Beyond Meat, Inc.

Good day and welcome to the Beyond Meat Incorporated 2022 First Quarter Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Luby Katua. 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 first quarter earnings press release filed today after the market closed. This document is available in 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 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 events unfold. Please refer to today's press release, the company's annual report on Form 10-K for the year ended December 31st, 2021. The company's quarterly report on Form 10-Q for the quarter ended April 2nd, 2022 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 may make reference to adjusted EBITDA, which is a non-GAAP financial measure. While we believe this non-GAAP financial measure provides useful information for investors, any reference to this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of adjusted EBITDA to its most comparable GAAP measure. And with that, I would now like to turn the call over to Ethan Brown.

Thank you, Louis, and good afternoon, everyone. Though we navigated significant cost challenges in the first quarter of 2022, the majority of which relate to scaling or strategic product launches and are temporary in nature, we made strong progress against our long-term growth strategy and saw encouraging signs of resumed growth. First, we engaged in significant activity across our global QSR partnerships. McDonald's conducted market tests in McPlant in the U.S., added the offering to all restaurants across the U.K. and Ireland, and continued trials in Austria. And currently, Yum! Brand's Pizza Hut added Beyond Meat as a permanent menu item across Canada, while KFC conducted a nationwide limited-time offering in the U.S., noting recently that its launch of Beyond Fried Chicken resulted in more media impressions than any other product launch in KFC's history. Two, we launched three SKUs of Beyond Meat Jerky with the Planet Partnership, our joint venture with PepsiCo. Sales of Beyond Meat Jerky since launch have been a resounding success, exceeding our initial expectations. Three, adjusted for jerky, We made continued progress on our cost-down program with regard to material costs per unit, and despite short-term fluctuations, we do not see any fundamental change in our long-term margin targets of 30% plus. Our cost-down program is a fundamental driver of this confidence. Fourth, we advanced the century profiles of our product platforms as part of the Beyond Meat Rapid and Relentless Innovation Program. This defining focus year after year on reaching our North Star of that perfect, indistinguishable build of meat from plants continues to be rewarded with product recognition. During the quarter, our products match several accolades, including, among others, BuzzFeed's number one spot for plant-based chicken tenders, All Recipes Community Choice Awards for Best Plant-Based Meat Brand, VegNews Best New Product Award for Beyond Chicken Tenders, along with Best Plant-Based Burger and Sausage for the Beyond Burger and Beyond Sausage. And finally, Consumer Reports Highest Score for Taste for the Beyond Burger, Beyond Breakfast Sausage Patties, and Beyond Dinner Sausage. We believe that through innovation, we are on a path to deliver against our North Star and unlock a meaningful percentage of the estimated $1.4 trillion worldwide meat market for our brand and appreciate these and other awards as encouragement along the way. Fifth, we saw some important signs of post-pandemic resumption of growth as food service entered Q1 with sluggish results but exited with solid momentum, contributing to March 2022 being among the largest revenue months in our company's history. Today, we are clearly in a period in which certain decisions that we believe best position the company to capture a long-term opportunity can generate adverse short-term results. In each instance, as we take a decision, we align around the path that we believe will build, over the long run, a profitable business of global scale. More specifically, we took the following actions, each of which negatively and temporarily impacted margins. First, we interrupted steady state internal production of base products to support the commercialization of innovative new items with key strategic customers, a decision we discussed in our Q4 call. In the balance of the year, we expect to reallocate internal production infrastructure to higher efficiency operations. Second, we've successfully executed the nationwide launch of Beyond Meat Turkey, the biggest product launch in our company's history in terms of breadth. using an initially higher cost manufacturing network for this new product and market. As I mentioned, we are very pleased with initial sales results, and we are now transitioning production into higher efficiency operations and have a clear line of sight to greatly improve unit economics in the second half of this year. While we do not take lightly the short-term margin impact of these longer-term investments, we are confident that through these actions, we are positioning the company well to capture robust future growth. We now turn to Q1 2022 net revenue results. Overall, we posted net revenue growth of 1.2% in Q1 2022. we saw a solid increase in pounds of products sold, rising 12% year over year, which was partially offset by a 10% decrease in net revenue per pound driven by increased trade discounts, strategic list price reductions in the EU, changes in sales mix, and decreases in the value of the euro relative to the dollar. In U.S. retail, we saw an increase of 7% in net revenue. However, looking at SPIN's takeaway data for the 12-week period ended March 20th, a brand-solid decline of 3.3%, excluding jerky, versus a category increase of 2.8%. We believe this result is driven by four main factors. First, broader softness in the natural and specialty channel continues, and we over-index in this channel relative to category. For context, total category sales in natural and specialty declined 7.5% year-over-year during the 12-week period, compared to a 4% increase in MULU. Second, across bin channels, Mulu plus natural specialty, we saw a shift in consumer purchase from refrigerated to frozen. Refrigerated plant-based meats, where we are heavily represented, were down 3.6% by frozen plant-based meats were up 7.2%. This change from refrigerated to frozen in part reflects increased consumption of plant-based chicken in the frozen section versus plant-based beef in the refrigerated section. Third, we face increased competition in the category. Nonetheless, we are encouraged that Beyond Meat remains the number one brand in refrigerated plant-based meats. Our brand velocity, which was 2.4 times greater than the category average, ranked highest among any of the top 25 plant-based meat brands. And lastly, fourth, we increased our promotional spending, resulting in lower net revenue per unit sold. This increase in discounting in part reflects competitive dynamics in the category. However, the main strategic driver for us with regard to price continues to be our own price parity goals informed by the aforementioned cost down program. Turning