Beyond Meat, Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Beyond Meat Incorporated 2021 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Should you require operator assistance during the conference, please press star zero to signal an operator. Please note this conference is being recorded. I will now turn the conference over to your host, Luby Katua, Vice President, FP&A Investor Relations for Beyond Meat. Thank you. You may begin.

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 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, 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 October 2nd, 2021, 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, 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, Luby, and good afternoon, everyone. Before discussing our Q3 2021 results in detail, I want to provide context for my commentary and clearly differentiate between short-term variability on the one hand and ongoing strong progress toward our long-term vision of becoming tomorrow's global protein company on the other. The broader context of my remarks can be summarized in two main points. First, my comments are our best understanding of an environment that is characterized by rapidly changing, and we believe largely transitory, dynamics. We are reminded, for example, that a quarter ago, Q2 2021, we posted record net revenues of $149 million. We believe our long-term thesis is strengthening, and undeterred by current instability, we've been making bold investments in our innovation, manufacturing, operations, and sales and marketing capabilities across the US, EU, and China. We make these investments not as hopeful thinking, but rather prudent planning against forthcoming launches and strategic growth activities. Second, my comments today are focused on the entirety of the quarter, how the business performed relative to our expectations as we began 2021 and our promising path forward. The headline for the third quarter relative to our expectations at the onset of 2021 is that it was a difficult operating environment, highly variable demand reflecting the Q2 retreat and then Q3 reemergence of COVID in the form of the Delta variant, sustained labor shortages impacting certain customers as well as our own facilities, and other high-impact supply chain disruptions are among the challenges characterizing the quarter. As we headed into Memorial Day, we, like many in the country, felt that the long shadow of COVID was finally receding. We saw growth in food service as restaurants and venues reopened to strong consumer demand and posted our aforementioned record quarter in Q2 2021. We began looking eagerly to the resumption of activities with our strategic quick-serve restaurant partners, both in the US and abroad, a key building block in our originally anticipated growth plan for 2021. Yet as the summer wore on and the Delta variant took hold, we did not see a sustained recovery. And as you will recall, in food service, COVID-19 disruptions in consumer behavior are particularly challenging for the segment of customers that we serve. Though in our largest active chain in the U.S. that does offer drive-through, we saw a meaningful uptick in velocity in the quarter, The majority of our customers today rely on in-store and in-venue consumption for sales. Accordingly, we were disproportionately impacted throughout the quarter as the Delta variant dampened consumer activity within the core of our food service customer base. Further, within food service, we believe that the downward pressure exerted by the Delta variant was further exasperated by labor shortages that drove reduced operating hours and menu rationalization. For our business, the extent that moving from test to fuller launches with our strategic QSR partners is an important contributor to our revenue build. The combined contribution of COVID's long tail and related labor shortages has had a particularly disruptive, though we expect transitory, impact on our growth trajectory. In short, though as we plan 2021, we held cautious expectations by the second half of the year we'd have our footing back in food service and specifically be more active with many of our QSRs, we saw further delays. Unlike 2020, when food service challenges led to a marked increase in retail activity, as food service demand reduced, we did not see a corresponding increase in activity in retail at either the brand or category level during the third quarter. We believe that the following broader behaviors and trends may be at play. This expectation is not intended to be exhaustive, and with time, we expect we will gain a fuller understanding of the drivers behind third quarter demand levels. One, consumers reported fewer, less frequent trips to the store. Two, consumers reported being less open to trialing new products. Three, consumers reported less interest in healthy options. Four, the cancellation or reduced scope of our sampling programs as the Delta variant spread limited new consumer exposure to our brand and category. Five, To a much lesser extent than food service, though still relevant, labor issues created complexity and possibly impacted demand at retailers due to delayed shelf resets and less frequent restocking. Six, with increased competition over the past two years, we're seeing, as expected, some impact on our market share. However, in looking at the Q2 to Q3 SINs market share data on a product mix neutral basis, it does not reveal competition to be a significant contributor to the aforementioned deceleration. Finally, when considering demand, it is worth noting the possible impact of our Q2 2021 revenues. We experienced a significant increase in shipping toward the end of the second quarter, driven in part by retailers stocking up for July 4th and the balance of summer grilling season, and food service operators anticipating a broader reopening of the economy. We believe these heavier levels of shipping during the last month of Q2 likely negatively impacted Q3 reorders. Turning supply chain, we experienced a series of disruptions throughout the quarter. These included labor shortages in our facilities at a transportation partner, at co-packers, and at third-party logistics providers. Collectively, these labor issues added complexity across operations and impacted our ability to fill certain orders. Additionally and significantly, Severe weather interrupted water supplies for two weeks at our Pennsylvania production facility, as well as destroyed sizable amounts of packaging inventory at a related storage center. Though we were able to reallocate certain materials from other locations, the loss of packaging materials at our storage facility had a sustained impact on our ability to fill orders as we awaited replenishment of damaged inventory. I do want to take a moment to discuss the general balance of exogenous and internal factors that contributed to our results this quarter. As you know, at Beyond Meat, we are highly focused on driving, with urgency, continuous improvement in our products. This cultural bent is captured in multiple ways, including the language we use to describe our processes, such as the longstanding Beyond Meat Rapid and Relentless Innovation Program, our internal innovation initiative. We apply the same lens of continuous improvement to our own organization, and this difficult operating environment highlighted areas of opportunity in our maturing company. As labor challenges, severe weather, and an explosion at one of our key suppliers each interfered with our operations in Q3, we worked to materialize planned redundancy more rapidly across our supply chain. Further, we encountered delays in some of our commercialization efforts, certain of which highlighted the need to expedite the consolidation of our scaling activities within a dedicated commercialization facility here in Los Angeles, one that is now underway. Having weathered both literal and figurative storms throughout the quarter that brought into sharper focus areas for more rapid development, we are emerging as an even stronger organization. These disruptions notwithstanding, through Q3 2021, we remained highly focused on the execution of our long-term strategy. And accordingly, we are pleased to report that we continue to gain ground across key enablers of our long-term growth. Broadly, we've invested heavily in readying an impressive range of products for our QSR partners, but significant resources against expanded capacity for planned launches. Our efforts are, of course, not limited to the U.S. market. As in the U.S., in the EU and China alike, we continue to strengthen and grow our capabilities, including sales, marketing, manufacturing, operations, and innovation, among others, as we expand our presence in these important global markets. Finally, we expect next month to announce an exciting addition to our leadership team and operations, one that will bring valuable and directly relevant experience in serving our QSR partners and scaling global food manufacturing operations. With this context as background, I will now provide greater detail into our Q3 results. We generated net revenues of $106 million, representing a 13% increase over the third quarter of 2020. Total retail net revenues were up 5% year-over-year, with continued strength in international retail, which increased 168% year-over-year, partially offset by weaker results in U.S. retail, which declined 16% year-over-year. Representative of