Beyond Meat, Inc.

Good day and welcome to the Beyond Meat, Inc. 2022 third quarter conference call. All participants will be in 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 and then one on a touch-tone phone. To withdraw your question, please press star and then two. Please note this event is being recorded. At this time, I'd like to turn the conference over to Terri Woodeman, Chief Legal Officer and Secretary. 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 Luby Katua, Chief Financial Officer and Treasurer. By now, everyone should have access to the company's third 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. We refer you to today's press release, the company's annual report on Form 10-K for the fiscal year ended December 31, 2021, the company's quarterly report on Form 10-Q for the quarter ended October 1, 2022, to be filed with the SEC, and other filings with the SEC for a detailed discussion of the risk that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please 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 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, Terry, and good afternoon, everyone. Last month, we signaled that the business continues to navigate a challenging period where broader economic conditions, particularly inflation, category-specific headwinds, and increased competition have, over the past 12 months, combined to disrupt what has been over a decade of growth. This disruption has been in contrast to the year we had planned, where we expected a resumption of our strong growth trajectory as the pandemic receded in the majority of our markets. In my remarks today, I will briefly unpack what we believe are the key drivers of this disruption in our growth, the elements that we believe are transitory, and those that may be more persistent. I will then walk through the full force transition underway toward accelerated cash flow positive operations in route to a sustainable growth model. Before doing so, I would like to take a moment to offer a broader perspective. As is the case with many emerging industries that challenge the status quo, the path to mainstream adoption is rarely straight and smooth. Turbulence along the way generally does not signal a diminished long-term total addressable market or TAM. The history of innovation is replete with examples of this phenomenon captured across a host of disruptive technologies. We are in one such moment as a brand category and are operating with urgency and decisive action to navigate it. We do so with an unwavering focus on our $1.4 trillion TAM, the global meat market, and continued execution of our long-held goal of achieving taste and price parity with animal protein. As we seek to pivot the business to cash flow positive operations and quicken our path to profitability, we are committed to transparency and accountability. To this end, in my remarks, I will center on a clear and highly focused set of actions that we are taking, which are intended to fortify the foundation of our business and drive long-term value for shareholders. For the next several quarters, I will turn to these actions to track progress, and as we advance, provide a more fulsome look at the underlying financial metrics we are using beyond free cash flow to form the backbone of a durable financial algorithm and total shareholder return equation. With that, I will now turn to a brief overview of current market dynamics. The current economic climate has not been kind to plant-based meat. The most quantifiable trend, which we believe is transitory, is a well-established history of consumers trading down on proteins during difficult economic times. This appears to be in full swing today. With persistent and 40-year record inflation in grocery stores, shoppers are seeking to dial out inflation by, among other measures, switching out higher-cost proteins for lower-cost proteins. Rebuy declines, spam rises, and so on. And while these items are on either end of the continuum, consumers are trading down throughout, generally from higher-cost beef and pork items to lower-cost chicken. In this environment, the category beyond meat should be expected to see declines as consumers flock to cheaper proteins. Correspondingly, household penetration for the plant-based meat category, according to numerator data, slipped for a second consecutive quarter, falling roughly 20 basis points versus the second quarter of 2022. Recall that Q2 saw the first sequential decline in household penetration for the category since at least Q1 of 2018, which is as far back as the data set goes. The declining trend in household penetration holds true for us and most of our peers as well, and we have seen some brands significantly retrench or exit the category altogether in the U.S. Despite the category slowdown, there has been a tremendous increase in the number of competitive entrants and activities. As we have maintained, we believe that healthy competition within plant-based meat is a good thing as it brings investment and marketing to the category. However, in the current environment, we are not seeing this benefit of competition. Instead, more companies are pursuing the same or fewer consumers. Though we remain the category leader in refrigerated plant-based meat, the volume of competition has eroded some of our share. As noted a moment ago, A shakeout does appear to be underway, and we expect more brands to either retreat or consolidate, a less cluttered playing field to emerge in the midterm. A less tangible, though important, dynamic is also present within the category today. As consumers intensify focus on making ends meet, health and environmental