Beyond Meat, Inc.

Good day and welcome to the Beyond Needs conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Start key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask questions, you may press Start and 1 on your touch-tone phone. To withdraw your question, please press Please note this event is being recorded. I would now like to turn the conference over to Lubbock Tua. Please go ahead.

Thank you. Good afternoon and welcome. Joining me on today's call are Ethan Brown, Founder, President, and Chief Executive Officer, and Phil Harden, Chief Financial Officer and Treasurer. By now, everyone should have access to the company's second quarter earnings press release 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 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, 2021, the company's quarterly report on Form 10-Q for the quarter ended July 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 gap measure. And with that, I would now like to turn the call over to Ethan Brown.

Thank you, Luby, and good afternoon, everyone. We have a clear view of our vast long-term opportunity and its ever-increasing global importance and a strong confidence in the leadership position of our brand. In fact, in Q2 2022, we recorded our second largest quarter ever of net revenues, even as consumers traded down among proteins in the context of very significant inflationary pressures. We simultaneously, however, recognize that progress for us and for the sector is taking longer than expected. We now expect, reflecting this inflationary pressure on consumer spending, specifically how this impacts higher cost proteins and foods, a delay, and post-COVID resumption of growth. Accordingly, we are taking a number of steps to reduce cash consumption to position the company for sustainable growth while we apply our near-term focus on the following key drivers. One, executing against a planned series of high-value market initiatives for strategic and food service partners, and two, strengthening our retail business through, among other measures, bolstering support for our core lines while bringing to market, among other new products that will expand our portfolio, one of our best innovations ever, a delicious and convincing strip of steak. Cost-related actions underway include, one, significant reductions in general operating expenses. For this quarter, we reduced OpEx by approximately 14 million, or 15%, on a sequential basis. Further intensifying reduction in production costs to drive continued sequential progress on manufacturing costs so as to recover healthy margins and reach pricing goals. Three, realigning organizational structures across North America, the EU, and China to increase regional focus, efficiency, and speed. Four, continued focus on managing down inventory levels. And five, And an action that I will now turn to, yesterday we instituted a reduction in force of approximately 40 positions. Given the high value of our team members, and again, the tremendous opportunity that lays ahead, the reduction in force is a difficult measure. Beyond Meat is a team of tremendously dedicated, passionate, and talented individuals who have come together in service to our mission, our customers, our consumers, and our shareholders. I am proud of what our team has built and are building, and the resilience that our company has shown over the past two years, as well as now, as we face, like others, challenging macroeconomic conditions. We are committed to treating those employees affected by this reduction in force with the utmost respect and providing assistance to help them in their transitions. The second quarter of 2022 saw a sequential contraction in U.S. household penetration of plant-based meat for the first time in over four years, according to numerated data, even as the number of brands and SKUs expanded by roughly 60 and 70 percent, respectively, over the past two years. As consumers are expressly seeking value, we believe that high inflation and the sector's premium pricing relative to animal protein is largely if not fully determining. Despite intense competitive pricing in the category by existing and new entrants on the one hand and rising animal protein prices on the other, the category remains a premium one relative to animal meats. As such, it is subject to the same trading down behaviors that one sees during inflationary periods. Enumerated data for the 12 weeks ended June 26, 2022 shows that the primary drivers of volume leakage for our own U.S. business were indeed shifts to animal protein, as well as to private label. This dynamic, shrinking consumer buying power in grocery stores that favors lower cost proteins and products, exerted greater than anticipated pressure on category growth, and in turn, our own growth. Turning to gross margin, although we made sequential progress on manufacturing conversion costs, this was obscured by the sale of certain inventory items to the liquidation channel. as well as increased inventory reserves for the same, the combination of which accounted for nearly 10 points of gross margin, pushing our gross margin down to negative 4.2%. Looking forward, though we do expect growth for the balance of the year, we need to continue to temper expectations given the clear precedent for consumers to trade down among proteins in grocery stores when buying power shrinks in inflationary periods. As I noted earlier, we've indeed begun to see this trading down materialize and expect to continue for the time being. As such, we are issuing revised lower guidance for the full year 2022. Before closing, I want to reiterate my enthusiasm for our brand and our long-term growth prospects. When research firm Brand Keys surveyed American consumers regarding the world's most innovative companies, Apple, Tesla, and Amazon took number one spots, respectively, across technology, transportation, and consumer goods. And Beyond Meat took the number one spot in food, according to a report released last month. I share this to note that despite the current economic environment, the long-term opportunity ahead of us remains, as I began, vast and substantial. We are grateful for the commitment of our partners, including some of the world's most valuable QSR companies, namely McDonald's and Yum! Brands, and one of the globe's largest CPG companies, PepsiCo, with whom we share the Planet Partnership joint venture. We note that the McPlant Burger, co-developed with Beyond Meat, is now a core menu item at McDonald's in the UK, and that in July, McDonald's initiated a 270-store test of the McPlant Burger in Victoria, Australia. In Austria, following the nationwide limited-time offer of a second McPlant build, the McPlant Steakhouse, McDonald's just started a nationwide limited-time offer of a third McPlant build, the McPlant Tasty, which is inspired by McDonald's popular Big Tasty Burger. Also during the quarter, the limited time test in the Plant Burger in the San Francisco Bay and Dallas-Fort Worth areas concluded as planned. Turning to Yum!, we have launched or tested five Beyond innovations thus far. This year's Beyond Fried Chicken LTO at KFC nationwide and Beyond Italian Sausage Crumbles at Pizza Hut in Canada, which is now a permanent menu placement. Last year's Beyond Pepperoni test in the US and the permanent addition of Beyond Beef Crumbles and Beyond Pork Crumbles at Pizza Delivery in the UK. These ongoing tests are a natural progression of our partnership with our strategic QSR partners, take time as well as iteration across product attributes, pricing, and other considerations, and we are encouraged by the multiple introductions that we're seeing with both McDonald's and Yum! globally as we innovate together. Finally, we are thankful for consumers who continue to make Beyond Meat the number one brand in our retail category of refrigerated plant-based meats, according to SPINS data, and we are planning aggressive steps across the balance of the year to further engage the consumer in grocery. I've said many times that I believe the rise of plant-based meats to a prominent role in the global diet is inevitable. The benefits of such a transition include driven by the unique effectiveness of plant-based meats in addressing climate and conserving natural resources are powerful. As the Boston Consulting Group recently reported, the climate return for plant-based meats measured in terms of carbon equivalent emissions avoided per dollar invested is unrivaled, significantly besting climate returns per dollar invested in green technologies across a host of sectors, including transportation and electricity. In closing, it is our foundational belief that we can usher in the mainstream transition to plant-based meats by driving ever more intently toward products that are indistinguishable in taste from, are clearly understood by the consumer to deliver health benefits relative to, and are at price parity or below that of their animal protein equivalents. We are focused intently on increasing efficiency in operations and production while driving execution of our highest value growth initiatives across North America, the EU, and China, and we confidently expect to emerge from today's economic conditions leaner, stronger, and very well poised to deliver on the promise of our brand. With that, I will turn it over to Phil to walk us through our second quarter financial results in greater detail and our outlook for the full year 2022.