the unusual patterns we are seeing, our third quarter U.S. retail net revenues were lower on a sequential basis, which runs counter to the general seasonality we were accustomed to seeing in our pre-COVID numbers. Our leadership position in U.S. retail continues to be borne out in product sales rankings, where we maintained our number one top-selling SKU position across all of plant-based meat and continue to own four of the top six best-selling SKUs in the category. Further, we gained distribution with a 23% increase in TDPs versus a year ago, according to spin data for U.S. Mulu, for the 12 weeks ended October 3rd. As you know, increasing TDPs is a positive outcome for our brand over the long run, but tends to exert downward pressure on velocity. Specifically, we saw a 21% year-over-year decline in velocity for the brand in U.S. Mulu for the same period. These dynamics notwithstanding, our brand velocity remains nearly three times higher than the category average on an absolute basis, which we believe strengthens our case for further distribution expansion with retailers. We continue to see consistent progress in important metrics such as household penetration and repeat rates. While household penetration for the category was down slightly on a sequential basis, we note continued advancement in our own penetration, which increased 20 basis points sequentially and 90 basis points year-over-year to 6.4%, according to SPIN's IRI consumer panel data for the 52 weeks ended October 3, 2021. With more households buying our products, we were pleased to see that our repeat rates also increased 60 basis points sequentially to 52.6%. Our buyer rate decreased 4% sequentially, likely impacted by higher promotional activity in Q3, while our purchase frequency was modestly lower quarter over quarter to the tune of negative 0.3%. We continue to innovate in the retail space and just recently began the early stages of a national rollout of Beyond Chicken Tenders. This product, derived from fava beans, is a clear winner on taste, texture, and nutrition, as it delivers 50% less saturated fat than traditional chicken tenders, while containing no GMOs, antibiotics, hormones, or cholesterol. We are pleased to report that right out of the gate, Beyond Chicken Tenders won the prestigious 2021 Food and Beverage, or FABI, Award from the National Restaurant Association. You should expect to see more from us under this platform in the near future, as we seek to offer a broad assortment of product offerings that grow our chicken portfolio. Turning to U.S. Food Service, we maintained our number one brand position in terms of dollar share, according to NPD data, for the three months ended September 2021, despite the intense variability from Q2 to Q3. Net revenues decreased 7% year-over-year and were, as noted, well below our Q2 total. As I shared, a good portion of our U.S. food service business, about two-thirds historically, but even higher now, is composed of outlets that were disproportionately impacted by COVID-19 and the emergence of the Delta variant. These include small independent restaurants, bars and pubs, corporate catering services, hotels, movie theaters, shopping arenas and amusement parks, among others. Internationally, our business again generated strong results with retail sales up 168% year-over-year and food service sales up 117% year-over-year, collectively reflecting gains in both distribution and average sales per outlet. I'll now provide a brief update on some recent product highlights and key strategic initiatives. McDonald's initiated limited-time offerings of the McClant Burger made with Beyond Meat patties in three European markets, including Austria, the Netherlands, and the U.K. In addition, as you've likely noted, last week McDonald's initiated a small, limited-time operations test at eight restaurants here in the U.S., We are excited to work with such an iconic global brand as McDonald's, and we're equally excited to see the overwhelmingly positive media response generated by the early tests in Europe. At the end of October, I was visiting our facilities in the Netherlands and had the opportunity to buy the McPlant Burger. It was, as expected, outstanding. On returning to the U.S. the following week, I was able to do the same in Los Angeles. In both instances, I watched and interacted with other consumers as they enjoyed the McPlant. Encouragingly, these consumers fit the mold of the flexitarian, and while not vegan or vegetarian, we're enjoying the McPlant burger. In Canada, we introduce Beyond Meat Nuggets nationwide at A&W on a limited time basis, marking another great milestone with one of our earliest QSR partners. This exciting product offers 18 grams of plant-based protein per six-piece serving, and as always, is made from simple plant-based ingredients with no GMOs, antibiotics, hormones, or cholesterol. Also in food service, Pizza Hut launched a limited rollout of our latest product innovation, Beyond Pepperoni, at roughly 70 locations across five U.S. markets. This new product, co-developed with Pizza Hut's culinary teams, truly showcases the strength of our innovation capabilities as we overcame numerous technical challenges to ensure that Beyond Pepperoni is nearly indistinguishable from Pizza Hut's iconic original pepperoni, even down to its crispiness properties. This limited offering at Pizza Hut in the U.S. comes on the heel of the permanent menu launch of Beyond Meat products at Pizza Hut UK in July. Given pepperoni's consistent ranking as the number one selling pizza topping in the U.S. and elsewhere, we are excited about the potential of this product line and are eager to expand its availability over the coming quarters. Last, but certainly not least, in the food service space, we recently announced the expansion of our test with Panda Express to 10 major markets across the U.S. at 70 locations. This follows the initial success of Beyond the Original Orange Chicken at select Panda Express locations in Southern California and New York City, which garnered rave consumer and media reviews and sold out in less than two weeks at all SoCal stores, making it one of Panda's most successful regional launches to date. We are proud to be Panda's partner of choice to recreate their iconic and most popular menu item. Let me now provide a brief update on our progress in growing our operations in the EU and China. We are now capable of performing each aspect of our production process in-country in the Netherlands and China, from production of our dry blends to extrusion to finished goods assembly. Moreover, in the Netherlands and China, we are operating our highest throughput extruders yet. For some time now, we've been building toward full end-to-end production in both geographies, and reaching this milestone is a major accomplishment for our team. I'm extremely proud of them and their work. As you can imagine, scaling complex processes in different economies around the world can be challenging. Doing so during the last 18 months under COVID-19 conditions complicated the work of our employees considerably. In just one example, due to travel restrictions to our Yajing China facility, we were required to conduct a significant amount of scaling activities with new staff over video conferencing equipment. We continue to pursue our global cost down program with the end goal of price parity with animal protein in at least one category, beef, pork, or poultry, within the next two and a half years. Today, we are working through a robust pipeline of cost reduction opportunities, including in the areas of raw ingredient procurement savings, waste reduction, throughput improvement, network optimization, including potential insourcing opportunities, warehousing and transportation efficiencies, before-mentioned local production in our global markets, and packaging optimization. With these efforts already underway and those still to come, I feel very confident about reaching our cost parity goal within the committed timeline. In closing, it remains our objective and focus to insulate our long-term strategy from short-term conditions. Just as we did not adjust our focus and strategy as a result of record revenues in Q2 of this year, continue to execute against our plan despite a difficult third quarter. As such, this remains a period of intense investment in our future. Here and abroad, we will continue to make the innovation, commercialization, marketing, and global production investments necessary for long-term growth. These investments are not founded on hopeful thinking, but rather are the result of planning against key partnerships, market development initiatives, and other opportunities, many of which have been delayed due to COVID-19 and the Delta variant, labor shortages, and supply chain challenges, including our own and those of customers. One of the benefits of being a relatively new public company whose early experience in the public markets has been forged by the last 18 months is enduring multiple stress tests that reveal both strengths and weaknesses and generate accelerated learning. We are emerging from the pandemic and its attendant challenges are far stronger as a result and are continually making progress on our long-term growth pillars of taste, nutrition, and cost as we prepare for 2022 and beyond. With that, I'll now turn it over to Phil to walk us through our third quarter financial results and outlook for the balance of the year.

