation for a reconciliation of adjusted EBITDA, adjusted gross profit, and adjusted net loss to their most comparable GAAP measures. And with that, I would now like to turn the call over to Ethan Brown.

Thank you, Lubbe, and good afternoon, everyone. Before diving into our second quarter business highlights, let me begin by welcoming our new Chief Financial Officer, Phil Harden, to his first Beyond Meat earnings call. Phil officially joined Beyond Meat a little over three weeks ago and is already proving himself to be a valuable addition to our team. Phil brings with him a wealth of finance leadership experience from one of the world's largest e-commerce and technology companies, which not so long ago set out on an ambitious journey to transform the way consumers shop. In many ways, our objectives are just as ambitious, as is the requirement that we maintain a long-term focus while making investments today for tomorrow's growth. And we are fortunate to leverage Phil's deep experience as we embark on this next leg of Beyond Meat's story. I'm personally very pleased to have Phil with us and hope you will join me in welcoming him. For Q2 2021 results, we generated record net revenues of $149 million, which came in toward the top of our guidance range for the quarter and represented a 32% increase year over year. I am proud of this result as we cycled our previous best-ever quarter in terms of sales, one where the defining feature was COVID-induced stockpiling as stay-at-home orders proliferated across the U.S. and globe. In food service, net revenues were up 218% year over year and 61% sequentially, driven by reopenings within the sector. Here in the US, food service net revenues were up 269% year over year, while internationally we saw an increase of 172%. We continue to hold the number one brand position in terms of dollar share according to NPD data for Q2 2021. Sales of Beyond Meat products were up 95% year-over-year in the quarter in NPD tract channels, in line with the overall category during the same period. This year-over-year increase reflects solid gains and signs of recovery among independent operators, including restaurants, bars, and pubs, lodging venues, and small regional QSR chains, among other segments. We continue to expect year-over-year growth within our food service business in the near term, albeit at a more moderate rate as we lap tougher year-ago comps and expect pipeline restocking to subside. In addition, general near-term concerns around rising COVID-19 infection rates could also have a dampening effect on food service demand. We did see a significant reduction in distribution at Dunkin' Brands as they rationalized their menu. We remain engaged with Dunkin' around future innovation and collaborations and are in distribution throughout their western U.S. stores. I should note that our breakfast sausage patty continues to do extremely well in other U.S. venues, such as Pete's and Phil's Coffee, among others. In international food service, the 172% increase in net revenue was driven mainly by broad reopening of economic activity in several markets, and we expect solid year-over-year growth in this portion of our business in the near term, barring a significant recurrence of COVID-19-related dynamics. Finally, oddly, as it relates to food service, we are looking forward with excitement to activity with our large strategic QSRs. As before, I should note that we supply at the request of these partners, and the timing of planned tests and launches could shift based on various considerations, including a resurgence of COVID-19 or other events. Shifting to retail, we saw a year-over-year increase in net revenues of 6%. This moderate increase includes a decline in U.S. retail revenues of 14% as we cycled Q2 2020's record retail revenues, which, as you will recall, were fueled by consumer stockpiling at the onset of the pandemic. This comparison notwithstanding, our key brand metrics of household penetration, buyer rates, purchase frequency, and repeat rates remain robust. We saw continued advancement in our household penetration, which increased 80 basis points sequentially and 120 basis points on a year-over-year basis to 6.2%, according to SPIN's IRI consumer panel data for the 52-week period ended June 27, 2021. And on a year-over-year basis, our buyer rate increased 12%, purchase frequency was up 9%, and our repeat rate increased 5% versus a year ago to 51%. In addition to these strong brand metrics, Beyond Meat's unaided brand awareness in the U.S. increased to its highest level of 26%, according to July 2021 survey data, and remains the highest such level among all major plant-based meat brands by a healthy margin. We continue to hold the number one product position and four of the top six products in our category according to SPNS data for U.S. multi-outlet and natural and specialty champs for the 12-week period and to June 13, 2021. Total distribution points for the Beyond Meat brand, or TDPs, increased 55% year-over-year driven by growth in total outlets, as well as the introduction of new products, including Beyond Meatballs and Beyond Breakfast Sausage Links, according to SPINS data from MULO and Natural Specialty Channels for the same period. This solid increase in TDPs, which we believe bodes well for the long-term growth prospects of our brand, does, however, exert near-term downward pressure on velocity, measured in dollars per TDP to the tune of 35% year-over-year. Overall, looking at consumer takeaway across MULO during the same 12-week period and reflecting the cycling of Q2 2020 stockpiling, sales of Beyond Meat products were down 4% year-over-year, slightly outperforming the category, which was down 4.4%, and contributing to a 10 basis point year-over-year increase in market share for the brand. In international retail, We maintained our strong sales growth momentum with net revenues up 198% year over year as we continue to drive increased distribution both in terms of footprint and average items per outlet. This growth occurred across a backdrop where similar to the US, globally the industry was down as it cycled Q2 2020 stockpiling. We believe our progress internationally will accelerate and broaden as we implement investments including the continued scaling of our EU and China operations that will enable capacity expansion, cost optimization, and increased consumer engagement. During the quarter, we launched Beyond Meatballs in Europe for the first time, beginning with major retailers in the Netherlands and Switzerland, marking the fourth Beyond Meat retail product offering available in Europe today. We also launched meatballs in Australia for the first time, as well as secured distribution of our burger at Woolworths, one of Australia's largest retailers, further demonstrating our commitment to expanding the availability and breadth of our product offerings across all of our key geographic regions. Overall, our distribution footprint in international retail saw strong growth of approximately 5,000 stores or a 21% increase sequentially, driven mainly by expansion in Canada, Germany, Australia, Austria, and the UK. Let me now provide a brief update on some recent product highlights and key strategic initiatives. As you recall, at the end of the first quarter, we announced the launch of the latest iteration of our