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spk09: Good afternoon and welcome to the Beyond Meat 2023 fourth 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 then one on your telephone keypad. 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 Paul Shepard, Vice President, FP&A, and Investor Relations. Please go ahead.
spk03: Thank you. Good afternoon and welcome. Joining me on today's call are Ethan Brown, Founder, President, and Chief Executive Officer, and Luby Couture, Chief Financial Officer and Treasurer. By now, everyone should have access to the company's fourth quarter and full year 2023 earnings press release filed today after market close. 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 that 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 that differ materially from those described in these forward-looking statements. Forward-looking statements in today's earnings release, 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, company's quarterly report on Form 10-Q for the quarter ended September 30, 2023, and to the company's annual report on Form 10-K for the fiscal year ended December 31, 2023, to be filed with the SEC along with 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 reference 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.
spk05: Thank you, Paul, and good afternoon, everyone. I will begin my comments by briefly reviewing the five priorities we anchored our activities around in Q4 2023, and then turn to our five forward priorities for 2024. In both instances, these steps are intended to serve and accelerate our progress towards sustainable operations and return to growth. In Q4 2023, we executed across the following actions. One, we sought to accelerate our transition to a leaner operating structure. As part of these efforts, we established a minimum of $70 million in cuts from our operating budget for 2024. We recorded approximately 95.6 in non-cast charges, primarily relating to inventory and assets now deemed to be in excess or no longer consistent with our path to profitability, and continued to consolidate our production footprint. Two, in U.S. retail, we put the finishing touches on a multi-year renovation of certain core platforms, including Beyond Burger and Beyond Beef. We believe this renovation further positions the brand to overcome misinformation regarding the nutritional and health profile of our products while providing strong support for certain pricing actions. Three, we conducted extensive pricing analysis and, as discussed momentarily, are now preparing to implement pricing changes to support gross margin expansion. Four, throughout the quarter, we continued to use inventory management to free up working capital. Five, we maintained our investment focus in Europe and served our strategic customers in this important market for plant-based meats, including continued traction in McDonald's across countries such as Austria, Germany, Ireland, the Netherlands, UK, Malta, Portugal, Slovenia, and Switzerland. Turning to 2024, a pivotal year for Beyond Meat, we are pursuing the following five priorities, several of which simply represent a transition from 2023 planning to 2024 implementation. One, we are beginning 2024 by executing within a leaner operation, consistent with substantially reduced 2024 planned OPEX and cash use. Part and parcel with this leaner operation is our ongoing tightening of focus relating to portfolio, markets, and consumer. We are, as just one example, discontinuing our Beyond Meat Jerky product line, despite its number one position in the plant-based jerky category. These refinements allow focus and resources to be put against our latest product platform renovation, Beyond 4, and other SKUs which you believe have higher profitable growth potential here in the U.S. and are consistent with my intention to focus more resources against key markets and customers in Europe. Two, we will be rolling out Beyond4 in U.S. retail and view this renovation as an important and potentially transformative moment for our brand and category. Iron sharpens iron, and we've certainly experienced this ancient metaphor firsthand. Specifically, the current climate of misinformation and efforts by incumbents, including, sadly, pharmaceutical interests, to poison the plant-based meat well push us to accelerate gains in the health profile of our product platforms. To be clear, as I've often repeated, likely the point of boredom of listeners, We are proud of the health benefits available through our current products, including, for example, those documented in the SWAP Meat Study published in the American Journal of Clinical Nutrition, where participants experienced a meaningful drop in LDL or bad cholesterol, as well as a decline in TMAO, a compound in the gut associated with heart disease, after switching from animal-based meats to Beyond Meats across eight-week intervals. And we are proud of the certifications associated with our existing product lines, such as the American Heart Association's HeartCheck program certification of our Beyond Steak and Beyond Beef crumbles. However, as we have also oft repeated, we are chasing a perfect build of meat from plants, and this goal encompasses sensory as well as nutritional characteristics. On the latter, our job is to deliver as much of the nutritional benefits of plant-based eating as we can in the familiar and satiating form and taste of meat. Over the years, we've surrounded ourselves with a broad ecosystem of doctors, registered dieticians, and leading health institutions to guide us in this effort. Combination of this extensive input and the talent and expertise of our research and development team is what led to what I believe is a significant breakthrough in the BEYOND4 platform. If you come to our facilities in Los Angeles, you will see that one of the analytical areas that we emphasize is the structure, interplay, and distribution of plant-based proteins and fats. In Beyond 4, the team was able to blend high-quality proteins from fava beans, red lentils, peas, and brown rice together with fats from avocado oil in a way to deliver superior nutrition and sensory outcomes. The nutritionals are clear and compelling, including high levels of plant-based protein. 