to our consumer panel metrics of household penetration, buyer rate, purchase frequency, and repeat rates, I'd like to first call out the beginning in Q1 2022 we have switched data providers from spins to numerator. And as such, the numbers I reference will not be directly comparable to figures I've mentioned in the past. To be clear, though, the year-over-year comparisons that follow are based on the same numerator data set. We are pleased to see that based on these measures, our overall brand health remains strong, even as our user base continues to expand. According to numerator data, through the first quarter of 2022, Household penetration of the Beyond Meat brand stood at 10.3%, an increase of 180 basis points year-over-year, while our repeat rate increased 80 basis points year-over-year to 46.3%. Purchase frequency and buy rate declined by 3% and 13% respectively, likely reflecting later new users given a healthy increase in household penetration, as well as reduced year-over-year pricing in the latter case. Within the U.S. retail sector, we are pleased to secure recent distribution wins. These gains include the launch of Beyond Burger and Beyond Meatballs at approximately 2,000 Rite Aid stores nationwide and the expansion of Beyond Chicken Tenders and over 8,000 new outlets nationwide at retailers including Albertsons, CVS, Select Costco Regions, Jewel Osco, Kroger, ShopRite, Sprouts, Target, Walmart, and Whole Foods markets, among others, bringing our total retail distribution of Beyond Chicken tenders to approximately 15,000 locations. Also in U.S. retail, as noted, a key milestone for us in Q1 was the nationwide launch of Beyond Meat Turkey. This innovative offering, a product of the Beyond Meat Rapid and Relentless Innovation Program, took a tremendous amount of work, countless iterations, and a close collaboration with the Planet Partnership. The intensity and duration of this research development and scaling reflects the guiding principles Beyond Meat. When we bring a new product to market, we aim to either create the category or win the number one position therein. I'm proud of what our team has been able to accomplish together with PepsiCo and the market results thus far. This fantastic on-the-go snack represents Beyond Meat's first shelf-stable offering, thereby opening a new distribution opportunity for our brand. It comes in three delicious flavors, original, hot and spicy, and teriyaki. Nutritionally, Beyond Meat jerky packs 10 grams of protein per serving, contains no cholesterol, GMOs, soy or gluten, and as always, is made with simple plant-based ingredients, including peas and mung beans, among others. Since its national launch in late March, Beyond Meat quickly established itself as the number one selling plant-based jerky brand. has substantially accelerated the growth of the category, in fact, more than tripling the category's sales, and early velocity results are trending ahead of initial expectations. Time to launch. McBeyond Meat Jerky also rose to become number one on Amazon's Hot New Releases page. Further, we expect to significantly increase our distribution of these products from approximately 56,000 stores today to about 80,000 by the end of May. If you've not already tried it, I highly recommend this delicious, lean, and convenient protein snack. Turning now to U.S. Food Service, we saw signs of accelerating momentum late in the quarter, with March posting an 83% sequential increase relative to February and a 42% increase versus the prior year. We believe that the slow start to the quarter was likely related to Omicron, labor shortages, and a late return to school, among other factors. In our international business, our volume of products sold increased 22% year-over-year in Q1 2022, although net revenues were down 7% year-over-year, primarily reflecting strategic price reductions and incentive actions in the EU. We expect to benefit from incremental distribution and velocity of our extended shelf-life burgers in the EU retail channel. It may in late Q2 and are working to bring additional extended shelf life products to EU grocery stores as soon as possible. More broadly, key developments in our international business continue to bolster our optimism for sustained long-term growth. Beginning in Europe with McDonald's, we are pleased with the continued strong performance of McPlant in the UK and Austria, and the case of the latter, the announcement of a nationwide test of a second McPlant build, the McPlant Steakhouse. McPlant Steakhouse features a Beyond Meat co-developed patty served on a sesame seed bun with lettuce, onions, tangy steakhouse sauce, and two slices of cheddar cheese. We're excited to see this product extension, the first of McPlant, which demonstrates a simple way to offer more varied menu options to consumers, seeking to diversify their protein options. In Europe, as in the U.S., I am pleased to share that Beyond Meat products continue to earn distinguished recognition Specifically, the Beyond Burger was named Good Housekeeping's UK's Best Vegan Burger in their annual barbecue taste test, as well as the Best Vegan Burger by which the UK's leading consumer association. In the Netherlands, we were a two-time winner in the Wheels of Retail Awards from DistroFood, Best Overall Innovation for Beyond Mints, and Best Meatball Substitute Brand. The Wheel of Retail Awards has been the most important prize for product introductions in the Dutch supermarket sector for 44 years. In China, in late March, we announced the launch of our flagship store on Pinduoduo, one of the country's largest e-commerce platforms, which boasts hundreds of millions of users nationwide. With our announcement, Beyond Meat became the first global plant-based meat brand to launch a store on Pinduoduo. where we'll feature locally produced Beyond Burger, Beyond Beef, and Beyond Pork products. Our launch on Pinduoduo represents our third such launch on a major Chinese e-commerce platform, following our previous additions on JD.com and Tmall. And in China, as we are preparing to do in the US, we are excited to bring new innovation to market. Reflecting our investment in local management, production, and innovation, We're excited to share the products coming later this year in China were developed with significant direction and execution by our Shanghai and Yajing teams. Before concluding, let me touch briefly on some global macro issues. As widely reported, the recent and ongoing conflict in Ukraine is disrupting key commodity markets. Some of these disruptions have a direct or indirect impact on portions of our supply chain. Whether we don't sell in Russia and have indirectly sold only small quantities through a distributor into the Ukraine, we have seen increased transportation costs due to higher fuel prices and increased pricing and scarcity of supply for a few commodities that we use in relatively small amounts. At this point, we're working through these issues, and the team has managed to avoid any significant disruption to operations. With that, I will turn it over to Phil to walk us through our first quarter financial results in greater detail and our outlook for the balance of the year. Thanks, Ethan.