Thanks, Ethan.

We achieved net revenues of $147 million in the second quarter of 2022, representing a decrease of 1.6% compared to the second quarter of 2021, the highest revenue quarter in Beyond Meat history. The decrease in net revenues was driven by a reduction in net revenue per pound of approximately 14.2%, partially offset by a 14.6% increase in total pounds sold. Q2 2022 net revenue per pound was $4.88, down from $5.69 per pound in Q2 2021, and was primarily attributable to decreased price per pound, including the impact of selling to liquidation channels and other pricing changes, including the EU list price reductions instituted in Q1 2022, changes in foreign exchange rates, and increased trade discounts. Moving down the P&L to gross profit. Gross profit during Q2 2022 was negative $6.2 million or negative 4.2% of net revenues as compared to $47.4 million or 31.7% of net revenues in Q2 2021. The combination of sales of certain inventory to the liquidation channel and increased inventory reserves weighed heavily on gross profit this quarter, representing a combined headwind, excluding any impacts from beyond meat jerky, of approximately 10 percentage points on gross margin. In assessing our inventory during the quarter, for certain goods we did not project adequate demand from full-price customers in the U.S. retail channel, and therefore decided to sell the inventory at a deep discount into the liquidation channel. The inventory carried a cost of approximately $10.5 million, and we realized revenue of approximately $1.9 million and a loss of approximately $8.7 million on the transaction. As part of our quarterly inventory assessment, we also increased our inventory reserves, which further reduced gross margin. We estimate Beyond Meat Jerky was an additional approximately 670 basis point gross margin headwind. an approximate 270 basis point improvement from the estimated 940 basis point headwind in Q1 2022. The sequential improvement was driven by an increase in revenue per pound, including a one-time true-up of $1.4 million, primarily for pricing on Q1 volumes, and a decrease of jerky as a total percentage of the mix. In Q2 2022, cost of goods sold was $5.09 per pound, an increase of $1.20 per pound year over year. We estimate jerky accounted for an approximately 57% of the increase, with the remainder being driven by increased manufacturing costs, including depreciation, increased materials cost, higher transportation and warehouse costs, and increased inventory reserves versus the year-ago period. To reiterate, we estimate Jerky accounted for approximately 57 cents of the increase, with the remainder being driven by increased manufacturing costs, including depreciation, increased material costs, higher transportation and warehousing costs, and increased inventory reserves versus the year-ago period. Manufacturing costs, including depreciation, increased approximately 48 cents per pound versus the prior year, with Jerky accounting for approximately 26 cents per pound and the remainder primarily reflecting expensive inventory created in Q1 and sold through in Q2, as well as higher depreciation per unit. In the Q1 earnings call, we spoke about the beginnings of an improved trajectory for manufacturing costs, and we saw that improvement in the P&L with a sequential decrease in manufacturing costs, led by continued improvements in our DeVault Pennsylvania finished goods manufacturing facility. Materials cost increased approximately 44 cents per pound year over year. with an estimated 29 cents of the increase driven by jerky. Not reflected in Q2 2022 results, but in the last earnings call, we said we were in the process of attempting to qualify products made from P protein isolate, or PPI, supplied from lower cost providers. We were successful and now have the capability to produce many of our products from 100% low cost PPI. This gives us flexibility as we balance the introduction of additional low cost PPI into our formulas the desire to consume existing WIP and PPI inventory, and to adhere to existing purchase commitments. We also continue to work diligently across our ingredients and packaging and have recently secured reduced prices on certain packaging components and are in the process of finalizing contracts on multiple ingredients. Logistics costs, including those associated with internal transportation and warehousing, increased 15 cents per pound in Q2 2022. versus Q2 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. And although up year over year, these costs improve sequentially through efforts like better execution and a recent RFP where we rebid our trucking lanes. The team remains extremely focused on working down our inventory balance, and as we reduce inventory, we expect to further reduce our warehousing costs. Inventory was a significant headwind for the business in Q2. In the case of sales through the liquidation channel, the entire impact shows up in decreased revenue per pound without driving a degradation in cost per pound. But in Q2, we also had an increase in inventory reserves that created an increase of approximately 14 cents per pound of additional costs versus Q2 2021. We are improving our processes to allow faster and smarter responses to change in demand and are making an effort to reduce the overall inventory levels to curtail this risk. Moving down the P&L to OPEX, operating expenses for Q2 2022 were $83.5 million, up $17.6 million from $66 million in Q2 2021. The year-over-year increase was driven mainly by increases in people expenses, non-people G&A driven by consulting fees, marketing expenses, and commercialization expenses related to scaling new products. OPEX, as a percentage of revenue, was reduced from 89.4% in Q1 2022 to 56.8% in Q2 2022. In addition to a larger revenue base, Q2 2022 operating expenses at $83.5 million were down $14.3 million sequentially from Q1 2022. The sequential decrease in OPEX versus Q1 was