21 grams specifically, with just 2 grams of saturated fat, which is 75% less saturated fat than a typical 80-20 animal beef patty. Avocado oil has been identified as potentially beneficial across a range of health outcomes, including reducing the risk of various chronic diseases, among them heart disease, as well as potentially helpful with eye and skin health, reflecting its composition of monounsaturated fats, antioxidants, and other plant compounds. The critics will undoubtedly continue to agitate. A favorite target is sodium levels, and the sleight of hand employed is to compare the Beyond Burger, which is seasoned, to an unseasoned ground beef burger. Keeping in mind that the current Beyond Burger contains 17% of the daily recommended value of sodium, which when appropriately compared to seasoned beef burgers, often means less, not more, sodium. Nevertheless, Beyond 4 achieves a 20% reduction in the amount of sodium, with the sodium content now registering at 14% of daily values. Quick math reveals that even if you were to have seven of the Beyond 4 burgers in a single day, this consumption alone would not exceed the daily recommended value of sodium. And here's the thing, we're not done. As a critic's position, talk, post, and lobby, we will keep chasing our own true north, that perfect build of meat from plants, and you can expect even lower sodium levels in subsequent generations. These and other advances in Beyond 4 have earned recognition from important members of the health and nutrition community. This includes the American Association's HeartCheck program certification of a series of heart-healthy recipes featuring the Beyond 4 Beef and Burger, The placement of the American Diabetes Association seal on our Beyond 4 beef and burger packaging, as both products meet the nutritional guidelines of the American Diabetes Association's Better Choices for Life program, and the Clean Label Project certification of the Beyond 4 beef and burger. Moreover, in a survey of registered dietitians at a recent conference, 94% of these dietitians answered that they enjoyed the taste of the new Beyond Burger, viewed it as healthful, and would recommend it, while broader consumer testing scored favorably across the taste, juiciness, and texture relative to our existing burger. Three, we are implementing changes to our U.S. trade and pricing programs, effective in early Q2. Though varied across channels and product lines, we expect the overall impact of these pricing changes to meaningfully impact margin across the balance of the year. This change in strategy does not reflect an abandonment of our long-sought price parity goal which we in fact achieved in certain very specific offerings. Rather, the change reflects three main factors. One, we clearly need to restore our margins, and this, coupled with the network consolidation I discussed momentarily, are expected to aid greatly toward this end. Two, the broad pricing programs we put in place over the last 18 months simply didn't accomplish the goal of crossing from early adopters into the mainstream. In retrospect, the noise and swirl surrounding the category reached decibels that were perhaps sufficient to drown out pricing and other messages. Three, given the aforementioned margin objectives, as well as the inclusion of certain premium ingredients in the Beyond4 platform, our pricing architecture is putting far more deliberate emphasis on tiered pricing across our product lines. Four, as referenced above, we are nearing the completion of what has been a very difficult but highly worthwhile consolidation of our production network. Though we undertook these changes for myriad reasons depending on the site and partner, we expect this right-sizing to substantially contribute to margin. To give a sense of the magnitude of this restructuring effort, it helps to consider that in the last two years, we've contracted our production network from as many as 13 co-packers in North America to just one today. This consolidation, coupled with an emphasis on internal production, has obvious benefits relating to overhead absorption, as well as logistics and quality control. Five, we are continuing to invest in our European business and related strategic customers. In a recent trip to the UK, I was struck by what I am personally certain is the future of plant-based meat, that is, a growing ubiquity. I was able to, within a radius of no more than three blocks, enjoy delicious Beyond Meat offerings at McDonald's UK, Pizza Hut UK, and Starbucks UK. More generally, I routinely enjoy watching with much interest the reaction of visitors at our headquarters in Los Angeles when they taste the McPlant Nugget, which is now available in Germany. Almost universally, it is viewed as indistinguishable from its animal protein equivalent. Similar to the delicious aforementioned products at Pizza UK and Starbucks UK, this outcome reflects years of development and investment that helped separate Beyond Meat. Before moving on from Europe, I should note that across 2024, we look forward to more fulsome entry into the German retail market given our recent satisfaction of local shelf life requirements. In closing my comments, I want to properly frame the state of our business. Over the last 12 to 18 months, we spent considerable time, energy, and resources reorienting Beyond Meat's trajectory amidst changing and challenging conditions with an eye towards sustainable operations and a return to growth. To reiterate, these major steps include a potential leap forward in the value proposition of our core product lines, a steep reduction in our operating costs and cash use as we continue to implement lean management principles, the contraction of our production network to achieve quality and margin gains, and the implementation of pricing changes, also in support of margin expansion. As we look forward, we expect the early results from this extensive spade work, together with specific actions we plan to pursue to bolster our balance sheet, to make 2024 an important, promising year for the Beyond Meat story. With that, I'll turn it over to Luby, our Chief Financial Officer and Treasurer, to walk us through our fourth quarter and full year 2023 financial results in greater detail, as well as provide our outlook for 2024.