Beyond Burger, the 3.0. Early feedback on the new burger has been very positive, with the product even earning People Magazine's Best Plant-Based Burger Award and being featured as such on Good Morning America just over a month ago. It remains too early to draw any definitive conclusions about the incrementality of Beyond Burger 3.0 versus 2.0. However, we expect that similar to the transition from 1.0 to 2.0, this new and improved burger will welcome more consumers to our brand. As I alluded to in my remarks about the sequential uptick of our household penetration, we may already be benefiting from the switch. As you know, we believe that tasting is believing, and to that end, We recently launched our biggest product sampling campaign ever in partnership with key retail customers. We will also be activating further sampling opportunities via our food trucks in various cities across the U.S. Just as noteworthy, we recently launched Beyond Chicken Tenders, marking a return under our PULSI platform. As with the Beyond Burger 3.0, Beyond Chicken Tenders are gaining strong recognition, for example, The product won the prestigious 2021 Fabia Award by the National Restaurant Association right out of the gate. Apart from their great taste, Beyond Chicken Tenders boast 40% less saturated fat than a leading food service chicken tender, 14 grams of protein per serving, have no cholesterol, and of course are made with no GMOs, antibiotics, or hormones. Beyond Chicken Tenders are currently available at more than 400 restaurants nationwide, and we intend to expand distribution throughout the balance of the year. Separately under our poultry platform, we announced limited time offerings at two fantastic partners, namely Panda Express here in the U.S. and A&W in Canada. For Panda Express, we co-developed a delicious plant-based take on Panda's signature orange chicken dish, dubbed Beyond the Original Orange Chicken. The offering, which became available at 13 locations in Southern California and New York, is a plant-based version of Panda's most popular menu item and has been met with enthusiastic consumer response, making Beyond the Original Orange Chicken one of Panda's most successful regional launches to date. And in another new product from our poultry platform, at A&W, we launch Beyond Meat Nuggets nationwide across Canada. Beyond Meat and A&W first partnered in 2018 to introduce the Beyond Burger to Canadian consumers, and we are thrilled to be bringing more innovation to market with this important partner. While these LTOs and limited distribution rollouts are just the beginning of our reentering to poultry, we're truly humbled by the overwhelmingly positive feedback our Beyond Chicken products are generating, and we are expanding our production capabilities under this product platform as quickly as possible. I'd like to now turn to our progress in China and the EU. First, in China, we continue to ramp up volume at our manufacturing facility in Yaxing, where we commenced commercial production of finished goods in early April. We are currently validating our extrusion capacity, which will enable full end-to-end production capabilities in China. We look forward to driving growth in this key market as we scale our Yajing operation so as to enable locally produced Beyond Meat products that are tailored to the Chinese palette, are available at a competitive price, and are made from locally sourced inputs. Our Q2 commercial highlights from China include the launch of a plant-based spicy beef wrap at KFC China in over 2,600 stores in 28 cities on a limited time basis, as well as the launch of our new e-commerce platform on JD.com, China's largest online and overall retailer. This new presence on JD.com unlocks distribution in roughly 300 cities throughout China and provides an unrivaled nationwide fulfillment network with same or next day delivery to a population of over 1 billion people. Our JD.com launch marks the first time our Beyond Pork product is widely accessible to consumers across China and we anticipate adding more Beyond Meat products to the platform in the future. Turning to Europe, we have completed the construction phase of our new facility in the Netherlands. We continue to produce proprietary dry blends there, and are in the final stages of validating our highest throughput lines yet. These tests are expected to be completed over the coming weeks, and we will be transferring learnings from these higher volume lines to our production sites in the US and China as part of our global cost down effort. Commercial highlights in the EU include several key retail distribution wins across Germany, the Netherlands, and Switzerland, among others. In addition, in July, following a successful trial last November, Pizza Hut UK added Beyond Meat as a permanent menu item at all Delivery Hut locations across the UK. Foreclosing my remarks, I'd like to revisit the three pillars of our long-term growth, taste, health, and cost. As I've noted, it is my belief that it will be a rare consumer who rejects a product that is truly indistinguishable from, healthier than, and below the price of its animal protein equivalent. We are making sizable investments today to realize this outcome. These investments, which are occurring across the U.S., E.U., and China, are vitally important to accessing the full potential of our total addressable market and establishing Beyond Meat as the global protein company of tomorrow. We are investing in all century aspects of our platforms and products, including flavor, aroma, appearance, and texture, or FAT, F-A-A-T for short, with the goal of collapsing the differences between our products and their animal protein equivalents. These investments generate near-term wins, such as the Beyond Burger 3.0 and our award-winning Beyond Chicken Tenders, among others, while enabling through the application of state-of-the-art equipment and best-in-class scientific and engineering talent future products in the US, EU, and China, alongside our other markets that bring us closer and closer to that true north of an indistinguishable build. And to bring these advances to the consumer, we are investing at a healthy pace in the commercialization of products and platforms for our QSR partners and for retail markets. We continue to invest in the nutrition of our products, as well as educating the consumer around the health benefits of going beyond. Our work with Stanford School of Medicine, a five-year program designed to generate clinically and statistically significant data relating to the health impacts of different protein choices, including our products, is an important part of this initiative. And finally, as I referenced earlier in my remarks, we are actively investing in our global cost down program. Most notably today, we are putting in place infrastructure and equipment to drive scale and efficiency gains and, in the case of EU and China, access local supply chains. Though I am pleased with our Q2 results, particularly the recovery in food service and expansion in international retail as we enjoyed some respite from COVID, it is our progress against these long-term growth pillars of taste, health, and cost that continues to hold our focus. With that, I will turn it over to Phil to walk us through our second quarter financial results in a bit more detail.