We achieved net revenues of $109.5 million in the first quarter of 2022, representing an increase of 1.2% compared to the first quarter of 2021. The increase in net revenues was driven by growth in the U.S. retail channel, partially offset by declines in our other sales channels. For Q1 2022, average net revenue per pound was $5.13, down from $5.70 per pound in Q1 2021, primarily driven by increased trade discounts, strategic list price reductions ahead of expected cost reductions, changes in mix, and a negative impact from foreign exchange. Moving down the P&L to gross profits. Gross profit during Q1 2022 was $190,000, or 0.2% of net revenues as compared to $32.7 million, or 30.2% of net revenues in Q1 of 2021. While we are thrilled with its early sales performance and strong customer response, Beyond Meat jerky manufacturing, still in its infancy, was a significant headwind to our gross profitability this quarter. We estimate the headwind this quarter at approximately 940 basis points of gross margins. The scale of the Beyond Meat Jerky launch is unprecedented for us, with the current distribution of approximately 56,000 locations already eclipsing our current U.S. retail distribution for all other products combined and expected to expand further to 80,000 locations by the end of May. To launch a first-time product at such a large scale and prior to the establishment of our own dedicated and streamlined process, we had to do so in an expensive and inefficient manner. In some cases, the initial path to finished good production requires a single batch to be processed across different facilities, incurring processing costs and transportation fees at each step of the journey. As we mentioned on the last call, as we look toward the remainder of the year, we expect this will get better. We have multiple initiatives underway with one of the largest improvements already secured as we recently signed a contract to consolidate operations with a third-party manufacturer that can produce jerky with more automated equipment. lowering fees and reducing the need for multiple processing locations, thereby reducing costly shuttle transportation. We expect this capacity to come online in mid Q3 of 2022. We also recently secured reduced pricing on mung bean protein, one of the key ingredients in jerky, and we look forward to locking in other efforts already underway. In addition to the decrease in net revenue per pound, COGS increased $1.15 per pound year over year. We estimate jerky accounted for approximately 68 cents, with the remainder being driven primarily by increased manufacturing costs, including depreciation, and higher transportation and warehousing costs, partially offset by improved materials costs and reduced inventory reserves and write-offs relative to the year-ago period. Manufacturing costs, including depreciation, were up 90 cents per pound versus the prior year. with jerky accounting for approximately 36 cents per pound, and the remainder primarily reflecting expensive inventory created in Q4 and sold through in Q1, as well as higher depreciation and other fixed overhead per unit. For the non-jerky inventory we manufactured in Q1, although still impacted by new product launches, lower food service volumes than initially anticipated, and variability of demand across products, our costs improved later in the quarter as we stabilized the network, match labor to production needs, and optimize where we produce each SKU based on the overall best economics. The result is inventory that still reflects elevated production costs, but on a trajectory that is improving. For example, Q1 2022 finished goods conversion costs in our East Coast facility were 23% lower than in Q4 of 2021. We are also currently running an RFP process with our third-party manufacturers that we expect will result in tolling fee savings. Finally, as you may recall in 2021, we saw a sequential increase in revenue between Q1 and Q2 from $108 million to $149 million. And as grilling season in the Northern Hemisphere approaches, we expect a similar uptick in Q2 of this year, further driving leverage in our costs. Logistics costs, including those associated with internal transportation and warehousing, increased 32 cents per pound in Q1 2022 versus Q1 2021. Note this excludes the outbound freight associated with shipping finished goods to our customers, which is included in our SG&A as a selling expense. The increase in logistics cost per pound was primarily attributable to increased transportation costs and from increased warehousing costs. In transportation, we experienced headwinds from both an increase in cost per mile and miles driven per pound. In this area, we also have an RFP underway to secure improved rates for established lanes. We're implementing changes to further reduce the use of expedited trucks. Warehouse costs increased primarily due to increased inventory year over year. Similar to Q4 2021, before taking into account jerky, we saw continued improvement in our materials cost per pound on a year over year basis. The material cost per pound increased two cents year over year in aggregate, We estimate jerky represented a $0.26 drag, implying a $0.24 per pound year-over-year benefit from all of the products. As part of our Cost Down program, further decreasing material costs is a key focus area for us. We have multiple efforts underway to negotiate more favorable pricing, utilize less costly ingredients, and streamline our packaging. We've seen recent success in one ingredient from eliminating a distributor and going straight to the manufacturer. and are especially excited by the ongoing progress we are making in using less expensive pre-protein isolates, or PPI. While we have secured PPI supply through a previously disclosed multi-year contract, we are seeing success in qualifying and utilizing greater proportions of PPI from less expensive suppliers stemming from our strategic sourcing efforts. Our current cost down efforts in this area are focused on allowing us to migrate to exclusive use of these lower cost ingredients and on our initial rounds of testing are looking promising. Lastly, with respect to COGS, changes in inventory reserves represented a 9 cent per pound benefit in Q1 2022 versus the year ago period, despite a 6 cent per pound drag from Jerky. Moving down the P&L to OPEX, operating expenses for Q1 2022 were $97.8 million, up from $57.4 million in Q1 2021. The year-over-year increase was driven mainly by increases in marketing, non-production headcount expenses, G&A primarily driven by ongoing consulting agreements, and an increased selling expense driven by higher outbound freight costs. Turning to our balance sheet and cash flow highlights, our cash and cash equivalents balance was $547.9 million, and total debt outstanding was approximately $1.1 billion as of April 2, 2022. Inventory increased to $283.8 million, up from $241.9 million at the end of Q4 2021. In terms of cash flow, for the three months ended April 2, 2022, net cash used in operating activities was $165.2 million, compared to $30.7 million in the year-ago period. Note, contained in our operating cash flows, we contributed approximately $37 million towards the build-out of our new innovation and headquarters facility here in the LA area, which was recorded in prepaid rent in the first quarter. Capital expenditures totaled $21.5 million in Q1 2022, compared to $23.4 million in the year-ago period. Next, I will provide some commentary about our 2022 outlook. For the fiscal year 2022, We continue to expect net revenues to be in the range of $560 million to $620 million, corresponding to year-over-year growth between 21% to 33%. In Q2 2022, we expect a similar sequential uptick in net revenues to what we experienced last year, followed by accelerated year-over-year growth in the second half of the year driven by recent distribution gains acceleration in international markets as a result of price resets and broader availability of extended shelf life products in the EU, anticipated new product launches, and expected QSR launches and trials both in the US and abroad. In addition, we will be cycling easier year-on-year comparisons in the latter part of this year. Although we are not providing specific margin guidance at this time, we did want to provide some additional context for our Q2 2022 margins. We expect Q1 2022 margins were the low point in 22, with continued progress in Q2, albeit still well below historical levels, accelerated back into higher margins later in the year. The high cost of Beyond Meat jerky will continue to be a headwind in Q2, but we expect substantial improvement in jerky unit economics in Q3 and Q4. For 2022, our current expectation is to incur capex of roughly $100 million, down from $136.0 million in 2021, although we will continue to look for opportunities to reduce this further by increasing the efficiency of our existing assets. Also, as we disclosed in our 10-K, we anticipate our contributions to complete the build-out of our innovation center and headquarters facility will be approximately $71 million in 2022, of which we already contributed $37 million in Q1, as previously noted. With that, I'll turn the call back over to the operator to open it up for your questions. Thank you.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. We ask that you please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question today comes from Peter Galbo with Bank of America. Please go ahead.