primarily driven by reductions in marketing and commercialization expenses. In recent quarters, the majority of our OPEX has been driven by non-people related expenses. approximately 61% and 55% in Q1 and Q2, respectively. We began managing those down in Q2 and expect to drive further reductions as we go through the balance of the year. In addition to direct spend reductions, we recently began rolling out bracket pricing to incentivize customers to order in quantities that more efficiently use our trucks to minimize outbound freight costs, another component of our OPEX. We have also been heavily scrutinizing our people-related expenses and headcount. And despite adding additional people in Europe and China this year, we ended Q2 with slightly fewer non-production heads globally than we started the year. We'll continue to manage down headcount through natural attrition and performance management. But to further decelerate spending, we announced some reductions in our workforce today, reducing it or yesterday, reducing it by approximately 40 people or approximately 4%. The reduction is expected to reduce OPEX by approximately $8 million annually, although we expect to incur incremental one-time separation costs of approximately $1 million in Q3 of 2022. Turning to our balance sheet and cash flow highlights, our cash and cash equivalence balance was $454.7 million, and total debt outstanding was approximately $1.1 billion as of July 2nd, 2022. In Q2 2022, Inventory decreased to $254.7 million, down $29.1 million from $283.8 million at the end of Q1 2022, and up $12.8 million from $241.9 million at the end of Q4 2021. We expect to continue to reduce our inventory balance going forward. In terms of cash flow, for the three months into July 2, 2022, net cash used in operating activities was $70.5 million, a $19.3 million decrease compared to the $89.8 million used in the year-ago period. Note, contained in our Q2 2022 operating cash flows, we contributed approximately $6.7 million toward the build-out of our new innovation and headquarters facility here in the LA area. which was recorded in prepaid rent, compared to approximately $26.6 million in Q2 2021. Capital expenditures totaled $20.4 million in Q2 2022, compared to $28.1 million in the year-ago period. Next, I will provide some commentary about our 2022 outlook. For the fiscal year 2022, we expect net revenues to be in the range of $470 million to $520 million, corresponding to year-over-year growth of between 1% to 12%. Previously, we had guided to $560 million to $620 million. The significant majority of the decrease was driven by three main areas. First, reductions in our outlook of Europe and the Middle East, where according to Nielsen data, plant-based meat across all our brands for burger, mince, meatballs, and sausage in our key European markets has decelerated from growth of approximately 7% in 2021 to shrinking approximately 14% year over year in the first half of 2022. Although we continue to gain share, the sustained headwind of the contracting segment is bigger than was anticipated. Also, we successfully launched extended shelf life for our burgers in March, but have been delayed in getting extended shelf life versions of other products out to the markets, though we continue to target doing so in the near future. Second, reductions in U.S. retail. As a reminder, the majority of our U.S. retail business is for refrigerated product versus frozen. According to SPNS data, refrigerated plant-based meat has accelerated its rate of contraction from negative 3.6% in the 12-week period ended March 20, 2022, to negative 12.5% in the 12 weeks into July 10. This broad pressure in our primary subcategory has more than offset any benefits gained from recent expansion of distribution. And finally, reductions in the forecast for Beyond Meat Jerky. As a reminder, we recognize revenue and COGS in our P&L as we sell into the Planet Partnership, and then further recognize our share of the net income or loss of the Planet Partnership in the equity and losses of unconsolidated joint venture line of the P&L. Although Beyond Meat Jerky has approximately quadrupled the size of the plant-based meat snacks subsegment, We had very high expectations for this product, and velocities are now turning below initial forecasts. Due to the length of the supply chain, this forecast decrease will have a disproportionate impact on new production and revenue recognized by Beyond Meat in the second half of 2022. For gross margins, In Q3 2022, while we do not expect similar liquidation and inventory headwinds to Q2, the decreased revenue forecast puts additional pressure on gross margin versus earlier forecasts by negatively impacting capacity utilization, which could also give rise to termination fees to exit certain supply chain arrangements, driving less leverage on fixed costs and delays the speed at which cost savings initiatives make their way into the P&L. We expect these challenges to result in an anticipated gross margin in the low to mid single digits for Q3 2022, increasing in Q4 2022, but still well below historical norms. For fiscal year 2022, our current expectation is to incur CapEx of roughly $80 million, down from $136 million in 2021, although we will continue to look for opportunities to reduce this further by deferring additional spend. We expect additional cash contributions for the build out of our innovation center and headquarters facility will be $12 million in the second half of 2022, with the expected $15 million remaining to the completion now deferred into 2023. 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 Start and 1 on your touchtone phone. If you are using a speakerphone, please pick up your headset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Start and 2. At this time, we will pause momentarily to assemble our host. And our first question comes from Alexa Howard from Bernstein. Good evening, everyone.