Thank you, Ethan, for the warm welcome and good afternoon, everyone. Let me begin by saying that I'm excited to join the Beyond Meat team at this moment in the company's history. Although there's plenty of hard work ahead of us, I believe that Beyond Meat is uniquely positioned to fulfill its long-term mission of changing the way we deliver protein to the center of consumers' plates, benefiting human health, our global climate and animal welfare, As the team is fond of saying internally, tasting is believing, and after having the privilege of sampling some of our innovation team's newest prototypes, I'm convinced that we have an opportunity to capture the appetites of meat eaters around the globe. Capitalizing on this opportunity will require long-term focus and investment in our global innovation and production capabilities, our marketing efforts, IT infrastructure, and human capital. I view my role as helping the company to do that in a structured and fiscally responsible way, bringing operational discipline and analytical rigor and ensuring that we simultaneously address the needs of our growing global organization while being disciplined stewards of our shareholders' capital. I'm excited to embark on this journey, and I look forward to getting to know each of you better along the way. With that, let me now dive into our second quarter financial results. As a reminder, Q2 2021 ended on July 3rd, which is later than in previous years, such as Q2 2020, which ended on June 27th. The later Q2 calendar captured more of the high sales volume days leading up to the July 4th holiday in the US. In prior years, these days would have been included in Q3. We achieved net revenues of $149.4 million in the second quarter of 2021, representing an increase of 31.8% compared to the second quarter of 2020. Growth in net revenues was primarily driven by a 218% year-over-year increase in sales to food service customers. reflecting further recovery from COVID-19, which significantly depressed demand levels in the food service channel a year ago. Total retail net revenues increased 6% in the second quarter of 2021 compared to the year ago period, primarily due to increased sales among international customers, partially offset by lower U.S. retail channel sales compared to the year ago period. In the U.S., our continued growth in total distribution A later calendar was not enough to offset the steep year-over-year comp resulting from consumer stockpiling behavior in Q2 2020. Across all channels, net revenue per pound was $569 in the second quarter of 2021, which was flat on a year-over-year basis. Taking a closer look at our distribution channels, in retail across the U.S. and international, our volume of products sold increased 9% year-over-year driven by internationals. Net revenue per pound for total retail was lower by approximately 3% year-over-year, primarily reflecting increased trade discounts in the U.S., partially offset by product mix shift. In food service, total volume of products sold increased 172% year-over-year, while net revenue per pound was up approximately 17% year-over-year. The strong growth in volume primarily reflects broad reopening of economic activity, both in the U.S. and in certain international markets. and a loosening of operating capacity restrictions across food service channels. As we look to Q3 2021, we expect our rate of volume growth in food service channels to moderate in Q3 relative to Q2. This expectation is driven by a tougher year-over-year comp, what we suspect was a tailwind in Q2 attributable to pipeline refill, and some recent loss of distribution in our food service business. In addition, we believe it's prudent to call out that due to recent increases in COVID-19 infection rates stemming from the Delta variant, We're seeing some early signs of a return to a more cautionary stance across certain parts of the food service sector. Moving down the P&L to gross profit. Gross profit during Q2 2021 was $47.4 million, or 31.7% of net revenues as compared to $33.7 million, or 29.7% of net revenues in Q2 of 2020. In Q2 2020, adjusted gross profit which excludes $5.9 million of costs associated with product repacking activities driven by the onset of COVID-19, was $39.6 million, or 34.9% of net revenues. We incurred no such costs in Q2 2021, so our gross margin and adjusted gross margin for Q2 2021 are the same at 31.7%. The year-over-year decrease in adjusted gross margin was primarily driven by higher fixed overhead costs per unit higher transportation costs, and higher depreciation and amortization expense, which reduce gross margin by approximately 170 basis points, 160 basis points, and 100 basis points respectively. With regard to fixed overhead and depreciation expenses, these increases are not unexpected and are being driven by our capacity expansion initiatives ahead of our anticipated future growth. Although such initiatives do put pressure on our margins in the near term, we maintain that in light of what we view as our long-term opportunity and considering the caliber and scale of retail and food service partners we seek to grow with, these strategic decisions are required. Turning to OpEx, total operating expenses were approximately $66 million, or 44.2% of net revenues, in the second quarter of 2021, as compared to $41.8 million, or 36.9% of net revenues in the year-ago period. The year-over-year increase in operating expenses primarily reflects growth in overall headcount levels to support our innovation, operations, and marketing capabilities, as well as our international expansion, increased marketing expenses, higher production trial activity, and increased outbound freight costs, which are included in selling expenses. Net loss in the second quarter of 2021 was $19.7 million, or $0.31 per common share as compared to net loss of $10.2 million or $0.16 per common share. Adjusted EBITDA was a loss of $2.2 million or negative 1.5% of net revenues in the second quarter of 2021 compared to adjusted EBITDA of $11.7 million or 10.3% of net revenue in Q2 2020. Turning to our balance sheet and cash flow highlights, Our cash and cash equivalence balance was approximately $1 billion, and total debt outstanding was approximately $1.1 billion as of July 3, 2021. For the six months into July 3, 2021, net cash used in operating activities was $120.4 million, compared to $44.3 million in the year-ago period. Capital expenditures totaled $51.4 million for the six months into July 3, 2021, compared to $26.0 million for the year-ago period. The increase in capital expenditures was primarily driven by continued investments in production equipment and facilities related to capacity expansion initiatives in the U.S., China, and the EU. Finally, let me provide some commentary about our near-term outlook. As I alluded to earlier, there continues to be uncertainty, particularly in food service channels related to the COVID-19 infection rates and the Delta variant. as well as reimplementation of safety measures in certain jurisdictions and potential impact on customer demand levels. Although we generally expect to see continued year-over-year growth in our food service business for the balance of the year, albeit at a more moderate pace than what we saw in Q2, for reasons I outlined earlier, this outlook assumes reasonable containment of COVID-19 infection rates, both in the U.S. and in certain international regions. In keeping with the more limited guidance reinstituted last quarter, For the third quarter of 2021, we expect net revenues to be in the range of $120 million to $140 million, representing a year-over-year increase of 27% to 48% compared to the third quarter of 2020. Embedded in this guidance are a number of factors that are affecting our typical seasonality between our second and third quarters. These include, first, an anticipated sequential moderation of food service shipments following some pipeline restocking activities. particularly in June. Second, relative to a year ago, we had five fewer shipping days in Q3 ahead of the July 4th holiday, which is obviously one of our key promotional periods during the summer grilling season. Third, we've had some loss of distribution in our food service channels in both our U.S. and international businesses, and some food service venues are finding it difficult to operate at full capacity, also due to near-term labor challenges. And lastly, fourth, We believe some added caution is warranted given the recent uptick in COVID-19 infection rates due to the Delta variant and increased uncertainty associated with that. Although not yet at a level that is causing major concern, we have seen a few early signs of customers reinstituting more restrictive measures and signaling a more cautionary disposition. In terms of profitability, As Ethan stated, we are continuing to invest in support of our long-term growth strategy, which includes investing in capacity, including internationally, investing in additional talent and organizational capabilities, investing in marketing spend, and we're maintaining a robust schedule of production trial activities in preparation for new product innovations we hope to commercialize in the near future. With that, I'll turn the call back over to the operator to open it up for your questions. Thank you.