spk10: Thank you, Ethan, and good afternoon, everyone. Before diving into the components of our fourth quarter P&L, let me provide some color more broadly on the significant non-cash charges you will have seen in our press release today. You'll recall we announced in November 2023 that we were initiating a review of our global operations spanning five areas. First, the potential exit of select product lines. Second, changes to our pricing architecture within certain channels. Third, accelerated cash accretive inventory reduction initiatives. Fourth, further optimization of our manufacturing capacity and real estate footprint. And lastly, fifth, a review and potential restructuring of our operations in China. We recorded $67.5 million in non-cash charges in cost of goods sold this quarter in connection with our global operations review. These charges consisted of a few different items, including the provision for certain inventory now deemed to be excess or obsolete, given changes to our strategic priorities, as well as more limited internal resources following our November 2023 reduction in force. We also recorded a significant charge representing accelerated depreciation expense on certain fixed assets determined to be non-core to our strategic priorities within the foreseeable horizon, but for which no recovery or sale value could be reasonably expected. Also in connection with the global operations review, we recorded a non-cash write off to cost of goods sold associated with a prepaid option to purchase certain raw material ingredients, which we no longer expect to exercise. Within operating expenses, we recorded a non-cash charge of $17.6 million, reflecting the write down to estimated fair value of certain production and R&D fixed assets, which we now intend to sell. Of note, $16.3 million of the non-cash items recorded in cost of goods sold and $3.6 million of the non-cash items recorded in operating expenses related to Beyond Meat Jerky, which we have made the decision as part of our global operations review to discontinue. Let me now briefly review our fourth quarter financial results before turning to our 2024 outlook. Net revenues decreased 7.8% to $73.7 million in the fourth quarter of 2023, compared to $79.9 million in the year-ago period. The decrease in net revenues was driven by a 14.6% decrease in net revenue per pound, partially offset by an 8% increase in volume of products sold. The decrease in net revenue per pound was mainly driven by changes in product sales mix and increased trade discounts, partially offset by favorable impact from foreign exchange rates. The increase in volume sold was primarily driven by sales in our international business, where we continue to see solid growth across our retail and food service channels. However, this was partially offset by softness in our U.S. business, where volumes declined in both our retail and food service channels, due mainly to continued category weakness and the lapping of certain business in our food service channel that did not repeat in Q4-23. Turning to gross profit and gross margin. Gross profit in the fourth quarter of 2023 was a loss of $83.9 million compared to a loss of $2.9 million in the year-ago period, which included the negative impact of non-cash charges totaling $78 million taken in the fourth quarter of 2023. Of the aforementioned amount, $67.5 million was associated with strategic decisions arising from our global operations review, and $10.5 million was due to other special items driven mainly by additional reserves for inventory associated with a large QSR customer and the write-off of a prepaid fee resulting from the termination of a co-manufacturing agreement in Q4 2023. Excluding the aforementioned charges, gross profit and gross margin were also impacted by lower net revenue per pound, partially offset by reduced logistics costs per pound compared to the year-ago period. Operating expenses were $76.9 million in the fourth quarter of 2023 compared to $62.8 million in the year-ago period. The increase in operating expenses included non-cash charges totaling $17.6 million associated with our global operations review, which I described a moment ago. Excluding these charges, operating expenses also reflected reduced non-production headcount expenses, lower restructuring expenses, reduced scale-up expense, and lower selling expenses, partially offset by higher consulting fees compared to the year-ago periods. Moving down the P&L, total other income net of $5.7 million was lower by approximately $1.2 million compared to the year-ago period, reflecting decreased realized and unrealized foreign currency gains. Losses related to the company's joint venture with PepsiCo, the Planet Partnership, decreased by approximately $8 million year-over-year, reflecting the reduced scale of our jerky business versus the year-ago period. Overall, net loss in the fourth quarter of 2023 was $155.1 million, or $2.40 per common share, compared to net loss of $66.9 million, or $1.05 per common share in the year-ago period. Net loss in the fourth quarter of 2023 included non-cash charges totaling $95.6 million, as previously described. Adjusted EBITDA was a loss of $125.1 million in the fourth quarter of 2023, compared to an adjusted EBITDA loss of $56.5 million in the year-ago period. Turning now to our balance sheet, the company's cash and cash equivalents balance, including restricted cash, was $205.9 million, and total outstanding debt was $1.1 billion as of December 31, 2023. Net cash used in operating activities was $107.8 million in the year ended December 31, 2023, compared to $320.2 million in the year-ago period. Capital expenditures totaled $10.6 million in the year ended December 31, 2023, compared to $70.5 million in the year-ago period. Let me now turn to our full-year 2024 outlook. We expect net revenues to be in the range of $345 million, and net revenues for the first quarter of 2024 are expected to be in the range of approximately $70 million to $75 million. Gross margin is expected to be in the mid to high teens and is expected to be higher in the second half of the year relative to the first half, reflecting the timing of anticipated pricing actions and further production insourcing activities. Operating expenses are expected to be in the range of $170 million to $190 million, weighted slightly more towards the first half of the year. And capital expenditures are expected to be in the range of $15 million to $25 million. Finally, in 2024, we plan to bolster our liquidity and potentially restructure our balance sheet. And with that, I'll conclude my remarks and turn the call over to the operator to open it up for your questions. Thank you.
spk09: We will now begin the question and answer session. To ask a question, you may press a star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.
spk00: Our first question comes from Andrew Strzelczyk with BMO.
spk09: Please go ahead.
spk04: Hi, thanks for taking my question. This is Daniel Gold on for Andrew. Hi. When will the Beyond 4 be rolled out, and will that be a phased rollout? And is pricing going to be rolled out alongside it? And what's the magnitude of pricing you plan on taking? and kind of what channels and geographies does that plan for?
spk05: Thank you for the question. So we're very excited to have the BEYOND4 come out. It will be shipping next month and probably start to gain broader distribution April timeframe and into May, and that will be in U.S. retail. On pricing, there are two kind of separate issues. The On4, as I mentioned in my remarks, was many years in the making, and we were able to get it out as we roll into the summer season this year. But it does coincide well with some pricing changes that we have to take. And so they will be largely coincident, and certainly it helps that there's some premium ingredients in Beyond 4, and I think an enhanced value proposition in Beyond 4 to help support that pricing. In terms of the magnitude, we should probably talk with retailers first before getting into the specific details on that. But the entire effort is really around making sure that we get back to very healthy margins. And we did a tremendous amount of work on this question around elasticity. worked with an external firm and looked across our portfolio at where we thought pricing, you know, had some headroom or room rather for growth. And so I think we've made the right decisions here and just look forward to rolling it out. But it is really part, if I could just reiterate some of the things that I was saying on our introductory remarks, it's part of an entire effort to really reset the business after, you know, about 12 to 18 months of effort. to reorient what we're doing from a much more growth at all cost focused operating model to one now that is highly focused on sustainability and profitability. And so the pricing increase is just one of those things. But if you look at all of the changes that we're making, whether it's a substantial reduction in operating budget, we'll be down significantly from 2023 if we execute according to our 24 plan. as well as a very substantial reduction in cash use. If you look at the global staff cuts we've made over the last several years, the one that we did in November was not insignificant at about 19%. And so I think we've really right-sized the business for the size of the current opportunity and the growth that we want to create ahead. Pricing is a very significant tool in restoring margin, but it's not the only one. We're also well underway in terms of production efficiencies that we've been chasing. And if you think about the magnitude of the effort over the last several years to put the business into a footprint that's consistent with the current opportunities, we've gone from 13 manufacturing locations that are external to our company down to one. And bringing a lot of that production in-house to benefit from much higher overhead absorption and some material flow efficiencies and things of that nature, reduce logistic costs, so on and so forth. So it's really part and parcel with an entire effort to reorient the business towards sustainable and then profitable organizations. I think I mentioned in the opening remarks that, you know, we're going to be discontinuing jerky. That's the same idea there. And then this last – global business review to take out some of the excess inventory and assets that we have from a write-down perspective and then be able to monetize those with less pressure on us. So all these things, again, we were at one size and needed to get a little bit leaner. I think we've done that now. And so in 2024, I very much look forward to a lot of this coming to fruition and this reset beginning to really show.