considerations take a back seat. This phenomenon makes it more difficult to broadly convey our core value proposition to the consumer a topic I will return to later. To summarize the current situation, we face an economy where blistering inflation pressure is shifting consumer behavior in the grocery store, category where competition has dramatically increased despite a broad and precipitous category slowdown, and a consumer base whose focus is understandably turned to fulfilling immediate basic needs over pursuing the broader benefits that represent our core value proposition. These trends have precipitated a substantial drop in revenues for our business, the impact of which is a series of knock-on effects across our income statement. They include a sizable reversal in expected improvements in gross margin as we contend with lower overhead absorption, greater variability of our inventory reserves, and excess capacity and related underutilization and termination fees within our co-manufacturing network. The path forward in this environment is clear, and at its foundation is a pivot from the growth above all operating model that has characterized our business to date to one that prioritizes positive cash flow and sustainable growth. This strategic shift is designed to stabilize the business, nurture our most important growth paths, and position us to drive and capitalize on renewed category growth as the economy emerges from its current state. We will use the following three tenets to underpin our path to cash flow positive operations and sustainable growth, and I will return to these in subsequent quarters to track progress. One, we are significantly reducing operating expenses while focusing on a more narrow set of strategic partner, retail, and food service opportunities and utilizing lean value streams across our beef, pork, and poultry platforms. Two, for the time being, we will be emphasizing cash flow accretive management of our inventory with a focus on profit dollars versus maximizing percent margin. Currently, we are further rationalizing our production network in the context of more moderate volume assumptions to improve overhead absorption, address underutilization fees, and support margin improvement. Three, We are applying a laser focus to our sales and marketing activities, emphasizing those opportunities that we believe strike the right balance between restoring near-term growth and nurturing our most valuable long-term opportunities. Though my comments today tend to focus on our U.S. business and global partnership activities, we are applying similar measures across our EU and China operations. I will now address each of the three pillars of our go-forward strategy in greater detail. one operating expenses we continue to bring our total operating expenses down and expect to drive further progress compared to q1 of this year we have reduced total operating expenses by 23 percent from 97.8 million to 74.9 million in q3 and we expect opex to fall even further in q4 and thereafter to date we have instituted two separate reduction in force actions, one in August and one in October, totaling approximately 240 positions. Together, these actions represent more than 20% of our global workforce. With our most recent reduction in force, we are expecting operating expense savings of approximately $39 million over the next 12 months, excluding one-time separation costs of approximately $4 million. Although letting go of these dedicated, passionate, and talented team members was painful, these actions were necessary to right-size our organization so that we are aligned with current business conditions. Moving forward, to support the execution of a more narrow set of key priorities while delivering further OPEX reductions, we are implementing lean value streams across the organization around our three product platforms of beef, poultry, and pork. I have, along with the team, strong enthusiasm around this implementation as Lean Value Stream Management comports well with and extends throughout the organization several of the principles of our Beyond Meat Rapid and Relentless Innovation Program. Two, aggressively managing down inventory and rationalizing our production network. We are focused on maximizing cash flow generation and profit dollars when it comes to inventory management over percent margin. Specifically, in the context of a more limited number of segments, we are testing a pricing reduction that more quickly collapses the pricing delta between one of our core products and its animal protein equivalent. We are implementing these programs in a highly targeted manner where we believe doing so will welcome new points of distribution and new consumers to our brand while increasing volumes throughout our facilities and network. We expect these activities to accelerate our drawdown of inventory, which we've already reduced by nearly $37 million since the end of Q1, and free up cash. In addition, we are taking immediate steps to rationalize our production network to address what we expect may be continued lower than previously planned growth. These activities include the further consolidation of production activities within our co-packing network, the full utilization of our own facilities by bringing in certain outsourced activities, and in certain instances, redistributing production across our network to address volume commitments. These measures are critical to improving overhead absorption and minimizing unproductive idle fees. Three, restoring growth in retail and food service through a series of targeted innovation, sales, and marketing execution. In the midst of all the noise