If you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. And our first question is from the line of Robert Moscow with Credit Suisse. Please go ahead.

Hi. Thanks for the question. I wanted to know if you could give a little more clarity on what you mean by some customers signaling more cautionary dispositions and cautionary measures. Does that also mean that they might be delaying test programs in the QSR channel and pushing those out a little bit later?

Yeah, thank you, Rob, for the question, and good to connect. So I think what we're seeing on the food service side are two things going on. One is there is a labor shortage that has impacted at least one of our launches and has postponed it until the first part of next year. And then second, we are seeing just general conservatism. If you think about some of the particularly independent operators and folks like that that came out of what we thought was the final phase of COVID, they stock up on product, and then there's this Delta variant that comes in, which requires them to be a little bit less confident about their outlook. So they're being more conservative in orders is what we're seeing. And so those two effects, the impact of labor and then the continued bit of cloudiness about the Delta variant, I think is creating a little bit of a drag on food service at the moment. And so for us, I think the main characteristic of the third quarter and our guidance is simply lack of visibility. And so that's why we wanted to be offering this new range. Yeah, okay. That makes sense.

And the second part of my question, international retail, like I really don't know how to forecast it. It's actually a lot higher than I thought it would be. Is this a new run rate at $28 million per quarter? Because it's a lot higher than it was last year. It's a lot higher than it was first quarter. So how would you describe the real run rate for that segment?

Yeah, I mean, I personally am really excited about international retail. I mean, the growth we saw was strong. I think we were up 198% year over year. added about 5,000 stores in Germany, Switzerland, Australia, et cetera. I don't know. I think there's a similar sense of lack of visibility in international retail as I just spoke about in the sense that we're seeing things like demos and promotions, particularly in Europe, pushed out or canceled because of the uncertainty around the Delta variant. And hopefully that's a very temporary thing, and that's obviously an optimistic view on it and the one that we hold, but wanted to be, again, a little bit conservative because of that. So I wouldn't suggest that's going to be the case in Q3 in terms of a run rate, but I do think overall it's a long-term, very, very promising course.

Okay. So you think it's possible that some of these retailers might have pulled forward inventory or, conducted a lot of activity in 2Q and maybe we're going to be a little more cautious until Delta passes. Is that fair?

I think that caution is probably right. Yeah. Yes. I'm not sure about the earlier behavior, but sort of a question. Yeah.

Okay. All right. Thanks. I'll pass along.

Yep. Thank you.

And our next question is from the line of Alexia Howard with Bernstein. Please proceed with your question. Good evening, everyone.

Hi there. So can I ask about the market share trends? Because they've obviously deteriorated somewhat, as we've all noticed in the Nielsen data. But I guess my first question is, what proportion of your US retail business is actually captured by what we see in Nielsen or IRI versus what you're seeing in SPINs and other non-measured channels like Costco? So just want to get a sense for how much are we missing that you guys are getting. And then secondly, obviously with the share trends deteriorating, we know we're lacking a big ramp up in distribution from a key competitor that happened last summer. Do you anticipate those share trends might start to stabilize at any point and what would drive that?

Yeah, so good question. I'll answer the first part of that and then turn it over to Louie. on the second for Phil. So, you know, if you look at, so we had this kind of peak of activity in retail in the second quarter of 2020 as consumers were stockpiling. And then you take a step back from that and begin to look at our share trends from, let's say, November to now. We have had a very steady upward trajectory on that. So I think we're at 21.1 or something like that percent now. And so eight consecutive four-week periods of increase. So I feel pretty good about where we're headed on market share. And we obviously do a lot of analysis around the impact of competition on the brand. And we're actually doing quite well in that regard. We're finding that our brand has maintained the vast majority of our buyers. And these buyers, as I've noted in the comments earlier, in terms of household penetration, buyer rates, frequency rates, etc., they are buying more on a per household basis. And so overall, those trends are strong. And then if you look at, you know, we obviously give some share up to competitors, but we're gaining more from the balance of competitors. And so on a net basis, that's why you see that increase occurring. So, overall, it's hard to compare against that Q2 2020 comp, but if you look at the trends, once that normalized, we continue to gain market share.

Hey, Alexey, this is Luby. So, on the second part of your question, in terms of how much is the SCANA data representative of our U.S. retail sales, so, you know, we subscribe to the SPINS IRI data, and, you know, I know on the street, you guys are probably looking at either IRI or Nielsen. What I can say is for the data set that we subscribe to, it's probably representative of around 70% or so of our U.S. retail business. The large pieces that are not captured in there that make up that 30% would obviously be you know, certain club stores. And then, you know, to a lesser extent, there's some things like, you know, certain natural slash specialty stores and a much lesser extent things like, you know, our DTC, right, that direct-to-consumer, which rolls up into retail as well. But I would say roughly 70% or so is representative of our U.S. retail sales.

Okay. Thank you very much. I'll pass it on.