Alexa, how are you?

Good, good. Thank you for the comprehensive commentary. So I guess, you know, we're all sort of looking at the guy down on the sale side for the second half, and that does imply a slowdown, I think, from the rate that we saw this quarter. What do you think it's going to take to reinvigorate the category, particularly in the U.S. and in Europe? I mean, is this something that is obviously going to be a work in progress at some time, but what do you think the key factors are there, and how long is it going to take to actually see some sort of turnaround?

Sure. Thank you again for the question. And so I think to start, a key Data point and data points are the following that if you look at the price of our ground beef today on a retail average 12 weeks using spins data we're selling it eight dollars and thirty five cents a pound. If you look at the USDA ground beef data for the month of June the price per pound was four dollars and ninety cents. So you have $8.35 per pound price versus a $4.90 per pound price. I can talk a lot about all the different influences and things that are going on in the economy, but that is a very difficult proposition when consumers have very high levels of inflation going on and their buying power in grocery is declining. So I think that There are a number of confounding factors. We went from a pandemic into record inflation, highest in 40 years. And for a sector that is still gathering its feet and is still in sort of the first set of downs, that's a very difficult set of conditions to navigate. Now, the good news is our strategy has always been about three things. It's been first and foremost about getting the taste right so that we are indistinguishable from animal protein. The second has been about making sure that consumers understand that our products have health benefits relative to animal protein. The third and most relevant here is price. So we've always known, right, that we need to drive our cost structure down and offer the consumer a price point that is the same as animal protein. So the pullback you're seeing against our sector is very consistent with that belief. And so in a kind of unfortunate way, it's reinforcing our strategy, and it's propelling us and challenging us to try to wring cost out of our system as quickly as we can. And while there's a lot of things that are obscuring our cost down initiatives, we are seeing progress, particularly on a sequential basis, on manufacturing costs, on logistics costs, and things of that nature. Now, what we need to be able to bring that into the market is a resumption of volume growth so that we can spread out those costs among more production. So what's needed to reinvigorate the category? One is to get out of this economic situation where consumers are trading down on proteins. You know, I think it's very well understood that, for example, spam rises during periods of recession. Spam is having its record year, I think the seventh year in a row, where they continue to grow, and you see that being accentuated in particularly difficult economic times. You see consumers trading down to lower cuts of meat. So we have to get through this period to see a resumption of growth, and I think it's pretty simple, and we're focusing on that.