Thank you, Ethan, and good afternoon, everyone. Let me provide a broad overview of our third quarter financial results before commenting on our outlook for Q4. We achieved net revenues of $106 million in the third quarter of 2021, representing an increase of 13% compared to the third quarter of 2020. Q3 2021 net revenue fell short of our initial guidance, and we provided a press release on October 22nd outlining the factors we believe led to our revised revenue guidance of approximately $106 million. So I will not repeat those factors here. Growth in net revenues was primarily driven by a 143% year-over-year increase in sales to international customers. Partially offsetting the increase in international, U.S. net revenues declined 14% in the third quarter of 2021 compared to the third quarter of 2020, with U.S. retail down 16% year-over-year and U.S. food service down 7% year-over-year. Taking a closer look at our distribution channels in retail across the U.S. and international, our volume of products sold increased 8% year-over-year with international up 123% and the U.S. down 9%. Net revenue per pound for total retail was lowered by approximately 2% on a year-over-year basis, primarily reflecting increased trade discounts in the U.S. In food service, total volume of products sold increased 24% year-over-year with international up 55% and the U.S. down 3%. Net revenue per pound increased for total food service was up 8% year-over-year, driven by reduced trade discounts in international compared to the year-ago period. Moving down the P&L to gross profit, gross profit in the third quarter of 2021 was $23 million, or 21.6% of net revenues as compared to $25.5 million, or 27% of net revenues in Q3 of 2020. In Q3 2020, adjusted gross profit, which excludes $1.8 million of expenses related to inventory write-offs and reserves and product repacking costs attributable to COVID-19, was $27.3 million, or 28.9% of net revenues. We incurred no such costs in Q3 2021, so our gross margin and adjusted gross margin for Q3 2021 are the same at 21.6%. The year-over-year decrease in adjusted gross margin was primarily driven by increased transportation costs, inventory write-offs, warehousing fees, depreciation and amortization, partially offset by improved co-manufacturer fees. On a sequential basis, decrease in gross profit was driven by increased sales discounts, increased inventory write-offs, increased warehousing, transportation costs, and depreciation and amortization. Turning to OpEx, Total operating expenses were approximately $77 million in the third quarter of 2021, as compared to $44 million in the year-ago period. The year-over-year increase in operating expenses primarily reflects growth in overall headcount levels, mainly to support the company's operations, innovation, and marketing capabilities. Increased spending and marketing activities, higher professional services fees related to recently established consulting agreements, higher restructuring expenses for primarily reflecting increased legal expenses, increased production trial activities, and higher outbound freight costs included in the company selling expenses. On a sequential basis, the increase in operating expenses primarily reflects higher professional services fees, increased marketing activities, higher restructuring fees, and increased outbound freight costs. Net loss in the third quarter of 2021 was $54.8 million, or 87 cents per common share as compared to net loss of $19.3 million or 31 cents per common share and adjusted net loss of $17.5 million or 28 cents per common share in the third quarter of 2020. Adjusted EBITDA was a loss of 36.8 million or minus 34.5% of net revenues in the third quarter of 2021 compared to adjusted EBITDA of $4.3 million or minus 4.5% of net revenues in Q3 2020. Turning to our balance sheet and cash flow highlights, our cash and cash equivalence balance was approximately $886 million, and total debt outstanding was approximately $1.1 billion as of October 2nd, 2021. For the nine months ended October 2nd, 2021, net cash used in operating activities was $191 million, compared to $42.7 million in the year-ago period. Capital expenditures totaled $104.3 million for the nine months ended October 2, 2021, compared to $38 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 and initiatives. Let me now provide some commentary about our near-term outlook. Overall, we continue to operate in a challenging and variable macro environment, affected in part by ongoing uncertainty related to COVID-19. labor issues at both retail and food service customers, significantly increased transportation costs, raw ingredients and packaging inflation, and global supply chain challenges, which have had a minimal impact on our business thus far, but could represent potential headwinds nonetheless. Combined with the dynamic nature of our category, Richmond, which remains nascent, this backdrop adds significant variability to our realized end customer demand, thereby increasing forecast and complexity. As such, although our outlook does not assume a significant deterioration in the operating environment as it stands today, it does reflect some conservatism, which we believe is appropriate given the challenges I just highlighted. For the fourth quarter of 2021, we expect net revenues to be in the range of $85 million to $110 million. The following factors worth highlighting are embedded in this guidance. First, we anticipate a moderation in year-over-year growth across all channels due to the fact that this year our fourth quarter contains five fewer shipping days compared to the fourth quarter of 2020. Second, we expect our fourth quarter results to be impacted by knock-on effects from the operational challenges in Q3. Although we expect to be fully recovered by the end of this month, these issues presented some headwinds early in the quarter. In both U.S. and international food service channels, ongoing labor challenges, as well as general caution based on COVID-related uncertainty, are also expected to have a dampening effect on demand levels. Finally, we expect a moderation in sequential growth due to accelerated orders in the third quarter of 2021 that would otherwise have been expected to materialize in the fourth quarter. In terms of profitability, as Ethan described, we continue to invest in support of our long-term growth strategy, which includes investment in people and infrastructure. Moreover, with our expectation of accelerating food service activity next year, including in the QSR space, we are maintaining a robust schedule of production trial activities to prepare for the commercial launch of new product innovations. We're investing in marketing activities to draw awareness and trial. We expect to see a steady increase in the pace of cost down initiative implementations, some of which require upfront investments. These activities will continue to exert pressure on our profitability in the near term. However, given the long runway we continue to see ahead of us in the global plant-based meat category, and in order to maintain and expand our leadership position within the sector, we believe these early levels of investment are necessary and will ultimately maximize value for our shareholders over the long term. With that, I'll turn the call back over to the operator to open it up for your questions. Thank you.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. If at any time you wish to remove your question from the queue, please press star 2. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Brian Spillane with Bank of America.