Alexi, if you do see, one of the things that I found actually encouraging about our market share activity is the sheer amount of money that is being spent marketing around this category and by competitors, and yet we still have this eight consecutive four-week periods where our market share is increasing, and we still hold the number one position, and we still hold four of the top six products in retail. Overall, I think in a competitive environment where there's a lot of marketing going on, we're benefiting from the impact of that marketing in a sense. It's bringing more consumers to the market. As long as our repeat rates keep going up, we're obviously going to benefit from that as more consumers come in and try it and then stick with our brand. So it's a competitive space, but one where we're doing pretty well.

Thank you very much.

And our next question is from the line of Adam Samuelson with Goldman Sachs. Please go ahead.

Thanks. Good evening, everyone. Hi. So I guess my first question is thinking about the production side and the cost environment and appreciating that there's a lot of moving parts in terms of your unit costs. At the moment, maybe just help us think about the inflationary environment you might be seeing in terms of freight, logistics, packaging, raw materials, fixed cost leverage, and how those are playing out. And on the fixed cost point, just how do we think about layering in some of the new production capacity in China and Europe, both in the second quarter and into the back half of the year?

Hi, this is Bill. I'll take that one. So, as we said in our remarks, the primary drivers of our gross margin deterioration, I should say adjusted gross margin deterioration, were really around fixed overhead, transportation, and depreciation and amortization. And so, as we said in the remarks, really the fixed capacity piece we're expecting, we're well aware of. And we are seeing some increases in, as you pointed out, transportation. Transportation is driven by two factors. The first is, what is the raw cost of the truck? And the second is, how are you running your network? And so both of those contributed. On the ingredients side, the materials didn't actually provide a major impact to our gross margin. We are seeing some increases of price, but there are other factors that drive the total cost in the gross margin calculation. And so they're kind of this quarter we're offsetting. So that's where we are on those. In terms of the fixed cost leverage, obviously we're investing to generate more capacity. We are in the process of bringing on capacity in both China and Europe. And so we will start, we're already incurring some costs there and we'll start incurring some more as more equipment comes online. But it also gives us the ability to manufacture close to our customers, create products in the local countries, which we're very excited about. And so we're eager to make those investments and grow those new markets and international.

And if I could just follow up on that, and it ties into kind of Rob's question earlier, I mean, does having the local production capacity help Do you think that unlocks some more significant both retail and food service opportunities in those regions and any framing on how quickly that is? And I'm just trying to get a sense of having what that does to your sales potential over the course of the next six to 12 months, or is it going to be a bit not as significant of a ramp?

I think it's incredibly important in the international market for us to get this end-to-end production fully up and scaled. And so we made the announcement about being under operation at our Yajing facility and now taking that to another level where we're going to actually be doing the full process there instead of just finished goods. And the entire reason that we're investing so much right now in both the EU and in China is to get to that local production, to access local supply chains, and as well to begin to tailor our products to the local palette. So we've almost been able to be successful in international markets without having the right pricing in place and with having products that, while good, were not tailored to those particular markets. So I view the work we're doing today in Nha Trang and Shanghai and in the Netherlands as a step function change that will allow us to offer products at a much more competitive price that are tailored to the local consumer using local supply chains. And it's not just the access to local supply chain. We've also taken the opportunity as we're building anew our production to build much higher efficiency lines So you'll have those two benefits coming together in those locations that allow us to offer a lower cost structure and then lower pricing to the consumer, which is absolutely essential. If you look at where we are, for example, on menu in China, it's way too expensive. And it's the strength of our brand and the quality of our products that allow us to play at that level. But as I've always said, our goal is to be able to ultimately underprice animal protein. Getting access to local protein supply chain in China, as an example, is a really important piece, as well as in the EU. So overall, yes, it's going to be a pretty big benefit to us. In terms of when we'll start to see that come on, I could probably give you more color on our next call on that, because it's very much in motion right now.

Okay, that's all really helpful. I'll pass it on. Thanks.

Thank you.

And our next question comes from the line of Brian Spillane with Bank of America. Please go ahead with your question.

Hey, good afternoon, everyone. Hey, I have two questions. One is just a follow-up, Ethan, to Alexia's question or your comment or response to Alexia's question. You mentioned that, you know, with competitors spending money in marketing, I guess, in the U.S., it's actually helping, you know, stimulate the category. So I guess it kind of raises the question, does it make you think more about maybe spending more in marketing and advertising? You know, as a category leader, it's kind of like when Coke spends, they drive the soft drink category. If you were to spend more, would it actually drive the category? And I have a follow-up.

Did our marketing team get a hold of you? Sounds like a planted question. Yes, and you know my whole thing with that, with marketing. I mean, I think it's incredibly important. You know, we love to – I mean, our story is so strong in the sense that when people start using our product, they do, you know, see the impact. They see it in their health, and they see it in the kind of impact they can have on the issues they care about and, of course, the taste. And so – It's easy to market this product, and we need to then think about how do we amplify those messages. And so all the work we're doing with ambassadors and athletes and things like that is really important. But when's the right time to really start doing that at a national stage, doing the national ads on TV and other pieces? And we haven't yet taken that step. You've seen billboards out there. You've seen a ton of social media ads. You see some limited TV buys. But there is another step up that we can take, and we're very close to that. It has to do with getting distribution in some of our larger quick-serve restaurant partners and things like that, as well as just getting COVID completely behind us. But, yes, you will see us spend more on marketing, and we've got a great story to tell, so we're going to get out there and do it.

Okay, great. That makes sense. And then just as a follow-up, you know, We've had this question a few times over the course of the year, and it relates to just getting the price or the cost of the product down to parity with animal protein. And so I guess a couple of questions around that. One is just, is that both true for retail and food service? So like your landed cost in the food service operators as well as what the consumer sees on the shelf in retail. And then I guess the second part of that is just assuming that that's still the ambition, Does the cost down program when it's completed sort of get you to the point where you can be at price parity and still achieve kind of the mid-30s gross margin objectives that you've had over or aspiration that you've had over a long period of time?