Our next question comes from Peter Galbo, Bank of America.

Hey, guys. Good afternoon. Thank you for taking the question. Sure. Phil, thank you for the comments on the gross margin cadence. I think that's helpful just in terms of setting expectations for the rest of the year. I was wondering if you'd be able to kind of do the same with just the revenue phasing in the back half, if there's any sort of split you're imagining, you know, whether that's at the midpoint of the range or just anything else to help us there. Thanks.

At this point, we're just providing full-year revenue guidance. And so you obviously know what the first two quarters are. So we're not providing additional detail. Okay.

Fair enough. I had to try. And then on the cash burn, guys, I guess you did see pretty significant improvement, at least quarter on quarter and even year over year. As you continue to kind of liquidate some of the inventory in the back half of the year, should we see that number continue to sequentially improve? I know you're talking about some of your OPEX spend being down, you know, further sequentially. Just anything to help us on the cash burn going forward. Thanks very much.

Yeah, we're very focused on the rate of cash expenditure. And inventory is a key one for sure. I think hopefully we will be able to not necessarily liquidate, but sell existing inventory and use existing ingredients. And the teams are working really hard to make sure we're being very smart in our supply chain and managing our inventory really well. So, yes, we anticipate through the rest of the year that we should be able to continue to drive down the inventory balance. Similarly, we're working to also drive down OPEX. We had a pretty big step down sequentially, and we're particularly, you know, we announced some layoffs recently. I think there's a lot more we can do in the non-people OPEX as well, and so that's a big focus area for us. But the intent is that we continue to reduce the rate of cash consumption as we go through the year.

Okay. Thanks very much.

Our next question comes from Adam.

Yes, thank you. Good afternoon, everyone. So I guess Ethan, I wanted to come back to the point you made about the price competitiveness of your product versus ground beef, and you gave that roughly $3.50 or so kind of price gap on the shelf at retail. And I guess I'm kind of thinking about that in the context of your gross margins. So just help us think about the pathway, not only for you to lower the price gap versus ground beef to improve kind of the consumer appeal in the tough consumer times or not, but to do so profitably and help us think about some of the levers on the cog side that you have and you've got line of sight to that can give you that magnitude of not only get the gross margins up from where they are now, but the unit costs down even more to enable the price reductions.

Sure. So I'll answer that, and then I also want to give maybe a bit of a more complete answer to Lex's question. So I think you can see the sequential decline in manufacturing costs. You see a similar sequential decline in transportation and warehousing. And particularly on the transportation and warehousing, I think it's just being driven by better execution. We just did a recent RFP on our trucking lanes and are taking other measures to really start to bring down our overall manufacturing cost structure. And in part, We're also looking now at a design to value strategy where we have such expertise in our understanding of ingredients and processes throughout the world of plant-based meat. And we're looking at how do we strip costs out from a design perspective out of our products and potentially offer portfolio strategy into the market so that we can get more broadly and more quickly to a profitable lower price point. So the idea is not to continue to orient the business toward just lower pricing without improvement on margin or cost structure, but rather is to allow the cost structure improvements that we're seeing to help drive that lower pricing. We do need the volume to pick back up, and we have some strategies there that we're going to try to deploy even during this difficult economic time. But it does get down to just continued blocking and tackling quarter after quarter, bringing these costs down, and we're starting to see some good results. Again, they're a little obscured by things like depreciation and just the lower volume we have. It is an effort to make sure that we're doing that in tandem, driving the cost structure down as we bring our pricing down. But to get back to the original question about reinvigorating, the thesis remains the same. The need for the sector remains the same and, in fact, is increasing in importance year after year. We've made a very significant amount of investment over the last three years. in commercializing and scaling products for large QSRs and for our partnership with Pepsi, the planet partnership, as well as new retail products. Our shift now is really toward a model where we can introduce and support those at a sustainable growth level. And so we're focusing on harvesting the investments we've made over the last several years. So what that doesn't mean is that we're pulling back from launches or tests with QSRs. You'll see a lot of activity from us in the next 12 months with our QSRs. You'll see it not only here in the U.S., but globally. And that's really bringing to market the work that we have already done. So we're looking forward to that. You'll also see us really focus on strengthening our retail presence. I believe so strongly in the benefits of these relationships with QSRs to be able to create an environment where the mainstream consumer can experience our brand that we've invested a lot of the last several years in that. I think one of the side effects of that is that our retail presence has probably been less powerful than it could be. And so we're making some investments in the retail space to better build out a brand block. If you think about what happened to the category over the last three years in retail, so we started with the fresh category. Beyond Meat really pioneered that. We had the beef products, the burger, sausage, et cetera. And then a number of brands came in, and it got kind of disorganized and disjointed as a category, particularly in the fresh space. And so what we need to do is allow the process to occur, which does in a lot of evolving industries. Brands that fall away, there'll be consolidation and things of that nature. But let's get back to a really clearly identifiable brand block in retail. Let's make sure that happens in refrigerated. Let's make sure that happens in frozen. So the beyond brand offers consumers a lot of choice across both categories. So, the new products that we're bringing into the market, particularly later this fall, will start to do that, and the products we're bringing next year in 2023 will start to do that. So, reinvesting in the retail space to strengthen our retail lines is something that we're really going to focus on as part of the effort to bring growth levels back to where they were. But again, I don't want to dismiss the larger macroeconomic environment. We've got to get out of this particular phase with the consumer where there's just so much pressure on their wallets and get to a more normalized, a more normal economy.