Hey, good afternoon, guys. I had two related questions just on how we should be thinking about expenditures going forward. I think there's still about $800 million of cash on the balance sheet related to the convert you did earlier this year. So just trying to get a sense of how quickly that money is going to be deployed. And again, assuming some of that is infrastructure, some of that is going to be hiring people. Just trying to get a sense of the cadence of that, I guess, as we begin to look over maybe the next year or two. And then maybe just a second related on expenses. And I think, Ethan, we might have talked about this on the last earnings call, but some of the commentary you made about just what you were observing with consumers, especially in U.S. retail, seemed to suggest that maybe consumers are not getting the message, for lack of a better way to describe it. So do you see a need maybe to not just increase marketing spend, but to really maybe sharpen the message a bit so consumers understand the health proposition, the taste proposition of the products?

Oh, great. Both good questions. And so let me begin with a more general view on the first around the kind of pace of spend. And I want to even take a step further back than I did in the comments to give my perspective on kind of what this quarter was about. There were a lot of different disruptions that occurred throughout the quarter, but if you look at where we've been in the second and third quarter of this year, we had 149 last quarter and 106 this quarter. If you take the average of those two, 127.5, If that were our results this quarter, right, we'd be up 35% year over year. So I'm not excited kind of either way on these results, other than to say that there's a lot of lumpiness and timing issues in them. And so, you know, the spend that you see is not spend against the current activities, right? It's really about the future that is, I think, around the corner for us. And that relates to all these deals that you've heard. about over the last 12 months, whether it's the joint venture with Pepsi and the Planet Partnership, and I think they were public about putting a product into the market next year in 2022 with that. You look at the McPlant tests here in the US and then the larger activities in the Netherlands and Austria and the UK, for example, which from everything I've seen in the media, which you guys have seen, so not speaking for McDonald's, but just characterizing what you see in the press, Those have been successful. And then you look at the activities across our YUM partnership, whether it's KFC in China or Pizza Hut here in the U.S. with the pepperoni test or Pizza Hut with the ongoing distribution in the U.K. of three different Beyond Toppings. And then, of course, you hear Taco Bell over this year talk about plans with us. So all of these things are accumulating within our system and requiring us to, in a good way, to make investments to be able to serve these future opportunities. And you go into, you know, whether it's Canada and A&W or the Panda Express here in the U.S., you look at continued rollout of new products and retail. And, of course, internationally, we're making significant investments, as I mentioned in my comments, just got back from the EU, both in the EU and China. And so all of those are not about this year and these results during this period of what we would characterize as instability. but rather for 2022 and beyond. And so I think it's, you know, an opportunity for us to continue to lay the core foundation of our future growth. And so, you know, if you were to look in the years ahead and start, you know, thinking about what type of revenue would come in from those opportunities, I think this level of spend in OPEX is entirely appropriate for those. So I don't know if you guys want to add any further detail to that.