Yeah, no, great question. So I think on the first one, what we publicly committed to is to within now three years or a little less, to be able to underprice animal protein in at least one category. And I think we're on our way to that for sure. And that will materialize in both the retail and food service space. And we're gonna do some fun things actually later this year, potentially in retail, just kind of doing some messaging and some marketing around that. But it's gonna be different for each platform. So poultry is harder, it has a much harder target. but beef is probably the one you'll see us do it in first. And on the margin itself, I'll probably let Lubbe and Phil answer that, but I think in general it's a little bit too early to tell just because there's so many factors. But this program is well underway now, and it's actually exciting. We've got a ton of folks in here working on it. It has to do with these large efficiency lines and gains in throughput. as well as negotiating through our supply chain, as well as some reformulation, some local supply, et cetera. So it's a big effort here. It's one, I think, that is really necessary to unlock the TAM here and give us the type of growth in the out years that we expect. And again, it gets back to these three flywheels or levers of get the taste so it's indistinguishable, get the sensory experience in entirety, whether it's the appearance, the aroma, the texture, Get that all right. Second, make sure the consumer understands it's healthier for them. So that's all the work we're doing at Stanford at Veteran and Third, as I've talked about. Get this cost down. I think it becomes a rare consumer that rejects it after you've accomplished those three goals.

All right. Thank you.

Thank you.

And our next question comes from the line of Ken Goldman from JP Morgan. Please go ahead.

Hi. Thanks. I just wanted a quick clarification. If 3Q21 had five fewer shipping days leading up to July 4th than it did a year ago, I haven't checked the dates on this yet, but is the implication that 2Q21 had five more shipping days leading up to July 4th? And if that's the case, how much did that help retail sales in the quarter? Or maybe I'm misunderstanding that whole thing.

Yeah, this is Phil. I'll take that one. So first of all, it's more about the timing of when the quarter fell. So it's not a different number of days overall. But obviously the lead up to the fourth is a pretty heavy grilling and heavy promotional period. And so it's just heavier volume that fell into Q2 this year versus prior years. So it's not an actual number of days in Q2. It would be different to the number of days in Q1. In terms of the size, a very rough way to look at it, sorry? A very rough way to look at it is just if we looked at Q2 this year, if the calendar had been kind of the same as last year, a very rough number would be about $6 million in the Q2 period as a result of that shift in the timing. So you're sort of trading off early spring days for mid-summer days.

Thank you. That's very clear. And then my follow-up is, you know, you mentioned food service distribution losses outside the U.S. I didn't get the sense they were that big, but can you just fill us in a little bit on what those were and maybe give us a sense of their size and their impact?

Yeah. Hey, Kenneth, Ethan, hope you're doing well. So I think if you think about the overall distribution for the company, we gained distribution over the quarter, went from about, what, 118,000 to 119,000. In the international space, those losses were primarily due to independent operators who didn't make it through COVID sort of washed out during the process versus being dropped from menu or things of that nature. So it was not a big number, and that was from what we understand the cost.

Thanks, Ethan.

Yeah. Anything else?

That's it. Thanks.

Ken, you usually have some sort of zinger here. That's it. All right, thank you.

And our next question comes from the line of Rob Dickerson with Jefferies. Please go ahead.

Great, thanks so much. I just had one question, you know, on the QSR partnerships. I'm sorry, I got a call late, so I hope they didn't ask this already. I think you had said at some point previously, Ethan, that maybe some of those new partnerships that you've recently signed could start to see some product come through maybe toward the end of this year, but probably more of a 22 and go forward event. So I'm just curious, kind of broadly speaking, if there's any update on timing of those products And I'm assuming, you know, if we just take McDonald's for an example, kind of the rollout of the plan, you know, and kind of how you're thinking about that in terms of, you know, kind of ramp this year into next.

Sure. No, thanks for the question. So not to be, you know, unfair to McDonald's and speak for them, I want to step back from them specifically. And if you look at the universe of of QSRs that we're working with that are large and global in nature. I do think, and of course these plans do change because of the, we've talked for a number of different reasons, COVID, labor, et cetera. I think you will see some activity this year that is test in nature and things like that or market analysis and tests and things like that. And then you're right, the general uptick will be in 2022 from what we're seeing. But provided plans don't change, there's something exciting that's coming actually in the very near term to new innovation from us that's rolling out with one of our big partners. So I'm excited about what I'm seeing in terms of the thawing in the QSR space, but I don't think it's going to contribute from those large partners to significant volume in the second half of the year.

Okay, fair enough. And then maybe if I just squeeze one quick one in. in terms of the new chicken product, uh, they're kind of timing expectations on the broader U S rollout, at least in retail. You know, again, is that something we should be expecting to see sometime later this year or, you know, or is that more, more of a, just give a reset, et cetera.

Yeah. I think that's been a really good launch for us. Um, the poultry platform in general and, uh, So we launched with the chicken tenders in broadly in food service and then did the Panda Express, which was a great project, sold out right away almost, I think within a week or so for the four-week plan. And then with A&W, the nuggets that we just launched there nationwide in Canada. And so that's just in the beginning on that platform. You are going to see more activity from our poultry platform in terms of number of customers and activity in the balance of the year. I don't know if we're going to assign a revenue target or number to that publicly, but it is something that we're scaling up now. All right.

Thank you so much.

Thank you.

And our next question comes from the line of Rupesh Parikh with Oppenheimer. Please go ahead.

Good afternoon. Thanks for taking my question. So I wanted to go back to just the loss of, I guess, some of your dunk in distribution. I was wondering if you could provide some more color in terms of what drove that loss of distribution, and then if you have any learnings going forward, I guess, on the QSR side. Sure.