spk04: That's really helpful. Thank you. Just one more for me. Can you speak to your confidence in the gross margin guide?
spk05: I'll give that to Louis, but I think the two main features that I just referenced, one is the pricing change as well as this consolidation of our production network and the increased or continuing, rather, COG reductions that you see throughout the last 12 months. Those will, I think, help significantly, and then also clearing out some of the higher reserve levels of liability.
spk10: Yeah, you know, not a whole lot to add to that, but, you know, I think just generally in speaking to sort of our confidence level, we feel pretty good about it, right? And so, you know, we did say in the guidance that we provided that we expect gross margins to be higher in the back half relative to the first half, and that's related to some of the timing around some of these actions. Ethan already discussed the pricing. One thing that we have communicated on prior calls as well is that we are rolling back to some degree the level of promotions that we've done. We really did some aggressive promotions in 2023 as a means of trying to draw more consumers into the category, and we're taking a little bit of a different approach this year. The insourcing of finished goods production is something that I think should not be underestimated. As Ethan said, it really gives us an opportunity to sweat our assets more and benefit from the fixed cost absorption, as well as the fact that it helps us from a logistics cost perspective as well, right? You can imagine if you have eight or ten different co-manufacturers in your network, you know, you're transporting ingredients and, you know, work and process items to multiple locations, that starts to have a, you know, detrimental effect on your logistics costs. And so all of these things combined, I think, give us, you know, pretty good confidence that we should be able to achieve the margin targets that we're seeking.
spk09: The next question is from Adam Samuelson with Goldman Sachs. Please go ahead.
spk11: Yes, thank you. Good afternoon, everyone. Good afternoon. Hi. So I just want to, a little bit, Ethan, I want to just make sure I'm thinking about the 2024 outlook pieces correctly. Given the revenue outlook you've given, given the gross margins, outlook for kind of mid to high teens, the operating expenses, and there's a, some DNA and stock comp. So it's not all cash, but there's also the CapEx. It would still look like the cash burn based on the gross margin, less the OpEx, less the, less the, um, less the CapEx, add back some DNA and stock comp. Um, you would still have a cash burn from operations in 2024 of a hundred million dollars plus. Um, And A, am I missing something in terms of the non-cash expenses in there? Because I'm just trying to think about that level of cash burn in 2024 relative to an ending cash balance in 23 of $205 million, arguably kind of expecting the burn half for more of your cash balance in 24 but for further liquidity actions.
spk05: I do think we should probably after the call work through this with you on some of the puts and takes. We're pretty comfortable that it's going to come in at a reasonable number and lower than 100, certainly at the midpoint. but we can get guidance on that as well.
spk10: Adam, I'm not sure what assumptions you're making in there in terms of some of the non-cash add-backs, but I think the number that you referenced there, roughly 100 million, I think if you just looked at some of the big non-cash items, the depreciation and stock comp from last year, and factor that in, and then just take our guidance, that would put us right at the range that you're talking about. Obviously, we expect to do better in certain areas. The other thing that's not baked into those numbers right we did you know part of the reason why we have these significant non cash charges is we're writing down you know certain fixed assets right to to estimated fair value so that we can sell them and start to monetize some of those those assets doing the same thing on the inventory side and so that should you know that that that should provide some benefit to cash as well You know, we did talk about that we're looking to bolster our liquidity. So, look, we're doing everything that we need to do to fix sort of the fundamentals of the business so that we are fundamentally a lower cash consumption business, right, with a longer-term goal, obviously, of getting to sustained free cash flow positive. But, you know, we're being responsible as well. And, you know, this is why, you know, one of our objectives for 2024 is to bolster the balance sheet. But, you know, like I said, there's other puts and takes that, you know, just our guidance alone on its face would not necessarily consider. But we think we'll provide a little bit of upside relative to the number that you were estimating.
spk11: Okay. All right. That's helpful. Let me take that offline. If I could ask a follow-up just on... The outlook for revenues, which you have down 8%, so it's a roughly flat year over year for 2024. What are volumes assumed in that at this juncture? I'm just trying to get a sense of how much pricey less you really think would come from the higher price increases, the higher prices, particularly in U.S. retail.