I guess the only thing I would add, this is Phil. You know, one thing that we talk about is make sure we maintain flexibility and, you know, use a mix of co-manufacturers and our own manufacturing. And so, you know, as we look forward, we'll continue to look for what best allows us to serve our customers. We'll realize the best economics and give us sort of flexibility there. So that'll be a factor in this as well. And we know, you know, potentially with doing some of our own manufacturing versus co-mans, there's potential cost implications. that are favorable, and so we're going to weigh all those things in addition to supporting our customers and looking at new products.

Okay, but fair to say... Just to circle back on my comment, I mean, if you... I wouldn't expect kind of a continued acceleration of OpEx spending, you know, sort of for year upon year, right? What we're doing is building to a particular launch point that we see in the pretty near future. versus this setting the trend for percentage of revenue for many years forward.

Okay, so fair to say the environment hasn't discouraged you, like you're spending what you need to spend to get where you want to get from a revenue perspective over the next year or two.

Yeah, absolutely. No, it has not discouraged us at all. I mean, I think the work we're doing, the foundation we're laying, I think is quite strong.

And then, Ethan, just on the marketing message, anything that needs to be tweaked there? Fair comment.

Yeah, I know, I think it's a great question. I think we need to continue to, you know, the reason we did the Stanford work and we had great results from that clinical trial was to create more data around the point of the health benefits of our products. And we have a five year program that we're doing with Stanford to continue to do studies in that regard. And so coming out stronger in 2022 with our health message, I think is important. And then of course, I think more and more consumers now are really focused on climate, right? You know, you've heard me say in the past that that's something that we market, you know, less directly around. But to the extent we can empower consumers who are feeling pretty helpless about what to do in their own individual lives about this, we're going to talk about that as well in 2022. So I think you'll see our most aggressive marketing to date in terms of, you know, focus and spend on those broader attendant benefits of our products. All right. Thank you. Yep.

Our next question is from Alexa Howard with Bernstein.

Good evening, everyone.

Hey, there.

Can you hear me OK? OK, so two questions. The first one is around P prices. We've obviously seen those surge on the yellow P price by over 100% over the last year. And in recent months, it's really jumped up. How much do you already have contracted out in contracts that are already captured for fiscal 22, given your demand expectations, and what could that do to margins? That's the first question. And then the second one is more around the demand side here in North America, particularly in the retail channel. I think you showed in the presentation that the repeat rates were improving sequentially. Do you have numbers around that? I think household penetration you also mentioned was up sequentially. And yet the retail sales are down sequentially quite a bit, even as velocity trends and total distribution points seem to be up sequentially on a year-over-year basis, if that makes any sense. I'm just trying to wrap all that up together and try and figure out what's going on with the demand and whether it has stalled somehow in the US at a category level, or whether it's really more somehow supply related and all the other challenges you've been facing. Thank you.

Yeah, very good question. Thank you. So I think the second one first and then turn it over to Phil for the question on pea protein, which I think we have a nice answer for. It is an interesting thing, right? So you're seeing household penetration increase. I think we're up at 6.4%. That's about 20 basis points sequentially and about 90 basis points year over year. And then repeat rates, you know, so more households buying it, and then, of course, people enjoying the product and buying it, again, I think are up around 52.6%. So feel good about those. Then you look at kind of broader brand awareness, and we have the number one spot now in total brand awareness, displacing Morningstar for the first time. And then, you know, in terms of that number, it's 61% brand awareness, which is compared to an average of less than 30% for other leading plant-based brands. So we're really still doing what we set out to do, which is to lead this movement. And we're still the number one product in retail, as I mentioned, for the top six, number one in food service, according to NPD data. So all these things would suggest that a quarter like this wouldn't happen. And I think that's what's so unusual about this quarter is, you know, I think in the absence of complete information, you know, people try as hard as they can to come up with various theories. And I'm resisting doing that. other than to say that there's just unusual consumer behavior, the things I outlined in my comments, whether it's people, because of the Delta variant, spending less time in the retail markets, being less open to trial and the absence of sampling programs, which has been so important to us in the past. I think all of these factors are coming together, some of the trends around what type of food choice people are making. to create an unusual quarter for us. But there's no indication in my view that coming off of a record quarter of revenue in the second quarter to this quarter that there's some fundamental change in the consumer mindset toward our products. And I think that all the activities that I just mentioned going forward with our partnerships suggest, in fact, the opposite, that things are strengthening. My view on the year is to get through the year with these unusual conditions and get to, you know, back to a strong resumption of growth, which I feel very confident about for 2022. You know, I think on the supply side, yeah, there were considerable issues on the supply side. I mean, we had, you know, sort of ongoing issues throughout the year around labor tightness, which everybody felt, and then we had this severe weather in Pennsylvania, which took out production in our facilities for up to two weeks and then ruined packaging. So we had a long tail on that one. So all these different factors came into play. And the reason that we brought the fourth quarter into the type of range that we did was we just didn't want to go through this fire drill again. The most immediate predictor of the future is kind of what just happened. And so we want to guard against having to run through another set of challenges. So I feel really good about 2022. I feel cautiously optimistic about the balance of the year relative to what we gave you guys. I think it's good to have this quarter behind us.

I'll take the pea protein question. We have fixed price agreements in place on most of our pea protein supplies, so we don't expect to see impacts from PPI in the near term.

Great. Thank you very much.

I'll pass it on.

Our next question is from Adam Samuelson with Goldman Sachs.

Yes, thank you. Good evening, everyone. How are you doing? Hi. So, Ethan, I was hoping to maybe think a bit longer term because obviously a lot of noise in the short term. And as we think about kind of a potential pathway to return to growth, clearly international expansion and some of your bigger QSR kind of food service launches are some of the big increments that could be coming over the course of the next 12 to 18 months. And I guess as we think about the revenue mix, pre-COVID 2019, your business was basically 50-50 retail and food service. You were much more U.S.-centric because you just started international, but now you've got manufacturing in Europe, you've got manufacturing in China, some local production in Canada. How do we think about maybe 23, 24, what you would think is a good revenue mix between retail and food service and domestic and international?