So the Dunkin' relationship, I think, first of all, it's important to note that it's still strong with respect to the western states and we're in all of their western stores and really enjoying the relationship. There was a change in management there and they have every right and appropriately decided to do a review of the menu and make changes and we were part of that. If you look back at our history of QSR launches, we are, from time to time, going to cycle off menus. And so if you look, for example, a couple years ago, Tim Hortons did the same thing. And back then, I don't think this portended any issues with our traction in food service, and I really expect the same in this case. I think you'll see us continue to add QSR distribution of the largest QSRs at a very healthy pace, provided we don't see a sustained resurgence in COVID. Again, it gets back to this most recent few weeks. I've mentioned A&W's Panda Express, etc. But Pizza Hut, for example, in the UK just added us as a permanent menu item, Italian sausage, beef, and pork crumble. The announcement I referenced coming soon. So, a lot of things going on. Then you look at that very product itself and how it's doing at Pete's and Caribou's and Phil's. I anticipated this question, obviously, and in reviewing the data from those stores, I came across a quote they'd shared with us from one of these outlets, Pete's and Caribou and Phil's. where they're talking about basically the three times lift in sales from their original forecast when they launched it back in March, which has held on steady since the launch. And the product at this particular store is the number two item behind the bacon cheddar product, bringing in more Gen Z consumers and driving new customers to business. That's exactly what we want to hear. from our QSR partners. And it's that very product, that breakfast sausage product that's doing it. So I think you'll see us continue to do things. Dunkin', that's my expectation. And, you know, just part of the kind of cycling on and off that occurs in the sector.

Great. And then maybe just one follow-up question. Just given some of the COVID uncertainty out there, as you look at your R&D spending and really SG&A in the back half of the year, you know, should we expect that you guys will still remain aggressive or, you know, or is there a potential for me to cut back in terms of how aggressive you are on the spending side?

I'm sorry, I didn't hear the first part of the question.

Yeah, so just with COVID uncertainty out there, I was just curious, like, you know, how aggressive do you guys plan to still be on the R&D and the SG&A side in the back half of the year?

Yeah, no, so I think it gets back to do we believe that anything has fundamentally changed in terms of the long-term trajectory of the business or not? you know, total market, et cetera. And in fact, the case keeps getting stronger for investment with the brand and what we're doing. And so if you look at the OPEX increase we've had recently, a lot of that OPEX has gone into the areas you'd want, which are, you know, people costs in terms of adding new talent, a lot of that in innovation, a lot of it in commercialization of products. And so we're going to keep doing that because, you know, again, as we viewed throughout the pandemic, these issues, are somewhat transitory and we don't think have an impact on long-term health of the business. So I think we'll continue to make those investments.

Okay, great. Thank you.

Yep, thank you.

And our next question comes from the line of Benjamin Thurer with Barclays. Please go ahead.

Well, thanks, and good evening. Just two quick ones. So first of all, you've clearly accelerated a lot capital expenditure, and you've talked a lot about the investments you're doing over in Europe, over in Asia. We're basically at a run rate roughly double where we were last year. So if we think about the back half and into 2022 and with the ambition you have to further deliver product locally produced, How should we think about your CapEx program in the next couple of quarters just to understand a little bit as well how cash flow is going to look like considering the heavy investments you're currently undergoing? Thank you.

Hey, sure. Ben, this is Luby. I'll take that question. So, yeah, you know, so you mentioned it, right, that if you look at the rate of spend that we've had so far through the year in the first half, we're, you know, running at roughly double, I say, I would say that you should expect a similar type of growth in CapEx in the back half of this year. And in terms of what CapEx looks like next year, we're not providing any sort of guidance around that. But I think what we've said generally that, look, over the next couple of years, this is going to be a pretty capital-intensive business because we see this opportunity ahead of us, and we are investing to try to capture our fair share of that. And so when you think about some of the things that we have going on, so there's obviously sort of capacity expansion there. is always sort of a constant that we're spending against, right? We have this new headquarters in L.A. that's going to house our new state-of-the-art innovation center that's coming up. We're currently looking, I think we mentioned this previously, at having a fully dedicated pilot production facility somewhere close in this area, so we'll be spending towards that. And then this cost-down program that we've mentioned, right, we are really taking... you know, a very wide lens and looking at all potential options, right? And so, you know, some of those initiatives that we are looking at from a cost down perspective may require some additional capital spending. So, you know, we'll give you guys an update on where we expect to be for 2022 when we are, you know, guiding for 2022. But, you know, we've said generally, look, the next couple of years are going to be pretty capital intensive, but clearly, you know, You know, we wouldn't be doing this if we didn't think that, you know, this is required to capture, you know, a significant chunk of the opportunity that we see ahead of us.

Okay. And then my second question is about your distribution channels and the brand awareness slide you're showing. So it really looks like that with the exception of international retail, there was a sequential deceleration. So we saw a few outlets in international food service as well as in U.S. food service. but we also saw fewer outlets in U.S. retail. Could you elaborate a little bit about what's going on in those segments? I understood the retail pieces that you talked about, Germany, Australia, Austria, U.K., so that's clear where the uptick is coming from, but what's been happening in U.S. retail and in food service, both international as well as domestic?

Hey, Ben, I'll take that one as well. If you look at the retail total growth in doors, I think what we've said is that in terms of a growth rate from the total number of doors that were in the US, you should expect to see that decelerate because we are so well distributed in the US today. we are pretty much in all of the major retailers here in the U.S. So the real opportunity from a distribution perspective in the U.S. centers more around the continuing to increase our product offerings per store as opposed to, you know, continuing to grow that number of doors, right? On the U.S. food service piece, right? You know, so, you know, we talked about Dunkin, for instance, right, that was obviously part of the driver there. The international retail, we're seeing continued growth, you know, in some of the markets that Ethan mentioned in his prepared remarks, Germany, Switzerland, Austria, Australia, for example. So I think you'll continue to see pretty robust growth there. And then, you know, what we saw in international food service, right, I think we lost 1,000 total doors roughly last in this quarter on a sequential basis. I think part of that is just reflective of the lingering impact of COVID-19, where we had primarily some of these small independent operators. A lot of them were in Canada, where we lost some of that distribution. But we think, look, the long-term arc of the distribution rollout in international food service still looks very attractive. So we would expect to see you know, growth there over the long term.