Hey, good afternoon, guys. Thank you for taking the questions. Sure. Phil, I just wanted to... ask some clarifying comments on the Q2 gross margin. I think it's helpful that the 940 basis points headwind from jerky in Q1. It seems like some of that continues into Q2, but maybe not all. So can you just, aside from all of the other kind of inflationary pressures, just what is the hit you're assuming to margins in Q2 just from jerky? Because I think that'll help us to kind of set a Q2 margin number that might be, you know, more in the range of, you know, given that one Q was kind of a big surprise at the downside. So any help there?

Sure, sure. So I'll take a high-level approach and then hand it over to Phil who can give greater detail. I think first and foremost the underlying theme here from my comments will be around, you know, we continue to manage the business to open up the longest – and best long-term growth outcomes that we can. And so when we have opportunities like this, even though they're going to be somewhat challenging in the near term, we're going to pursue them. And we did that here because a clear line of sight to much better margins in jerky as the year progresses. And so Phil can give some detail on that. But the other area that was bringing some pressure on the cost front and in margin was around the higher price inventory that we were selling through as the quarter progressed. And we'll see some continued pressure from that for a bit more this year, but not too much longer. And in that case, again, it was this decision framework that we have, whereby we looked at some long-term opportunities so that we needed to reorient production away from steady state for a bit to be able to fulfill those opportunities. And now we're in the process of reorienting back toward more steady state production. And so, you know, if we didn't feel we had good line of sight to restoring over a longer period of time, those 30% plus margins, we would feel differently. But we want to try to maximize our ability to grab as much of the total adjustment market we can over a longer period.

So this is Phil. The additional color I'll add is on a per unit basis, we expect the bulk of the improvement will come later in the year. So Q2 for a given pound of jerky may look fairly similar to to Q1 so that the headwinds should be similar. There are a lot of moving pieces and one of the things that makes getting more concrete guidance difficult. So obviously, number of pounds of jerky we sell. We also incurred some very small lower-up cost of market based on the jerky left on the balance sheet. We were pretty clean this quarter so it wasn't a lot. And so those things will factor into the total amount. the cost per pound we expect to begin improving more in Q3 with this new facility that's expected to come online. So as you model, I think Ethan touched on kind of the big themes there, but I think it's fair to assume a similar type of economics per pound.

Okay, got it. And then just as a follow-up, you know, guys, the cash burn rate, you know, close to $190 million, you know, when accounting for CapEx, in the quarter. I mean, at current steady state with 2Q, you know, also probably being a challenge quarter, you know, how are you starting to think about needs for future growth capital as you start kind of working down, you know, the cash number from the convert from last year? Thanks very much.