Yeah, that's a good question. So I think currently we're about, in the U.S., 78% retail, about 22% food service, which is a pretty big departure from where we were pre-pandemic. And I'm certainly running the business in a way that is investing very heavily in food service and particularly in strategics. I wouldn't be doing that if I thought 22% was going to hold. I do think you're going to see an increase in the food service business within Beyond, a significant increase, as we get into more and more of the strategic accounts that we've been working with over the years. And if you look at just our performance, even in this last quarter, something interesting is in that information, which is that our largest, one of our largest QSRs that has a drive-through that we're currently in as a permanent item, our sales went up quite a bit in this past quarter, year over year. And so I think that phenomenon that we talked about where consumers may be pulled back in retail due to some of the issues I mentioned, and then as you would expect a bump in food service to occur because of the challenges that the kind of mom-and-pop operations and venues like sporting goods and concert halls and universities and things like that were having, we didn't get the same pickup that you would have seen otherwise. And I think that has to do with the distribution mix in food service that we've talked about a lot where we're, I think, now about 81% in independent operators and venues and things of that nature versus about 19% in these larger strategic accounts. And so we're just not getting that, you know, if you look at the trends with consumers today in food service, they're using fast food restaurants primarily with drive-thrus and things of that nature. eating more fast food during the course of the pandemic, and we weren't picking up on that because of the nature of our distribution. So as we get into more and more food service accounts that are some of these large strategics, I think you'll see that grow. I don't know that it'll get to 50-50 and stay there, but I think you can expect it to approximate that kind of range, 60-40, 50-50, depending on the quarter.

And then U.S. versus international? Yeah, U.S.

international. So, yeah, so U.S. and international, I think the mix now, we're about 63% U.S., 37% international. And I was really happy with international growth. And I'll tell you something, when I was in Europe, so I'm the most critical of our products by far in terms of someone who's informed about all the different products in the market. There's a lot of activity going on in the EU. I did a nice store tour with our sales team and We went back to one of our production facilities and cooked up all the different samples from all the different competitors, compared that against our products. And, again, if I had found one that I thought was really good, the innovation team here would have heard about it. Now, the products are good, but ours are better. And that gives me great hope for Europe. And you're seeing some really early results coming out of international work in terms of the growth rates. I think we're up about 168% internationally. And so You know, really, really bullish on the EU. We're taking a lot of investment there. We've got two facilities there now. Also bullish on China, both food service and retail. I think we're up over 100% in food service internationally. So I would expect internationally going forward to be a very meaningful part of our business, particularly as we bring along these QSRs, not just in the U.S. And so one other way to look at it is the activities we've had with McDonald's. So, as I mentioned in my comments, you know, the Netherlands had a terrific new plant there. But if you look at, you know, whether it's the test in the UK, in Austria, or in the Netherlands, you know, all reports of those from external sources have been positive and well received. Pizza Hut in the UK continues to be, to do quite well as well. As those type of tests pick up and launches pick up, you'll see more and more international harm mix.

Also, to essentially look at international growth, we mentioned an accelerated order, which would be an order that would be a little unusual versus what we typically see. We estimate that at approximately 3.6 million in international this quarter.

All right. That's really helpful. That's a lot of color. I'll pass it on. Thank you.

Our next question is from Rupesh Parikh with Oppenheimer.

Good evening. Thanks for taking my questions. So I just want to touch on the gross margin line. So first, a housekeeping on Q3. Is there any way to quantify the inventory write-off in your adjusted gross margins for Q3? And then I have a follow-up.

So in Q3 2021, The unusual item, we mentioned it a couple of times, was water damage in one of our warehouses that was predominantly packaging. That was about $1.9 million.

Okay, and that's still in your adjusted gross margin number?

Yeah, it's still in the gap gross margin number as well.

Okay, great. And then for Q4, is there any granularity you can give us in terms of how to think about gross margins? Because what we saw in Q3 may be a good reflection. how to think about Q4?

Well, I think there were some things that were probably a little unusual in Q4. First, we mentioned trade discount. We don't anticipate trade discounts quite as dramatically as we did this quarter. The inventory write-off, we already sort of sized. That was unusual. And then the only other thing to say, so we would expect improvements from both of those lines, barring some other issues. we did capitalize some of the costs this quarter when we were running sort of less than optimum as we struggled through some of this stuff. So there is some cost on the balance sheet that'll play out. So that would offset some of these other factors I just mentioned.

Okay, great. And then I guess my last question. So Ethan, we've heard from other players just challenges, you know, growth challenges within the plant-based protein category. Just curious your take on, you know, what's really happening out there. Is there, I don't know, is there incremental pressures you see overall within the category? So just love your thoughts on what's happening out there.

Oh, thank you. I think the thing that we're trying to kind of make sense of and the reason that I, you know, summed and then split the two quarters is, you know, we just had a record quarter. So we just posted 149, and we had a just tremendous amount of excitement as food service came back on and then stopped. And so there's so much unusual behavior going on with whether it's labor, stimulus checks, supply chain issues we've had, You know, some of this, I think, slowing introduction of innovation into the category, just with all the different distractions going on. The fact that we've invested a lot of our innovation monies into these large QSRs that are forthcoming, and we typically lead the category in retail in that type of way. You know, all of that, I think, is combined to just have a... You know, more dormant Q3 that I think people wanted. So, I don't think there's any sector issue or any segment issue. You know, we continue to see strong year growth in terms of overall annual revenue. And if you look at 2022 and the work we're doing there, I think there's tremendous excitement in our company about what's coming. So this is a bit of a kind of a pause and, you know, have the pandemic and labor issues and supply chain stuff not interfere. I think this quarter would have been quite different.