And if I could just ask a quick follow-up, if I looked at the COGS spend, whether you want to do this year or the last 12 months, how much would you characterize as fixed that would have the more obvious leverage if you got the volume throughput higher?

Well, I think even among the variable cost, you know, one of the areas the teams have done great work on in the cost downstreams is running the machinery faster. But you've got to have the orders to take full advantage of that, even from a variable cost perspective. So obviously you can use the asset more fully if you're running it harder, but it's also easier to produce with your variable costs if you're running full speed. And so, you know, there are obvious things like depreciation that are fixed, but, you know, volume drives fuller trucks. It drives better utilization in the co-manufacturer network. And so it really, you know, is a significant benefit to both the fixed and the variable cost.

Okay. I appreciate that, Collar. I'll pass it on. Thanks. Sure.

Our next question comes from Ben Terror with Barclays.

Yeah, hey, good afternoon. So one quick one because I think we need to ask it. So you've talked about some of the rollouts with McDonald's and some of the determination of those. Can you share an update on some of the initiatives or some of the potential planned things, particularly in the U.S., like second waves? I mean, we've seen it in other markets, so it feels like normal. But if you could add some additional color on that, Ethan, that would be great. Thank you very much.

Sure. As much as I'd love to, you know, I can't. We are a supplier and really want to be respectful of McDonald's and how they want to handle this. I think you've heard us both be silent on the recent speculation, and that's all I need to say.

Okay. I had to try it. So with that in mind, well, you know me. So if we look into the CapEx and things you're delaying and basically reducing in this year and then pushing into next year, what are the things where you think you can actually push safe on the CapEx side in order to improve that free cash flow profile? And where do you think this is a must invest on the CapEx side, innovation, product development, et cetera, and capabilities there, I guess, is part of that. But if you could give us a little bit of a sense of what you're postponing, what's behind that, so that we understand what the potential implication of that CapEx delay is. Thank you.

Sure, this is Phil. So first I think a lot of the build out has been to build capacity both for kind of existing products as well as new products. We have a lot of capacity now. And so, especially as the forecast falls and as we can sort of better run our existing equipment, it doesn't necessarily necessitate as much investment as you've seen from us in the past, because we've invested quite a bit in CapEx previously. So, we don't see it as a major hindrance. I think the teams have been very diligent in going through and you know, are being appropriately frugal to make sure that we're managing the cash carefully. But we don't see it as a major hindrance for the business at all at this point, given the amount of installed capacity we've already got.

Okay.

Thank you, Phil.

Our next question comes from Hopesh Parish with Open Hamer.

Good afternoon, and thanks for taking my question. So I just wanted to touch on some of the pricing efforts that you guys discussed at the press release, and I think what we saw in the U.S. retail market. So first, in the EU, you talked about list price increases. Just curious if that was originally contemplated within your guidance, and do you expect to make further adjustments in that market? And in the U.S. market, we did observe price reductions at Costco. Just wanted to get a sense of if you're trying to do price reductions as well in the U.S. retail market.

Yeah, so I'll take that. On the EU side of things, we actually saw a nice – volume increase year over year, but that was more than offset by an actual reduction in pricing, which brought revenue down 22%. So we've actually tried to calibrate better our pricing to what we're seeing from competitors in the EU. In the US, we have run deals and promotions across, we did across the second quarter. And again, I think that's a key thing. unusual phenomenon going on, right? Everyone else is taking price, but our category continues to do a lot of discounting and things of that nature. So, again, it puts emphasis on the importance of continuing to get these sequential gains and cost reduction. But in Europe, we actually ended up reducing, not raising.

Okay, great. Thank you.

Our next question comes from Robert Mosco with Credit Suisse.

Hi, Ethan. Given the change in your outlook for sales and your commentary that you need volume to go up a lot higher and there really aren't any catalysts to get it higher in order for the model to work, Why not reduce the workforce further? You know, 4% doesn't seem like a very big number. And I guess the reason I ask it is, you know, you say you've scaled up to support large QSRs for big, chunky launches. But, you know, it doesn't look like those are on the horizon. So if they aren't on the horizon, does that mean you would necessitate bigger cuts to come?