Sure, sure. So I'll go ahead and follow the same sequence you're handing over to Phil, but wanted to give some quick comments. So I wouldn't take this quarter's cash consumption and then just kind of play it out and assume that we're out of cash based on that. We are taking several measures to reduce overall cash consumption, and there's particularly high cash consumption in certain areas this quarter. But if you look at OPEX, we did slow substantially the rate of OPEX growth Q4 to Q1, and we continue to look at reducing OPEX as the year progresses. Second, on the CapEx side, we have a reduction from 2021 and are also looking at ways to trim that. But the bigger one here is also inventory. We did build up a lot of inventory coming into the summer link season. We expect to wind a lot of that down across the course of the year, and that will generate quite a bit of cash. And then we do see improving margin as the year progresses. So that'll also obviously help and contribute. And then lastly, you know, we've been in this kind of holding pattern for a bit here coming out of the pandemic. And we are starting to see some resumption of growth. Although, again, we continue to caution that that will materialize in a bigger way in the latter half of the year. But as that happens, we should start seeing more favorable quarterly cash consumption. So we feel good about that. We do have a plan to manage cash through to a point where we feel comfortable. And at that point, we'll look at options. But right now, we feel good about where our runway is.

Yeah. Ethan, the only other thing that I'll add to that is if you look at our Operating cash flows include a line for a prepaid leasing expense, which is associated with the build-out of our R&D and headquarters facility. We contributed $37 million to that count in Q1. The expectation for the remainder of the year should be only about $34 million in totality, and so we're very front-end loaded on some of the costs this quarter.

The next question comes from Robert Moscow with Credit Suisse. Please go ahead.

Thanks. A little unclear where to begin. A question about the 80% growth that you talked about from February to March in food service sales. I mean, it's a big number. Is March your regular run rate or does it include any benefits from limited time offers. And then I wanted to know, I don't think I've heard about extended shelf life burgers in the EU or these price reductions. Can you talk about the reasons for doing that and why extended shelf life in EU but not the US?

Sure. So I'll take the first hack at this. So I think on the The question about March, I think we're just seeing a fundamental, hopefully, shift in consumer behavior, and people are coming back in and coming back into the brand. So we're happy with that. I don't think there's any kind of one-time hit that is driving that, and we'll keep monitoring that as the year progresses. But that was a very encouraging sign for us. On the extended shelf life, that has more to do with the requirements there in grocery and where we are relative to those. And so by extending it, it's to meet more of the norm there versus what we were doing previously. So it's not a strategy to extend beyond what's typical in the EU.

okay um and my follow-up is kind of a broader question about you know the the price reductions in the u.s and getting closer to traditional meat i mean we're in a time of unprecedented uh price inflation in conventional meat and your your strategy has been to to reduce prices for for plant-based burgers and i guess what i'm surprised about is that that that hasn't yet brought in more consumers to the category. So I'm wondering if you've done any research to indicate that confirms that the price will be the trigger that increases the trial and repeat, or could there be other factors that drive this?

I think it's really three things that I've talked about a lot over the years. One is, you know, continue to drive the taste profile, which we really do need to do and have some terrific innovation coming later this year. Second is to continue to communicate the value proposition, which is around health, to the consumer and then to a lesser extent environment. And then the third is price. And particularly in these QSR environments, we feel very focused on price. But what's happening in the sector overall in grocery is, is you see all these new entrants coming in and many of them are using price as a way to try to capture early market share. And so while the animal protein industry has been able to substantially increase pricing to essentially offset significant reductions in volume, in our sector we have not had the opportunity to do that. So if you look at our sales year over year on a volume basis, we're up 12%. But because pricing has been so competitive, that's not showing up as being offset. And in retail, that's certainly the case. So it's an environment where there's a lot of, I think, unsustainable pricing behaviors going on that we're weathering and we'll weather fine. You know, we're still the number one brand in the retail category. Our velocity turns at two and a half times roughly the category average. It's the highest of all 25 plant-based meat brands that are covered. And so we feel really good about the fact that we've been able to just withstand this. But it's not entirely up to us on these pricing things. We have to remain competitive in that environment. But over time, our approach is not to get to our parity goal through discounting, right? It's to continue to drive cost reduction. And so we've done that through our cost program. If you look at the material costs quarter to quarter, we've been able to reduce those. There's a ton of noise in our cost, again, for long-term strategic reasons. We decided to launch the jerky, which was our biggest launch ever, to 56,000 stores currently and growing. That is larger than our existing footprint in retail, among all other products. So it's a very expensive endeavor to scale up to that and get those out there. And we did it on a network of production facilities versus a single spot, which we're now reorienting our production toward one that's more efficient, which is the right thing to do. And so we also launched for strategic QSRs, which drove pricing up, drove our cost structure up as we went away from steady state production. So all this noise is in the system, but if you look at what we're doing, we are taking this cost down program very seriously, and we will hit this price parity goal that I set now three years ago. We have about two more years to get it. But in fact, if you look at our jerky and you look at the average price of jerky in the marketplace, you'll see that we already are pricing at parity with the jerky. And we wouldn't do that if we didn't have clear line of sight to get to the margins we want. So I know there's a lot of hand-waving and a little bit of wringing of the hands regarding some of our quarterly results. But what we're doing is managing this business to create the longest-term growth opportunity. And these are growth opportunities that I don't think investors would want us to turn down, whether it's launching – what will soon be 80,000 stores with the jerky, whether it's continuing to do trials globally with McDonald's, whether it's continuing to do trials with Young and across their different brands. These are all things that make sense for a business that is looking to expand into a global protein company over a longer period of time. And it's just going to generate some noise in the near term. And I feel comfortable with that. And, you know, I think the market will catch up with that. But we feel good about where we are and, you know, On pricing, we're not going to deviate from that. Okay. Thanks, Ethan. Yep.