Okay, great. Thank you.

Our next question is from Peter Sala with BTIG.

Great. Thank you. Thanks for taking the question. I wanted to ask about the McPlant and the test you guys are doing with McDonald's. I know it's now available in the U.K. and a couple other markets in that vicinity. Is there anything you can share on the initial performance that you're seeing there? And then secondly, as it's being marketed there, can you give us a sense on how much of the marketing expense McDonald's is picking up and how much maybe you guys may be contributing? Thank you.

Yeah, so I can't share anything, and I really want McDonald's to obviously take the lead on this, not that they want, with good reason. So all I can give you is the media reports that are out there, which have all been very positive, as well as my own experience as a consumer, which anybody could do, asking people at the register and drive-through how it's going. And the results in Los Angeles, as you'd expect, have been amazing from the information I'm getting just from talking to people at the register. And then, of course, the media coverage has been very positive. So in terms of marketing, we wouldn't be able to disclose that. But the other consideration is these are operations tests. So there's not a lot of, and I'm not sure all the European ones can be characterized this way, but generally there's a distinction between an operations test and an advertised test. And so in the U.S., for example, there's really no advertising, right? They want to see just how the back of the house operates with these products. And so I think One of the opportunities to get back to your earlier question for 2022 for us and a real mandate to our marketing team is it'll be the biggest marketing year ever had. And part of it will be in supporting not only McDonald's but other QSRs as we make the case to the American consumer and consumers globally that they can eat what they love by going into the stores they love and enjoying products that are made from beyond meat, benefits to them above and beyond what they could otherwise expect.

Thank you for that. Very helpful. So just one last question on the McPlant. Is there any reason to believe that McPlant, you know, with Beyond Meat would have any operational challenges? Is the product any different at all than a traditional beef patty in terms of cook times or, you know, the ability to get it made in that amount of time? Just wondering where the operational challenges may land.

Yeah, I haven't heard that, that there's any operational challenges within the back of the house. And certainly what I've seen from the stores that I've toured, they seem to be doing really well with it. It's a great product. I don't know if anyone following has had an opportunity to have it, but it just, you know, if you want some reassurance about where we're headed, go get a McPlant. Absolutely delicious. And yeah, we're excited about it.

Thank you very much.

Our next question is from Ben Thurer with Barclays.

Perfect. Thank you very much, and good evening. Actually, along the lines on the rollout, et cetera, Ethan, can you share a little bit the cadence, how you expect this to further roll out, and if within the guidance for the fourth quarter, the rollout as it's happening in the U.K., Is that contemplated, like a step-up change? I think there was an addition to it just a few weeks ago for more stores in the UK. It obviously started at a low level, but it's adding up. Is that part of your guidance? That would be my first question.

Yeah, so I appreciate that. First of all, I appreciate the fact that you guys are asking questions about McDonald's, because we've been talking about it for years, and now I can actually reference stuff going in stores and And all I can say, again, it's been really neat to see this. All the media reports have been very positive. The anecdotal information I have from going to different stores has been very positive. But they have to control everything about sharing the results to the cadence of the expanse. What I will say is that the investment levels you're seeing this year, not just specific to McDonald's, but specific to our entire food service platform have been significant because of what we expect in 2022. And in fact, some of the, you know, the addition that I mentioned to our management team is also going to be revealing in terms of what we're looking for in 2022.

Okay, perfect. And then just to kind of wrap my head around it. Um, if we take a look at the performance in the most recent quarter, it really feels like a story of two worlds with the U S being very much impacted in both sides, retail and food service. But then on the other side, having the international business that actually performed very well back on track. I mean, you've recovered some good stuff here. So what word, I mean, What is it in your hands what you can do? I mean, putting a lot of the commentary and explanation outside, but what is it in your hands what you can do to get the U.S. somewhat back on track and get this out of this declining growth rate? Because it was weaker on a sequential basis. It was weaker on a year-over-year basis in the U.S. just too fast. What is it you can do? What are you focusing on? What do you need to do in order to make that work again on the U.S. piece? Because the international piece, I'm not worried.

Yeah, no, thanks. I love the international. Again, adding, I think we added like 7,000 customers across the quarter internationally. So, you know, I think one is just time, right? Is all of this Again, like, you know, having facility knocked out, having, you know, labor issues, all these, you know, the Delta variant coming back and kind of, as I mentioned in my comments, Memorial Day, things were swinging. We were really excited about where we're headed for the summer. And then this news starts to creep out about the health returning and all these other issues. So, so much is time. Let's get some distance from that. That's the first thing. Second is, you know, our core items. I mean, they're terrific items. And we're continuing to cost down those platforms. We're continuing to look at everything from packaging to how we market those in 2022. So I think you'll see a rekindling of energy around our core items. And we're also laying our new innovation, right? So whether it's the chicken that's rolling out, we'll get fuller distribution there, or these things that you've heard about in the last year that have been in the making that we expect to come into fruition in the U.S., whether it's, again, the planet partnership expansion across these QSRs that I've mentioned, And that has an effect of giving us the opportunity to really spend the most we've ever spent on marketing to educate the consumer about all these different places they can get it and the benefits, whether health or environment, et cetera, that come from it. So I think let's get some distance from the kind of operational challenges of this environment. Let's continue to invest in our core because those are terrific products and we have great production there. let's get the innovation out into the market, and let's go tell our story, right? And let the fog clear of the events of the last year, go out there and tell our story. So I feel enormously confident about where we're headed. The only reason we gave more tepid guidance on fourth quarter is just because we didn't want to go through this again. And when you have floods and this pandemic and the labor issues, you know, you want to be a little more cautious. That's how we do what we do.