spk10: Yeah, so we don't necessarily guide to volume, right? So we gave you the revenue dollar projection, but what I can say is We looked at price elasticities very deeply as part of this exercise, and we're looking at our pricing, and it is going to vary by channel and region, et cetera. But we believe and we feel pretty confident that in some of the areas where we are looking to take pricing, that the elasticity, the changes in price will more than offset the anticipated loss of volume as a result of the price increase. And so I don't want to get too specific on volume numbers, but generally speaking, we would expect the elasticity to be less than one.
spk11: Okay, so just to be clear there, if you're still having revenue dollars down, but the price increase is offsetting the volume declines, is the revenue declines, the dollar declines a function of exiting product lines or regions, or what then would be underpinning the revenue dollar decline expectations?
spk10: Yeah, so there is some exit of product lines. We talked about jerky as an example. The other thing is the reality is our U.S. retail business continues to be challenged, and so there is some assumption in there which we hope will turn out to be conservative, but nonetheless we've seen baseline velocity erosion in U.S. retail channel. And so we're trying to factor that in, you know, particularly on the downside. So, you know, those are sort of the key drivers, I guess, when you look at the lower end of the range.
spk05: I think that's right. The continued kind of vulnerability in U.S. retail is something that just as you do your models, as we do our models, right, we didn't want too rosy a picture around. I think the general... notion here is that we're doing a massive product launch that's transformative in terms of what we've done over the last eight years. It's probably the most important renovation we've done since the Beyond Burger. And then we're also taking price. So the two of those make it very hard to predict with a ton of certainty any type of growth. We just don't know. So we wanted to come in with something that was reflected kind of current information and hope to change it and have a better outcome.
spk11: Okay, I appreciate all that color. I'll pass it on. Thank you.
spk09: The next question is from John Baumgartner with Mizuho. Please go ahead.
spk08: Good afternoon. Thanks for the question. Sure. I wanted to stick with the guidance for next year and specifically the OPEX. I mean, the midpoint you're guiding to is about, like, a 25% drop from, you know, your recent sort of run rates. The global force reduction announced last quarter, I guess, explains a small part of it. But I'm trying to understand the rest of that decline, especially in the context of what I guess seems to be more reinvestment in marketing and brand building at this point.
spk05: So I think I've said this before, but, you know, one of the – Things I like to say about marketing is that, you know, marketing is a lot easier when it's true. And what it really gets to is, you know, you've got to have a great product. And I think Edward Land said it in an even more pointed way, which was marketing is what you do when your product's no good. And, you know, what we have to do, right, is reengage the consumer into this entire category with products that are really delivering value to them in a way that they understand. And so for us, that's really about continuing to improve the taste, which I think we've done with Beyond4, but also addressing this fundamental issue around health. As I said in my prepared remarks, we really do have a set of products that today can deliver fantastic health outcomes. And I've seen it in my own life and my family's. I've seen it in studies we've done with Stanford, which I won't belabor today. and others. But what we wanted to do was take it another level. And we wanted to continue this march toward that perfect build. And I think we've taken a really big step here. It is not just an iteration. It's something that's more transformative than that. And so to be able to have these products where you're enjoying the satiating experience of having a burger or having a bolognese or whatever you decide to do with it, and yet having an oil that, for example, many in the nutrition community and medical community would characterize as heart healthy is something that is new. And it's something that changes the dynamic of the decision. You know, this went from five grams to two grams of saturated fat. And it's not just the composition of, sorry, it's not just the level of the fat in our product. It's the fact that it now comes from a source that that I think is very well identified as delivering benefits, not just because of the low levels, but because of what's in it. So this is things like polyphenols and antioxidants and other plant compounds that, you know, depending on what study you want to look up, you know, people have attributed to, you know, being helpful in the area of cardiovascular disease or dementia or, you know, the health of your eyes or skin, whatever it is. There's a lot of benefit here. We've also been able to reduce the sodium, which, as I said before, is a red herring. But it's still there and something we have to address. And so at 14% of daily value now, that's a significant improvement. And then you look at the proteins, whether we're using not just pea protein, but by going with red lentils and fava beans and brown rice, we've increased the protein amount. So you have a product that fundamentally delivers a stronger value proposition. And you'll certainly get a market around that, but there's also a word of mouth in this community, and there's a strong desire, whether it's the health community or the environment community or the animal welfare community, for these products in this category to come back. And so I think we're going to leverage that, and you'll see us work a lot with registered dieticians and nutritionists in the medical community, as well as with these very large health organizations that I mentioned, the American Heart Association, American Diabetes Association, association. In fact, the American diabetes seal will be on the package itself, Clean Maple Project and others. So we're going to have to market for sure, but we're also going to do it in a way that, look, this is a fundamental shift in the value proposition. It's enhanced, it's increased, and I think people will begin to realize that. So this use of grassroots marketing, this use of institutions that are standing behind this, I think will allow us to do it much more efficiently. And so some of the costs that we've cut out of the business, you know, I think only help us to become profitable more quickly versus hurt us from a marketing perspective. Okay.
spk10: No, I think you covered it.
spk08: Okay, then to follow up on the gross margin guidance for 2024, the improvement there, how much does that rest on the price increases? I mean, I guess it sounds as though you're not building in much operating leverage from new volume growth. The Coleman consolidation, I think, has been accruing sort of quietly all along. And then with the China anti-dumping duties and the pea protein, I imagine input costs can't be all that beneficial this year. So it feels like the gross margin expansion in the guide, a fair amount of it just boils down to the price increases. Is that right? I guess can you walk through kind of the relative contribution and magnitude there for the drivers?