Right, so I think we have taken some pretty significant reductions in overall OpEx. I think the sequential decline was something like 14% or 15% quarter-over-quarter, and we're going to continue to drive that to the extent we don't want to continue to cut into our people costs. We have an incredibly talented team. We obviously care a tremendous amount about each and every employee here. But the more important thing is that I would probably dispute the idea there's no catalyst for resumption of volume. There actually are catalysts. And we just can't predict the macroeconomic environment. But I think just keep an eye out for activity across the globe from us and from our strategic partners. And it may make more sense. But again, the big thing is let's get through. Let's show some patience around this. difficult economic environment, and then let's get back to some more normal conditions and growth in retail and in our food service business. But I wouldn't say that these QSR relations aren't coming to fruition. I think that will be something that will become clear in the next six to 12 months.

Okay. Thank you.

Our next question comes from Ken Goldman with JP Morgan.

Hi, thank you. You know, while we're on the subject of, you know, QSRs and partnerships, you know, we have seen with other companies trials with a particular QSR, you know, come to an end as expected. And sometimes those turn into expanded partnerships several months later. So, you know, I wanted to understand a little bit better about how the trial You know, you mentioned McDonald's, so I guess it's okay for me to kind of mention the specific customer. How did that go relative to your expectations? What were the learnings, maybe? And especially, could you kind of compare, maybe contrast, why the U.K.-Ireland market was one that was ready for expansion when, you know, it seems maybe the U.S. was not? I'm just curious for some color there. Thank you.

Yeah. So I don't – again, I just can't comment on the McDonald's stuff to that level of detail, but I also – wouldn't necessarily argue the US market is not ready. I think there's a real desire among people watching our company to kind of have a binary outcome at a very early stage in the development of this sector and for our business. Tests are done for all kinds of reasons. They're done to determine pricing. They're done to determine build. They're done to check out incrementality. And they get the results, and then they make assessments. So, I think there's a lot of noise in the system in the media right now about what's actually going on. To speak more generally about Europe, I think Europe is pretty advanced in terms of the plant-based market. I think that the governments are more proactive in terms of encouraging this shift. I mean, the thing about this is the It's going to happen. The reasons that this is so important only increase on a daily basis. I don't know if you saw The Economist, the coming food catastrophe and things of that nature. We have an issue. We have to solve it. We are one of the major solutions to help solve it. And so efforts to try to call the outcome of this game during a recessionary period, during a pandemic, in my mind, are kind of folly. I think we need to focus on continuing to execute our strategy, our strategy to drive toward taste, to drive toward health and communicate that and ultimately drive toward price. The day that we get the products to be indistinguishable from animal protein, get the consumer to understand that these have health benefits above that you'll get from animal protein, and they can buy it at the same price, we will have a very, very promising part of the market. That's going to be distorted while things are going on in the economy that we can't control. What we can control is how Effectively, we drive toward those. We have an amazing team. We've brought people over from industry that are very expert at running lines at low cost. For example, Doug and Bernie from Tyson and many others within our company. What I do is stay focused on the things we can control, stay focused on serving our customers who we're lucky to have. We have some of the best customers in the world with Donald and young brands and Pepsi and so many others. And kind of just keep our heads down, keep doing our thing. And over time, you'll see, I think, tremendous growth in the sector. The same thing happened in electric vehicles. I enjoy sometimes reading the 2019 commentary on Tesla and just the abuse that that stock took. I think it's premature to make the kind of calls that people are making, and it kind of spurs us on, actually.

Thanks again.

Our next question comes from Peter Sully, BTG.

Great, thanks. I just wanted to come back to the conversation around jerky for a second. I think you guys said the velocity trends are a little bit below forecast. Could you guys give us a little bit more color on what you're seeing there? I know we're a couple quarters into this, but just a little bit more color on where it's selling well, where it's not performing as well, and maybe any changes you or Pepsi might be making to accelerate the sales there. Thank you.

Yeah, I think the one thing I can comment on on that is, first of all, it was just an enormous launch, right? I can't remember the exact number, but 80,000 plus locations at one point. And I think they did an excellent job at that. What is happening is that they have a more significant percentage of their budget that they're going to be spending, this is I'm talking about the Planet Partnership, spending on shopper marketing activities going forward than they have thus far because they're waiting for sort of fuller distribution. So we just have to watch and see. But it's a new space for us. It's a new partnership for us. It's a new product for us. So the build may happen slowly, more slowly than we thought, but it's a great product. It's really great to see it out there in the marketplace and people like it. I think I would add too that, you know, the

Beyond Meat Jerky makes up the significant majority of the plant-based meat snack subsegment. So, obviously, it's very, very big in the category.