Okay. And as you always say, you're the biggest critics of your own product. And the beyond 3.0, it was, you talked a lot about it last call, the rollout going into summer season. And obviously it seems like there was weakness in there. Have you, can you, can you share any direct feedback, customer feedback on the perception of the beyond 3.0 and what it might need for you to do on innovation as you've just talked about innovation going forward?

Yeah, so I think there's so much noise in retail behavior this past quarter, it'd be hard to draw conclusions from that. But if you look at, for example, the awards we've been winning, I think we referenced this last time, you know, People Magazine and just got another award yesterday on the Berger, I don't recall, it was Nourish Group. Anyway, so a lot of, I think, recognition around the continual march we have toward product improvements and around product improvement. So I wouldn't say there's any one thing that we're looking to change on the burger. It gets back to that acronym I was talking about, fat, so flavor, or aroma, appearance, and texture. We're making improvements across all four of those and expect to release an even better burger in 2022. But no particular element that we're focused on more than others.

Okay, perfect. Thank you very much. I'll leave it here.

Our next question is from John Anderson with William Blair.

Oh, thank you. Good afternoon. Just a couple quick ones. You know, I was wondering if, you know, with the food service difficulties, you know, largely COVID induced and the push out of some of the rollouts in food service, is it possible that that is having kind of a second derivative effect on retail demand for your products? I've always thought of food service as maybe a great trial vehicle in addition, obviously, to a source of sales itself, you know, and then a way to kind of generate retail sales for at-home consumption. Is that something you thought about or think could be having an impact on retail demand as well?

Yeah, I mean, absolutely, in the sense that, I mean, in a lot of different ways, actually, but the one in particular is, you know, as we We brought on some, I think, significant talent in our marketing department in the last quarter, both on the shopper marketing side and in general marketing. And we have a terrific head of brand here that's been with us for a long time. And this year would not have been the year to launch our national marketing campaign, just because we're going to get so much more out of it as we're in these large QSRs. And so waiting until that moment to do it is the prudent use of resources. And so we've held off from that. But as you get into 2022 and you start to see some of these further tests and such come to fruition and longer term deals, You'll see us make that investment to make sure the consumer knows that they can grab it at this fast food place, in this convenience store, and in this grocery. And so, yes, there is a kind of synergy that we're looking to take advantage of as we're in both outlets or both channels in a more dominant way. And then, you know, I also think this trend around consumers kind of just being fatigued, right, that they're just going to their usual, they're getting a lot more fast food than they were in the past, and because we're not in those locations right now, you know, that has hurt our trial. And then, of course, you go into the retail environment where we're not allowed to sample, where samples are very awkward and limited and everything else. It's, again, it's a dismal operating environment, and the more time we can get between where we kind of were in the third quarter with all the challenges going on and where we expect to be, uh, in the near future, the better. Okay.

And then, um, you know, you talked about the objective of getting to price parity again within two and a half years in, in one of, one of your categories. I'm just wondering, you know, what's the most, I mean, what has to happen for you to do that? And I mean, are you committed to that at, at kind of all costs or are, there are kind of margin objectives or cost-out objectives that you're going to have to achieve in order to kind of, you know, reach that level of, you know, price relative to where you sit today?

Yeah, I think the margin is not the area that we're expecting to pull this from. And I think seeing us kind of manipulate margin in various ways to be more geared toward that we want to make sure that this particular launch is as successful as it can be. And if we have line of sight to an operating model and a production model where we can restore that 30% plus margin down the road, then you'll see us play around with margin. But over the long run, it's the things that we've talked about. It's continuing to drive down cost of our materials, which there's an inflationary pressure across the board. But because we're a new industry, we're also getting the benefit of new entrants and people scaling and being able to offer cost reductions over time. So we have a very big program here. Phil is leading it with an outside consulting group. And we're making really good progress. So I'm not backing away from that. I've got about two and a half years to meet it. I think it will mean beef. And, you know, we're getting a lot of help, too, because the commodity pricing on beef is going up. I think the 20-year average is like $2.07, but, you know, of course, right now and in the future, we expect it to be considerably higher. So I think we're well on our way, and I think that's going to be an exciting moment, you know, when you can... In fact, some of the products we're launching next year, you'll see us hint at that price parity. So it's going to be... I think it'll be interesting. Great. Thank you.

Our next question is from Ken Goldman with J.P. Morgan.

Hi. Thank you. I know this is a tough question to answer, but do you have any best guess as to maybe what your annual sales number might have been excluding the supply issues? Just trying to get a sense for sort of what it would have been if shipments had matched demand, so to speak. And again, I know we're asking in a general sense because I know it's so hard to be precise there.

This is Phil. I can give you what color is available. So when we sent out the release on the 22nd of October, there were really kind of three buckets in there. The first was demand. That was the biggest when you're looking at what happened versus forecasted. And then the second was the kind of operational stuff with weather as kind of the key driver. And so... Well, it's definitely been a lot of headaches. I think that that part is smaller than that initial bucket of demand. But that's about as much as we've said at this point. And then into this quarter, you know, we're largely working through the last of the what we feel are the last of the sort of knock on effects. And so, you know, things that definitely are getting kind of back on track at this point. So not an enormous impact, but certainly disruptive.

Understood. I'll let it go there. Thanks very much.

Ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn the call back to Ethan Brown for closing remarks.

Thank you. So as I said, we really are looking to 2022 with a lot of optimism. And the investment we're making today you know, continue to be focused on that future and not on the sort of more difficult operating period that we're all experiencing. So I'm every bit as confident as I have been and really look forward to getting back on the line with you guys in a few months here and sharing, I think, what would be good results and some good commentary on where we're headed. So appreciate it. Everyone stay safe and be in touch soon.

Thank you. This concludes today's conference. Beyond Meat thanks you for your participation. You may disconnect your lines at this time.