The next question comes from Ben Thurr with Barclays. Please go ahead.

Hey, good afternoon. Thanks for taking questions. Just wanted to stay within that topic of the three things. Obviously, taste is important. That's for sure. That's what it all starts with. But amongst price and then maybe a little bit in understanding what's been going on in the international markets, because if we take a look at the results, It felt like in the U.S. the discrepancy between volume growth and then ultimately sales growth, it wasn't that big. But it was kind of stunning to see how significantly you were able to expand volume in the international business, be it in retail or food service, i.e. by 20% up to 30%. But then the international revenues were down 7%. So could you elaborate a little bit about the pricing strategies international and what's been driving that and maybe try to kind of give a little bit of clarity how much was pricing in local currency, how much was ethics, and how much was just a shift in strategy into promotioning activities maybe within retail or food service?

Yeah, so again, this is, Phil can add to this, but This is, again, where I think we just have to kind of everyone take a step back and look at what we're doing. So, you know, we were able to increase volume in retail in the EU by about 19% for the quarter year over year. But that was offset by a 21% reduction in net revenue. But if you look at what's happening right now, we're trying to get in line with competitive pricing in Europe. while we're also building out capacity there in terms of our own extrusion and downstream manufacturing becoming more and more efficient. So it's not where it needs to be today, but it will get there. And so we wanted to continue to grow our market share versus weight until we had full capacity set up. And so that's an example of... pricing, you know, we're pricing to get into a competitive space in that market even as we go further and go towards animal protein. With the food service, it's even more dramatic, 29% growth in volume, so really nice uptick in volume offset by a reduction in pricing. But over time, right, that pricing will make sense from a margin perspective because of the efficiency that we're gaining. in our production network in Europe. And so we do think that price continues to be a good lever. And it gets back to this perspective I've shared many times. If we can create products that are indistinguishable from animal protein in terms of taste, we can make sure the consumer understands the health benefits of our products, such as the work we're doing with Stanford and others. And then lastly, if we can get the price to be at parity or below, it becomes an unusual consumer that says, I'm still not going to consume that. And so, again, these things take time. They're not linear, per se. We're going to have fits and starts, and it's going to require patience. But these are the right steps to take for our business, and they'll generate some near-term results that people don't like, and that's okay.

Just to add to that, we estimate that foreign exchange is approximately a three-percentage-point headwind, which is predominantly euro versus the dollar-driven headwind. The only other thing I would say is some of the trade discounts are somewhat lumpy, particularly as we're rolling out the lower prices. And so in some cases, you're discounting so you get the product at the lower price for what's already out there. Then as we're selling into the distributor, we're also at that lower price. So you may see some kind of lumpiness in that line. And we'll continue to review what we're doing with trade as we see how the new price points which are a little different by country play out. And so this will be something we learn as we go.

Okay. And then my follow-up is really around what you said about the capacity investments in Europe. Can you give us an update where you stand right now? How much of the product that's particularly sold in Europe still needs to be shipped over and then basically packed and marketed over there versus when do you expect to have like the level of production call it domestically, or at least within the broader region, available to improve a little bit that cost headwind?

Yeah, so I wouldn't want to give a timeline right now, but I think the way to think about it is on a finished goods perspective, we're quite good in terms of the EU production. And now it's shifting to integrating the back end of our production process to the point where we're not shipping over WIP and things of that nature. And so I don't think it's too far off. And so we feel good about bringing our costs in line with that price reduction in the not too distant future. But I don't want to give an exact date.

Thank you. Perfect. Thanks, Ethan. Sure.

The next question comes from Ken Goldman with JP Morgan. Please go ahead.

Hi. Two from me. Ethan, you've said on many occasions that your product is superior to competitions on a number of levels. Uh, you know, if this is the case, why do you need to follow your competitors down on price to this degree? I guess, wouldn't you have a bit more consumer loyalty, you know, that maybe should allow you to retain more price? Um, you know, I guess what's the point of kind of reaching price parity with animal based meat if it kind of crushes your margins like this.

Right. So I think, uh, again, first of all, um, so I think, uh, a couple of things. One is, you know, this impact on margin is not long-term, right? Like, we have a very good line of sight to calming down our network, you know, not constantly doing all these launches. So taking the kind of operating cost out of that and then looking at a material basis, we continue to drive down material costs and I think can accelerate that. So on the cost side, I think you'll see some advantages come to fruition. But on pricing, you know, I think it's a fair question. And our products, you know, it's not my opinion. We get a ton of awards and, you know, rankings that are number one, et cetera, and so forth. And we're pleased with that, and we should be doing that. We spend a lot in R&D, and I feel we have this goal of making it indistinguishable, as I've mentioned, and are getting closer and closer. In fact, I'm very excited about the opportunity to release some products this year that I think are exceptional. But we also have to do a better job educating the consumer about the differences among brands. I think there's still confusion within people's minds, particularly us and one other brand. where I'll get emails asking me about our products and so on and so forth, and it will actually be addressed to the other brand. And so we have to do a better job distinguishing ourselves, and I think at that point that will help quite a bit. But one of the main competitive pressure points on pricing is coming from that other brand, and I don't think there's enough differentiation in the consumer's mind.