Great. And then it was nice to see that the OPEX kind of moderated pretty meaningfully, I guess, sequentially. Can you just talk about any other reductions you guys are expecting or how we should be modeling that in the back end of the year?

Yeah, so we are expecting to further reduce OpEx as we go from Q2 to Q3. I think there are some moving pieces that make it difficult to predict exactly what it will be. There's costs like the outbound customer freight. Some of the marketing, obviously, if we find lower funnel marketing with a very high return on ad sales, that we're confident is incremental, we'll choose to invest there, especially given some of the commentary around volume. But, you know, we're targeting something in the mid to lower 70s as sort of the Q3 number. And again, that can change as we get into the quarter a little more, but that's the current kind of model build.

Thank you very much.

Our next question comes from Cody Ross with UBS.

Hey, good afternoon, everyone. Thank you for taking our questions. I just want to touch a little bit on the sales that you had through the liquidation channel this quarter, and we appreciate the guidance or commentary you gave there. How do you feel about your inventory position today, and how much more sales do you have, if at all, to go through this channel, through the back half?

Sure, so we're putting a lot of work around our process to make sure we're identifying inventory as it ages. This was a very unusual sale for us, and based on kind of where we are now, we're not anticipating this kind of volume next quarter. We feel like we've reserved appropriately, so obviously we'll have to continue to watch what our Outlook does, as well as kind of how we're managing inventory as it goes through our system. But we're not anticipating this size of an impact going forward. But I would look for us around the edges to continue, you know, as things become at risk, we would far prefer to realize some value rather than destroying the product.

So just to clarify, you will have some product go through that channel, just not the same magnitude in the back half. That's our expectation. Got it. But nothing anywhere near as large likely as what we saw here. Got it. And then I just want to turn quickly to your cash burn situation. You significantly improved this quarter, burning roughly $90 million of cash. You have about $450 million on the balance sheet. It's probably the biggest question we get from investors today. I know you will be more tightly managing expenses going forward, but with the reduced sales outlook, it's hard to see how you won't need to access the capital markets in the next few years. Is that your assumption, or do you see a pathway to an inflection in profits and cash flow on the horizon? Thanks.

So I'll take it in a general sense and then turn it to Phil. I think that the change in tone that I hope people are picking up on from me is that although our strategy remains the same, We really are moving into a phase right now, given broader economic conditions, that we're harvesting existing investments. We're reorienting toward a more sustainable growth model for the time being. We're executing these planned QSRs and food service launches. We're focusing on lifting our retail sector back up again, and our retail brand, rather. And we're doubling down on cost and price. And all of those things we're doing with an eye toward reducing the consumption of cash driving the business toward a more sustainable position. So I don't think we're going to offer a direct answer on a future cash raise, but we are working extremely hard on bringing the business into a more sustainable position. I don't know. Nothing further.

Got it. Thank you. I'll pass it along.

Our next question comes from Michael Levery, Piper Center.

Thank you. Good afternoon. You touched on some of the things that influenced your change in thinking on the guidance with just the jerky velocities and a couple of those sort of specific things. Was there any change in your food service expectations that was a driver of that as well?

Well we update the forecast at really a kind of bottoms-up level and so obviously there's always movement but it was definitely not one of the top three that we called out as a key driver and we explained the significant majority of the reduction in the outlook.

Okay that's helpful and just on the gross margins you gave some nice color on how that should progress but The jerky piece specifically that you've called out the last two quarters, what's the sort of endgame there? Is that going to be a headwind that you just sort of live with, or is there room to really improve how that impacts the gross margin overall as well?

Yeah, so I think it's going to come back to the same answer we gave before around once volumes start to – materialize there, you'll start to see some of the reductions that we put in place. But until that point, you won't. And so we have integrated that production process more fully. And so going forward, it is much more efficient. But we still have some inventory to sell through and some volume that we need to see materialized to show that. But no, it won't be once we're back into kind of a full swing of volume. it will not continue to be a significant headwind. That's right.

Can you say how much your sales to the Planet Partnership, how much sales came from jerky this quarter?

Yes. In Q2, our jerky volume was about $15.9 million.

Okay, great. Thanks so much.

This concludes our question and answer session. I would like to turn the conference back over to Ethan Brown for any closing remarks. Please go ahead.

Thank you. Thanks for the very good questions. I think the general feeling we have here has been echoed by other companies that this is a difficult economic period. And that's kind of it. It does not color our tremendous enthusiasm for the long-term opportunity. I think it does force us to bring in to greater focus the need for a more sustainable position. But our strategy serving these terrific QSR partners that we have, reinvigorating our retail brand, doubling down on cost and price, including through designing new products to value. All of these things are ways that we're reacting to these conditions and strengthening our business. So we look at this as an opportunity to get stronger, to come out a little leaner, and resume the growth that we expect and look forward to showing. Thanks, everybody.

The conference has now concluded. Thank you for attending today