spk05: So I think, you know, you hear me talk a lot about how proud I am of the research development team here. And I often spend more time on it than I do on the operations team. And one of the things that I have felt hasn't been fair, not fair, but just has been unfortunate, is that, you know, they're doing a really good job driving our fundamental cost structure down. whether it's our facilities in Pennsylvania or Missouri. I mean, these are great operators that are really driving efficiency. And every quarter we have something that comes up, whether it's we're dislocating from one co-packer and there's some fees or there's some high reserves coming in from legacy products or partnerships that have kind of disrupted that and have not allowed them to shine publicly, although I see what they're doing. And so as we steady and kind of bring in the production network, I think some of those savings that we're achieving in our facilities will start to come through a little bit better. And an example of that is just the, you know, as we're taking production out of external networks and into internal The utilization rates in our facilities are significantly improving. Overhead absorption is significantly improving. So these are things that I think, even though we're going to be using, for example, in Beyond 4, some more premium ingredients, they kind of are offset and then even driven down somewhat over time by the internalization of our production and the continued production in Beyond 4. in overall cost. So for the guys who are listening, the gals who are listening, appreciate it. And, you know, you guys got to keep it up. We're finally going to be able to show it.
spk10: Yeah, I would just add, you know, I think it's fair to say that, you know, the price increases are a significant factor that play into the gross margin expansion that we're targeting. for next year, but it's not just that. You know, as Ethan mentioned, right, there's a lot of stuff that's been going on, you know, just across the, you know, the production, our operations organization, et cetera. You know, the other thing in addition to just, you know, price increases, we talked about pulling back on trade. So the combined, you know, impact of those two things, right, actually has a pretty potentially meaningful impact on trade. overall net revenue per pound. And then, you know, you mentioned the internalization, right, the increased insourcing of our finished good production, you know, and you mentioned that, you know, some of that has pretty much been accruing already. I think that's true, but there still was a lot of noise in our cost of goods in 2023. Even as we were internalizing, we're still dealing with things like underutilization fees and things like that. That type of stuff should be significantly reduced in 2024. And so now I think we are in a position where we start to benefit in a much more meaningful way from bringing a lot of those production volumes in-house. And then I mentioned a little bit earlier that there should be benefits as well from just a more streamlined network overall in terms of logistics costs. When you look at some of these initiatives that we're targeting now to reduce overall inventory balances, that benefits warehousing costs and things like that. Even the reclassification of some of these fixed assets to held for sale will have a beneficial impact from a depreciation perspective. And so you combine all of these things together, and that makes us feel pretty optimistic about where gross margins can go this year.
spk08: Okay. Thanks, Luby. Thanks, Ethan.
spk10: Sure. Sure.
spk09: The next question is from Robert Moscow with CD Cowan. Please go ahead.
spk02: Thanks for the question. Ethan and Luby, it looks like the center of gravity is going to continue to shift to international markets for your business. Can you speak to the profit margin profile of operating internationally? How is it different from domestic? Can you operate... at a respectable margin overseas, or are there complicating factors that make it more difficult than here?
spk05: Thanks, Rob. Good to hear from you. So when we think international, obviously I've said a lot about Europe in the past, and in some sense that's becoming kind of its own thing. operation over there. So it's not necessarily like we're shipping things from here or anything of that nature. They're driving a lot of the same cost reductions. We have a terrific partner there who does some of our production and is really a true partner to us, as well as a very good general manager there and team. I think, you know, I don't foresee that being particularly challenged from a cost perspective. Now, we're still pretty nascent there, and so we do have to continue to adjust downward the cost structure, but that's possible. And it's something that we'll continue to focus on because some of our retail pricing, for example, is just too high for those markets, and so we need to continue to adjust it. But that comes with time and further localization of our network, which is doable. We just need to take the time to do it. And then on the, you know, kind of food service side, we'll continue to drive costs out of those products and improve margin. And I think you'll start to see that come through in 24.
spk10: Yeah, not a lot I would add to that, Rob. You know, but I think fundamentally if you look at our international business relative to U.S., it does skew more towards food service. you know, some of the large, you know, QSR customers in international. And so, you know, as you can imagine, the margin profile for that business would look somewhat different than on the retail side. But, you know, I guess the short answer to your question about, you know, do we, you know, have respectable margins in international, I would say yes. But as Ethan mentioned, there's still a number of things and initiatives that we're pursuing to bring about even further improvement in margins in international business.
spk05: And it is striking, as you know, it's not directly responsive, but it's an opportunity. It is striking to see the difference there in terms of uptake of the category of products, the thing I mentioned earlier. in my prepared remarks, is significant. Within a several-block radius in London, you're going to McDonald's and getting a Beyond Burger. You're going to Starbucks and getting a Beyond Sausage. Pizza and getting a Beyond Pepperoni. And it's... these trends tend to be stronger in Europe and then come over here, and that's certainly our hope that we'll get through the politicalization of these protein choices here in the U.S. and just get back to, hey, let's do something that's good for our health, good for the environment.
spk02: Well, Ethan, I'm very impressed that you're going to McDonald's and Burger King in London when you visit there, so keep up the good fight. But you also mentioned that pricing is too high for some of your products in the market? I think you've said that before. Can it be more specific as to why that is? Is it more commoditized, the category in Europe? Or how do I think about that?
spk05: Yeah. No, I'll give the details on it. But I was talking about retail, and it just – we're still – You know, think about Beyond Me 2009 here in the United States. Like, we're still kind of getting going there in terms of the overall production process and things of that nature, but clearly further along than we were at that point. But, Lubbe, you can give some detail.