Thanks. And then question two, you described the market's reaction as, I think, quote, hand-wringing in reaction to some of the investments you're making today. And I think the message is that maybe some people are sort of missing the point about what you're doing for the long term. But in reality, your sales were up 1% year-on-year in the quarter, and your SG&A was up 93%. And I think some investors I've talked to are saying, look, it's great to hear your vision for a better future. We understand that the SG&A increased. Some of it's out of your control. But I guess the question is, how do you think about balancing long-term opportunities and some of the shorter-term considerations for your shareholders. Is there some point in which you need to adjust that spending to kind of, you know, match what's happening in the world today?

Yeah, I mean, absolutely. And I think I've raised those points around, you know, we are going to continue to reduce the growth in OPEX. We have a pretty reasonable CapEx plan for the year. Inventory is going to take a lot of cash out of that. Margin, we see improving over the course of the year. But I think asking that question first quarter of next year, and I think it'll be an interesting answer. I don't think that this current condition persists. And I think that the moves that we're making today are really the best for the long-term shareholder. It's not easy stuff, right? But for those that understand the long-term value that we're trying to unlock, this is exactly the right thing to be doing.

Understood. Thank you.

Yep.

The next question comes from Alexia Howard with Bernstein. Please go ahead.

Good morning. Good evening, everyone. Thank you.

Hi there.

Okay. So can I ask, I mean, just coming back to the cash burn, because obviously that's top of mind for everybody I'm speaking to. You're halfway through Q2 almost. Do you have any sort of read as to what the cash burn is likely to be this quarter? I know that you've said that the prepaid leases for the R&D center are obviously going to get smaller. Did I hear you say that the inventory cash burn might actually start to reverse? I mean, I'd be very curious about that. And is there anything else that we might actually see start to improve, whether it's in the net income line as we go through Q2?

Sure. Good question. So I think the most precise answer I can give is probably going to be a little bit lacking. But the general trend here gets back to my point. I would not take this quarter's cash burn and replicate it out and say, okay, that's when you guys are out. We're taking these steps that I mentioned, particularly on the inventory side. You'll see across the course of the year some cash being freed up there. And then, again, we've had some lower than we'd like sales quarters. That doesn't seem to be persistent, and so we'll generate some better operating outcomes from that perspective as well. So we actually feel pretty okay about our cash position, and we're obviously aware of it, and at the point that we feel we need to do something we will, but right now we're managing it through just careful use of the funds.

Great. And then my follow-up would be just curious about the switch from the SPINS data to numerator. What prompted that and why the transition now? Thank you and I'll pass it on.

Hey, Alexia. This is Luby. I'll take that one. So, you know, the numerator data we actually found you know, probably have better coverage of our, you know, sort of total consumer-based demographics. It does capture more omnichannel sales, which we think is, you know, an increasingly important sort of channel for our brand. It does capture more millennial consumers as well and some of the younger generations, which, again, we believe is an important demographic for our brand. And so, you know, we made the decision to switch panel data providers based on those types of decisions.

Great. Thank you very much.

I'll pass it on. The next question comes from Peter Sala with BCIG. Please go ahead.

Great, thanks. I just wanted to come back to the conversation around gross margin. Even if you exclude the beef jerky impact on the margins, just trying to understand when we should really see the inflection on gross margins. Should we see a significant inflection in third quarter and then fourth quarter again? Just trying to understand what in the pressure that you felt this quarter you think is going to be transitory and really kind of eases significantly in the back end of the year.

This is Phil. I'll take that one. So if you look at this quarter from a cost per pound perspective, it's very, very similar to Q4. And, you know, as Ethan talked about, like, you know, our manufacturing cost is very, too high right now on a per-pound basis sort of ongoing. And so there's a lot of work underway there. We started making good progress late in Q1. We changed some shift schedules, made some other changes to align the optimal location for the production. But some of the inventory, especially given the inventory balance we have, already exist and will sell in Q2. So I would expect that knowing what I know today, Q3 would be when you would start seeing some of those improvements really coming through the income statement. We'll see a little bit of it in Q2 and we'll have to see kind of where we net out on a trade basis as well and some of the other kind of current period costs. Now certainly volume helps us and so if you look at things like depreciation costs, having a bigger quarter which we typically expect seasonally in Q2 and Q3 should also be a little bit of a tailwind.

Great. Thanks for that. And then just as a follow-up, Ethan, I think in your prepared remarks you had mentioned, you know, expect more QSR trials in the second quarter. I don't know if there's anything you can share on that front in terms of are these with your current partners or new partners? You know, are we talking chicken or are we talking still on the burger side? Anything on that front would be helpful. Thank you.

Sure. So I think what I meant to – I think what I said was sort of second half of the year. But, yeah, I mean, the partnerships we have will continue to roll out tests, and I can't speak for them, but you'll see further activity from some of our major partners. Yeah.

Thank you very much.

The next question comes from Adam Samuelson with Goldman Sachs. Go ahead.