in the broader economy and the civic challenges facing our segment and brand, it's important not to forget something. We remain an innovation engine working on one of the most powerful solutions to some of the most serious challenges facing our country and the world. As you will recall, this year we were recognized by American consumers as the most innovative company in food as they, in the same survey, Recognize Apple, Tesla, and Amazon as the world's most innovative companies across technology, transportation, and consumer goods. As such, even as we continue to reduce our operating expenses and implement lean value streams, prioritize cash flow from inventory, and right-size our production network, we will do what we do best, innovate. As we challenge and push our way into our long-term $1.4 trillion TAM, Specifically, in retail, we plan to restore growth to our core product offerings of burgers, beef, and dinner sausage in the refrigerated set through exciting product renovation and to leverage and support these renovations by pursuing distribution expansion, certain aforementioned strategic pricing activities, and targeted marketing. These products, which generally carry the highest margins across our product portfolio, account for roughly three-quarters of our total gross revenues, and the majority of our retail gross revenues. Previously teased our fourth iteration of our Beyond Burger, so I'll speak more openly about that particular item now. Though we will not give a release date for our retail channel, I will say that I'm thrilled at the improvements the team has made on the broader Beyond Burger platform. Throughout its development, I've watched key customers and stakeholders come through our innovation center, try a version of this fourth generation product, and quickly share my belief that it is a meaningful advance toward our North Star of being indistinguishable from its animal protein equivalent. Though we have long emphasized the refrigerated meat case next to animal meats as one of the long-term engines of significant growth, we do not discount the importance of the frozen aisle in grocery. As such, we are bringing an increased amount of innovation to the frozen category. We are continuing to prioritize expanding distribution for our chicken tenders, which, as you may recall, won the 2022 People Magazine Food Award, while adding a host of new, easy-to-use, delicious offerings for busy families and consumers. These include the recently announced Beyond Steak, which truly delivers the juicy, tender, and delicious bite of seared steak tips with the added nutritional and environmental benefits of plant-based meat. This brand-new product, which, like our chicken, was also the recipient of a well-recognized award, which will be announced soon, is now available at more than 5,000 Kroger and Walmart stores nationwide, as well as at select Albertsons and Ajo divisions, with further distribution gains expected in the near future. Reinforcing our health value proposition, Beyond Steak is low in saturated fat with zero milligrams of cholesterol and and has no antibiotics or hormones. And as just announced, we followed up on the introduction of Beyond Steak with the launches of Beyond Chicken Nuggets and Beyond Popcorn Chicken, which are rolling out at over 5,000 stores at national retailers like Walmart and Kroger, as well as select regional retailers like Ahold and Albertsons, and is expected to expand into more outlets in the near future. As with tenders, these chicken products deliver tangible health benefits to the consumer, including having 50% less saturated fat than the leading brand of traditional breaded chicken nuggets, zero milligrams of cholesterol, and no antibiotics or hormones. Frozen plant-based chicken is the largest single subcategory in all of plant-based meats and continues to grow at a double-digit pace, so we are pleased to be expanding our presence with additional chicken items. Turning now to food service, in the last year alone, Beyond Meat has executed an impressive number of launches and tests across the globe with our strategic partners. Specifically, in the last 12 months, we have had 25 trials for permanent menu launches with nine distinct products across our beef, pork, and poultry platforms in 18 countries. Though these activities do not result in immediate sustained revenues, they represent very important seeds that we are planting for future growth. For example, across the McDonald's network, we have been busy launching the McPlant in Australia, the US, UK, Ireland, Germany, Portugal, Taiwan, Austria, and the Netherlands. And as of today, we are pleased to share the McPlant has already become a permanent menu item in the UK, Ireland, Austria, and the Netherlands. Moving on to Yum. As you know, we tested Beyond Kentucky Fried Chicken here in the U.S. early this year, and we've launched Beyond Meat toppings with pizza at locations across Singapore, Germany, Kuwait and the UAE, Canada, Guatemala, and El Salvador, with Canada, Guatemala, El Salvador, and Singapore already converting to permanent Beyond Meat menu items. Most recently, regarding YUM, we are excited to be testing Beyond Carne Asada at Taco Bell locations in and around Dayton, Ohio. The Carne Asada product represents the toil and ingenuity of many special and talented people across the YUM and Beyond Meat partnership. It was not easy to bring to life, and getting it right was a walk through the halls of real innovation. Ideation, research, development, failure, iteration, breakthrough, and back again countless times, and then resounding success. It is something new to the world, delivering