spk10: Yeah, Rob, you know, I think... One of the differences when you look at the retail landscape in the EU versus the U.S. is they have a much larger private label presence. And so I think the penetration of private label in the EU is about double here in the U.S. And so there is a much larger broader, I guess, portfolio of items that compete in our category at a much lower price. And the consumer in the EU does seem to be a little bit more predisposed towards private label than maybe the average US consumer. We, two years ago, took some steps to close the price gap of our products relative to the broader competitive set in the EU, but certainly certain product categories where we still remain at a pretty healthy premium. And I think over time the goal would still be to try to compress that gap somewhat, not necessarily – I don't know that there's a need to come down to the level of private label in the region, for example, but there are areas where we think that the price gap is still wider than where it needs to be. But that's something that will occur over time. I don't think it's something that we're immediately looking to address. That's just some general fundamental differences, I think, between the trade in the EU versus the U.S.
spk02: Okay, thank you.
spk09: Thanks, Rob. The next question is from Alexia Howard with Bernstein. Please go ahead.
spk06: Thank you. Good evening, everyone.
spk09: Hi, Alexia.
spk06: So can we just get back to the dynamic in the U.S. and how How do you go about re-recruiting lapsed consumers? If people were somehow disappointed in previous products, what compels them back into this, especially if the price gaps to animal meat products are expanding because of the price increases you're planning to take? And then specifically, I guess, linked to that, is marketing spend expected to be up or down in 2024?
spk05: I think on the question of bringing people back into the category, the biggest deterrent has been this health question, right? And you've heard me talk about it before that there's a, you know, it's not without impetus and support from the incumbent industry. And that needs to really be looked at as well. I mean, it's not just the animal protein players and their lobbyists, but it's actually the pharmaceutical members of the pharmaceutical industry, which I find to be kind of disturbing, actually. And so we had to write the message, and, you know, we could do that by yelling from the rooftop about the benefits of our existing products, or we can just try to make them even more healthier and unassailable at some point. So that's what we've done, I think, with Beyond Forward. We'll continue to do it. You can expect future iterations to continue to drive improvements. And then it's just linking up with associations and national institutions that... really can validate what we're talking about. And they helped develop these products. That's the fascinating part about this work is that we didn't just do this, you know, in a conference room on our own. We were out in the community talking to doctors and nutritionists and each of these institutions. Our head of communications did an amazing job pulling together an ecosystem of doctors and nutritionists and different national health organizations as well as universities, and we listened. And we work very closely with them. And I can go back to individual conversations with individual doctors that relate to specific inputs that we used. And so I do think that there's an opportunity here for a more organic style of marketing that relies on the power of social media, that relies on the fundamental truth of the products to bring people back in. And this wasn't just a health upgrade. This was something that for years we've been focusing on creating much more of a neutral beef taste. As I've mentioned many times, there's over 4,000 molecules that make meat taste like meat, and our job is to use the scientific expertise we have here to match those with analogous or the same molecules and plants and then find out what the main drivers are and incorporate this into our products. And I think the team has done an amazing job with this product doing that. So you get a benefit in health, you get a benefit in taste, and you get the word out. And, you know, we've been very successful over the last decade and using people in a position of influence within society to carry that message because they believe in it. And when the message is this powerful, when you have the opportunity to help people really improve their cardiovascular health, to really improve their the risk outcomes that they face in their day-to-day life from a health perspective, there are folks in position of influence that want to talk about that. And so you're going to see us go back to that playbook in a very big way to get this message out. And, you know, whether it's ambassadors or influencers, whether it's some of the institutions, when you're trying to do something that's good and people recognize it and there's a lot of truth to it, you tend to get help. And I think we're going to get a little help from our friends on this one.
spk06: And when will it be out on the shelf? Is it a national launch in the first half of the year?
spk05: Well, if that's a personal question, I can send you some.
spk06: Okay. It's kind of. It really is that big of a leap forward. And just coming back to the marketing spend, is that going to be up or down this year overall? And then I'll pass it on.
spk10: Yeah, like I said, we do expect in aggregate our marketing spend to be down. As you can imagine, if you look at, you know, our guidance, our OPEX guidance, what that implies in terms of a year-over-year decline. We are taking pretty broad cuts across the organization, but I think when you start to dig down into specific areas of the business, specific departments, You know, what really matters is, you know, how that spend is going to be directed. And, you know, so Ethan, you know, touched on this, but, you know, it's really the mix of the marketing spend and, you know, really taking a targeted approach, being very deliberate, you know, about where we want to spend those marketing dollars. And so in aggregate, yes, it will be lower, but...
spk05: Just one comment on pricing. You're right that in certain areas there will be more of a delta between animal protein and our cells, but in others there will not be. And so this is not a kind of crude application of a price increase. We have some very important partnerships and relationships where, depending on the product line, there won't be much change. And so, including in retail, you'll see some products where there's really not that much change. But in the aggregate, based on the elasticity studies we did, we'll get a nice bump in terms of margin while still offering the consumer, you know, value for those that want it.
spk06: Great. Thank you very much. I'll pass it on.
spk09: Sure. The next question is from Peter Saleh with BTIG. Please go ahead.
spk07: Great. Thanks for taking the question. It sounds like you guys have done a lot of work on pricing and the level of pricing. It sounds like it's a pretty meaningful change in your strategy. So I'm just curious, are you thinking about this as a one-time price hike to kind of get you in order here? Or is this just a real meaningful change in strategy where you're thinking this will be a hike this year or maybe two hikes this year and more price hikes as we go forward. Just trying to understand how this strategy is really evolving on pricing. And then can you just elaborate a little bit on your tiered pricing comments? Is this tiered by distribution channel, by product? Are some prices coming down or are all prices going up? Just trying to understand those comments. Thanks.