Yes, thank you. Good evening, everyone. Can we maybe think about just look at the long-term profitability, and you talked about reaching 30% of those 30% gross margins. What revenue level do you think you need to be at to actually reach EBITDA profitability and be free cash flow positive. I guess the spirit of the question is I look at the OpEx structure of the business, whether on an absolute dollar basis, on a percent of sales, or on a per pound basis, and I'm just really struggling to see the pathway to get to EBITDA or cash flow profitability in the near to medium term, just given where the OpEx

spend is today so this is so I think certainly more volume helps us in that regard we're not giving a multi-year guidance here but the first thing is get our costs back in line with what we think it should be and we spend a bunch of time talking about the reasons why it's not right now and then over time yeah we've got it we've got to grow into this OPEX space, and we also have to take a look at all the OPEX and make sure we're happy with what we're getting for the spend. And that's an ongoing exercise that we continue to evaluate.

Okay. And then as I look at the guidance for revenues for this year, can you maybe just – we have the first quarter. You talked about the new products in the second half, incremental QSR. um kind of trials and activity in the back half of the year how much of the revenue guidance um contemplates new product introductions in 2022 um and i guess inclusive of that jerky um and how much of that encompasses kind of incremental qsr activity than what's in the marketplace today i'm not sure we can get that level of color on it um but i do think the important thing to look at is you know we're coming out of a period

for a variety of reasons, it has been slower on the revenue side than we want. But for us to continue to reinforce the growth targets that we set for the year, we're going to have to have a pretty big quarter-over-quarter performance as we get into third and fourth quarter. And so, you know, we're not backing away from that. We feel good about that, and that has to do with, you know, where we see some of the core business going and the opportunities that we're pursuing today and you know, that's pretty impressive growth on a quarter-over-quarter basis for the second half of the year. So, you know, part of my sense of, like, I just think there's a need for people to take a step back here. When I talk about long-term, you know, there's also some immediate or intermediate performance coming up that I think is pretty promising. So I have a very different perspective, and that's why I use the term bringing hands, than I think some that maybe are less close to the business.

Okay, and then I just have a clarifying accounting question, and then this is for Phil. The equity loss to Joint Venture was $670,000, and I'm just trying to square that with the losses or the cost you've described on Jerky, and I guess why are, wouldn't that be flowing through the JV line also?

Sure, so Jerky, we treat the plan of partnership as arm's length subsidiary or Joint Venture, And so, you see the revenue and the cost flowing through Beyond Meat and then the profit or loss from the JV close to that other line. Does that make sense?

Okay. Yeah, we can, I can circle back offline. Thank you.

The next question comes from Ryan Bell with Consumer Edge Research. Please go ahead.

Hi. How do you think about the strength and importance of brands overall in the alternative meat segment in retail and the degree to which the category more broadly can resist the push towards commodification, kind of like traditional meat? Are there any things that you can do to have incremental value add to help mitigate some of the potential risks of that as we're seeing pricing being a key driver of share gains?

Yeah, that's a good question. So I think it just gets back to continue to innovate, continue to really clearly explain the value proposition around the ingredients that you're using. So in our case, we're using very clean ingredients. It's a pretty simple process. We don't use genetic modification. So there's all these characteristics we need to keep explaining to the consumer around what differentiates our product and our brand. Again, I don't think that this pricing that you're seeing in terms of what other companies are doing is sustainable. So I think the only other publicly reporting, well, there are two, and one of them had a negative 14% margin. So this is something that I don't think will persist in the long run. There will be some private label success in the industry for sure, but as long as we continue to innovate at the rate we are, and deliver better products year after year. So far we haven't seen that be a major issue for us. Our brand continues to have enormous recognition. I think brand awareness increased recently. Household penetration increased recently. So I think there's a long way before we face that question at a serious level.

And just one more for me. In terms of innovation, With the beef jerky, you said you were pushing it out on a national level, and there were costs of getting to that scale that quickly. When we're thinking about future innovations, is there something from a strategic standpoint that was unique about the beef jerky and that relationship, the JV, the PepsiCo? Or is it more you just want to push to get scale and that advantage of getting share within a specific niche or category? rather than starting small and focusing on cost?

Thanks. Sure. I think it was unique for us in the sense that we had never done a shelf-stable product like that. We wanted to do something that would be disruptive to that category and special because when we enter a market we want to try to be number one or create the category. And so we did it in a pretty unique way, and we've been able to, over time, get that to be a really repeatable process that can be scaled and made efficient. So it was a major undertaking. We went from, again, 45,000 stores on the retail side with regular product over 12 years. We had to go into 56,000 stores in a very short period of time with a product we've never produced before and did it and have the number one spot in it. So we feel good about that. Again, when I get back to this, do you want us to, to Ken's question, do investors want us to run the business at a smaller level and focus on maximizing margins, let's say on a retail burger, or do we continue to make the decisions that are going to create the longest term value for the investor and a decision like this is going to do that. You know, simultaneously, we're getting ready for launches for strategics in other parts of the world. There's just a lot going on. And maybe, you know, there's some people that that's not the right approach, but that's the approach we're taking that will create the longest-term value. And it's very consistent with the goal that we set out to do when we went public, and we'll continue to do that. Thank you. That's it for me. Yep.

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

I just appreciate the good questions and look forward to chatting with folks on the second quarter results. Thanks.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.