I think to Luby's point, if you look at, you know, the total distribution points in the U.S., we did see this 55% year-over-year increase, and that's not just adding numbers of stores, but obviously being able to introduce new products into existing stores. And when you walk down the aisle at retail, you do see just a few Beyond Meat products in any given store. And so, you know, the opportunity to, innovate across all three of our platforms, beef, pork, and poultry, and dramatically increase those total distribution points is significant for Beyond Meat, and that's really our focus on the retail side.

Okay, perfect. Ethan, thank you very much. Thank you.

And our next question comes from the line of Michael Lavery from Piper Sandler. Please go ahead.

Thank you. Good afternoon. You call out the 70% increase in your manufacturing capacity, but you're certainly also looking at a near-term run rate from sales that's not that close to that level. Is the right way to think about bridging that gap, the price cuts that you anticipate, the capacity facilitating so that you would have the volume bump and some sales lift but not in the magnitude of a 70% range?

How do you think about your side on utility capacity, basically? Yeah, that's a good question. So I think it is a combination of these efficiencies we're going to be driving through increased throughput and all the other cost-down programs that we're pursuing. But also to think about the number of partnerships we have in place and the amount of preparing we're doing for those partnerships. And then what I just said about U.S. retail should be layered on top of that. in terms of different form factors. And so you see a steady improvement in the COG structure as we implement this Cost Down program on our existing product lines, the ability to offer those to consumers at a lower price, and then you layer on the strategic launches with our partners, and then the new innovation coming across those three platforms, and that's how you bridge that.

Okay, that's helpful. And Just a follow-up on the U.S. Food Service outlet. You've got the 34,000 you're calling out this quarter now. I guess just how current or accurate is that? And maybe specifically thinking, is all the Dunkin' update reflected there already, or is there some trickle to come? Just trying to help. Can you help us understand what to have in mind for 3Q and beyond?

I think similar to what I was saying earlier about I think you're going to see activity in the balance of the year from some of our QSR partners writ large. But in terms of meaningful additions of stores, that's something we probably can't comment on without – anyway, probably shouldn't comment on it one way or the other.

But I guess just specifically what you know has already happened in the last quarter or I guess even this month is reflected in that 34. Yes. Okay, great. Thanks a lot.

And our last question comes from the line of Ryan Bell with Consumer Edge Research. Please go ahead.

Hi, everyone. I know we've had a reasonably good I know we can get a reasonably good sense of your share within U.S. tract channels. It's obviously a lot harder for us to get a read on the competitive positioning within food service just overall. Maybe a difficult question to answer, but would you be able to give us a sense as to where you stand just from a broad share perspective for meat alternative products in food service relative to some of your competitors?

Yeah, I mean, so the good news on both the retail and food service side of our business, we hold the number one position in terms of, you know, the product and on the retail side and brand on the food service side. And that's the MPV data, which is, you know, the broad line distribution, not direct delivery. And so, doing really well there. And it's both up and down the street business where, you know, not the larger chains or regional chains, but the independent operators. We're doing well there. We're seeing good growth there. And then, of course, the regional and national and global QSRs. So, even the partnerships, if you look at that, it's a good way to assess. I mean, the partnerships we have with McDonald's, with Yum, across the... KFC, Pizza Hut, and Taco Bell banners were really well positioned in the food service space. Lubick, you want to add to that?

The only other thing that I would add to that, Ryan, is that it's very difficult to get an accurate picture of the entire food service space because, to Ethan's point, the data that we're looking at and we're referencing and we're sharing with you guys is NPD data. which for the most part excludes the largest QSRs. Those are typically your direct delivery type of customers. And so it's very hard to get the entire view. But as Ethan said, at least from the data that we do see, which is the NPD data, which is primarily broad line distribution, we have the number one market share position there. And so we feel really good about our positioning. And then obviously, we're going to continue to pursue growth with some of the large strategic QSR partners out there, which would not be captured in that number.

Okay, so it's fair to say that from what you can see in that data that you'd feel that you're gaining share?

Yeah, we've certainly gained share, yeah, within the NPD tract channels, yeah, and we continue to hold the number one share there, so.

Great, thank you. And one last one for me is sort of a bigger picture question. When you're thinking about the broader household penetration and purchase frequency for your products relative to traditional meat analogs, how far along that journey are you in terms of the comparison of looking at, say, the weekly and monthly household penetration, repeat rates, and just the general utilization? I know that we're seeing gains overall when you're looking at an annual basis. You sort of see it in different time frames, but I would assume that you guys are still quite far off from where traditional meat products are, and that provides a strong runway for incremental growth there.

Yes, sure. I can take that. So, yeah, look, I think there is still a pretty wide gap between the entire category, plant-based meat and animal protein. And so to your point, I think what that means to us is that there's a significant opportunity to continue to grow this business. So we are not looking at our household penetration on a weekly basis. you know but certainly when we get updates you know we are pleased to see that it continues to take up and in fact you know the sequential increase that we saw in this quarter was was was quite a step up versus you know the last couple of quarters and so we're really pleased with the way that the the overall growth in the business is trending but there's still a huge huge market out there right when you can start to compare us to animal protein so I We obviously want to try to capture as much of that opportunity as we can over the long term. Thank you. Sure.

And we have no other questions in the queue at this time.

Great, so I'll just offer a few remarks before we sign off here. First and foremost, as we were talking about with the company, we're very hopeful that everybody will go out and get vaccinated so we can all get back to business, get back to school, and put this thing behind us. We're certainly encouraging that in a significant way here at the company. This last quarter, Q2, was our largest revenue quarter ever, so record revenue and by quite a margin, so we're really excited about that. Keep commercializing these new products, and the launches that I mentioned were just very important and exciting milestones for our company. Continuing to maintain that top four of the six items in the category in retail and have that number one position. and then continue to advance these global partnerships and put infrastructure in place in the EU and in China to be able to be of service. So, so many exciting things happening, you know, and we did want to offer this more conservative look at Q3 just because there is so much ambiguity in terms of these broader market conditions. And we look forward to coming back and talking to you guys again in a few months and hopefully having a lot more clarity on where the general economy is. So, thanks very much. Thank you.

That does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a great day.