the taste, mouthfeel, and satiating experience of its animal protein equivalent. And importantly, it is being offered at the same price as its animal protein equivalent. If you are in or near Dayton, it is well worth the trip to Taco Bell to taste the future. As I round out some of the latest strategic launches, I'd like to turn to Panda Express. In early September, Panda Express brought back Beyond the Original Orange Chicken to over 2,300 U.S. locations for a limited time offering following a successful regional launch last year. As with McPlant to McDonald's and Beyond Carne Asada at Taco Bell, I encourage you to stop by at Panda Express and enjoy the absolutely delicious Beyond the Original orange chicken. Tasting is believing. The final piece in this third pillar of our strategy is a more aggressive and more narrowly tailored application of our taste, health, and planet message, focusing on those consumers who are most able to hear us during these difficult economic times. When I think about the first order of business in our long-term vision, building meat from plants that is indistinguishable from its animal protein equivalent, I am confident that we are advancing year by year. And when I think about the next critical step in our long-term strategy, driving down the cost of goods of our products so that we sell at or below price parity with animal protein in at least one category, I am equally confident we are advancing the goal that I set three and a half years ago. Where we need to do better and will do better is in connecting with the right consumer at the right time around the very real broader benefits of going beyond so that we can make the leap from early adopters to the early majority. I believe this to be the case with both our health and planet messaging as a brand and as a sector. With health, we've allowed special interest groups to have a field day seeding doubt about the health profile of what they call fake meat. I'd like to spend a moment on this point. We care about our ingredients and are proud of our process because we care about health at the very foundation of our brand. I return to, for example, recent research conducted at the Stanford School of Medicine as part of our five-year plant-based diet initiative with the university. In the first clinical trial, published in the American Journal of Clinical Nutrition in August 2020, researchers reported declines in LDL, or bad cholesterol, and TMAO when participants switched from animal protein to plant-based Beyond Meat over successive eight-week periods. TMAO is a compound that forms in the gut and has been correlated with heart disease and certain cancers. As we move forward, we will be announcing a major partnership with the National Health Organization and taking other steps to highlight to consumers the tangible health benefits of Beyond Meat. Two, we need to do a better job helping the consumer better understand the connection between our products and climate. Again, focusing on the right consumer at the right time when we have the greatest chance of being heard. The climate impact of our food production system exceeds that of our transportation system globally. Correspondingly, plant-based meat is one of the most immediate and powerful tools available to the public for addressing climate change. Here again, I return to research, which I shared earlier, conducted at the University of Michigan in 2018, where the team performed a lifecycle analysis of the original Beyond Burger versus a quarter pound US beef burger, and found that producing a Beyond Burger not only generated 90% fewer greenhouse gas emissions, but also used 99% less water while requiring 93% less land. As I've long maintained, marketing is a lot easier when it's true. And in our case, as these and other data points suggest, we have a very real and compelling story to tell consumers on health and planet. What you'd expect from us going forward is more pronounced, narrowly targeted messaging around taste, health, and planet directed towards those consumer segments most likely to listen to our voice. In closing, last month, as on this call, I signaled change in our growth strategy. Namely, after a long period of investment, I've set a clear target for our company to achieve cash flow positive operations within the second half of 2023. My decision to accelerate positive cash flow operations and ultimately profitability is simultaneously a recognition of today's challenging economy and tomorrow's opportunity. We are and will be here for the long game. To reiterate, the three main pillars we're using to advance positive cash flow and implement a sustainable growth model are one, continued reduction in OPEX and a narrowing of focus on key strategic partner, food service, and retail opportunities while making further efficiency gains through lean value streams across our beef, pork, and poultry platforms. Two, emphasizing cash flow accretive management of our inventory with a focus on margin dollars versus maximizing margin percent and concurrently rationalizing our production network in the context of more moderate volume assumptions. Three, narrowing our sales and marketing focus to a core set of activities that we believe strike the right balance between restoring near-term growth and nurturing our most valuable long-term opportunities. I look forward to returning to our call in the new year to update you on our progress across this critically important pivot and plan. With that, I will turn it over to Lubbe our new Chief Financial Officer and Treasurer, to walk us through our third quarter financial results in greater detail and reiterate our outlook.