spk05: I don't think it's a change in the long-term strategy. If you think about, and this is something I find fascinating, but we won't dive into too much here, but just the incredible efficiency you have when you take a set of amino acids from plants versus waiting for the bacteria and turn nitrogen into protein, all that stuff, it's just more efficient. And so there will be a day when this dramatically underprices animal protein, but that's not today. We did achieve price parity with certain products in certain markets recently, but in my view, That was not certainly a global statement at all in terms of the products. We still have a big delta for most of our products. But I will say that the pricing measures we took, I don't know they made that much difference. I think there was so much noise in the category, so much noise about the category, so much agitation outside the category with people saying negative things about the category, scaring consumers away. that pricing just wasn't that as effective a tool. And my view is we probably ended up selling a lot of our products to the same consumer at a reduced price. So we learned that and moved away from it. But I do think there's a real opportunity to continue to offer outstanding innovation year after year, that does have a more premium price on it while you continue to offer some of the rest of your portfolio at a lower price. And so I do think you'll see that from us. And so when we talk about tiered, part of that is that type of dynamic. I think the other is with particular customers and channels. If you think about very large strategic customers that are selling, let's say, billions of burgers a day, You know, that type of customer price sensitivity is so important, and so we'll continue to drive those type of products to parity as quickly as we can. I hope that helps.
spk07: Yeah, I know that's very helpful. And then just lastly, on my end, given all the changes you guys are making, do you expect this to have a material impact on the number of doors that you're in in 2024? Sure.
spk05: Yeah, I think it's too early, Tom. I meant to say billion serve, not per day. I think it's just too early. Too early, Tom.
spk10: Yeah, I mean, Peter, the one thing that I would call out in terms of distribution outlets is, you know, we said we are discontinuing the jerky product. And as you know, there were... there was a pretty significant distribution presence related to that product. It got us into certain channels like convenience, for example, where you look at the rest of our portfolio, it doesn't really play there. And so certainly on the U.S. retail side, if you include the impact of jerky, those numbers should come down. But, you know, apart from that, I think we're pretty well distributed across U.S. retail, so I wouldn't expect too much movement in those numbers. I think we would expect over time to continue to grow our presence across U.S. food service. And then it still feels like pretty early days for us in international, quite honestly. And so I think there's room for further distribution expansion in international markets, in the EU and other areas. And, you know, even same on the international food service side.
spk07: Great. Thank you very much.
spk09: Sure, sure. The next question is from Ben Thurer with Barclays. Please go ahead.
spk12: Yeah, thank you very much, and I'll keep it short. So thanks for squeezing me in. To follow up a little bit on some of the dynamics in food service and kind of the success international versus the declining trends in the U.S. and also wanted to bring this back to some of the partnerships over the years you've laid out with Yum! Brands, with McDonald's, and so on. I know, Ethan, you've talked a lot about the McDonald's case over in the U.K., but what are you seeing, particularly with those food service players in the U.S., as it relates to your products and the rollout of those? Any color you can share on that, that would be much appreciated.
spk05: Yeah, thank you very much for the question. That's a fair one. As I've done in the past, I really need to let those partners, you know, comment on their view on the category versus, you know, we're just a supplier to them. So I want to be careful on that front. I think that they look to the type of success we're having in Europe and then make decisions based on what they're going to bring here. But I will say the climate here has been so – we were criticized earlier – and clouded with this misinformation and things of that nature that we really have to straighten that out first from a get the right information out there, make sure the consumer understands the value proposition, and I think the rest will follow from there. I mean, if I could, just on this BB4 that we're rolling out, what we're trying to do here is create a question in the consumer's mind as to why wouldn't you do this, right? And, of course, if it's too pricey, That's an answer, but we don't think it will be prohibitive in its pricing. And health benefits are so clearly there. The support from the medical and nutrition community is there, and the taste is there. And obviously environmental benefits, and I will answer your question, but the ability to solve the main issue that people are laying their hands about with climate is through a change in how we get protein to the center of the plate is absolutely phenomenal. And if you talk to people who study these issues, whether it's the gentleman at Yale that's in the video we did for BEYOND4 or folks at NYU, Matthew Hayek is one of them, who study this and the use of land and biomass to bring carbon back out of the atmosphere and cool our climate and to reduce methane emissions associated with livestock, et cetera, so on and so forth, it's an incredible opportunity. And so we're going to make sure that consumers understand that, that when we're talking about healing their body and helping them to achieve better health outcomes, we're also able to do that on the planetary side. At some point, it becomes such a powerful value proposition that the consumer does come back in. We need to take it away from the politics. We need to take it away from us versus them. Farmers should be very much involved in this and making a great living doing it, not only growing our crops, but potentially receiving funds from the government to sequester carbon. It's a real path forward for our country and for the globe. I think we just have to get people excited about that concept again, and the rest of the industry will follow in terms of restaurants and things of that nature. For us to apply a lot of focus on that this year is probably not the right area. Let's continue to be successful with them in Europe, and let's see what unfolds here in the U.S. in the future.
spk09: This concludes our question-and-answer session. I would like to turn the conference back over to Ethan Brown for any closing remarks.
spk05: Thank you. I would encourage folks to visit and put it in the press release with the video that we put together around BEYOND4. Again, to get a sense of the health benefits and to get a sense of the global environmental benefits, both of them are very strong. I think both will bring the consumer back to this discussion. And, you know, tasting is believing. We're trying to buy type brand. And as folks taste this new iteration, I think they'll be quite pleased with it. You know, we're cautious in our optimism. We've obviously had some tough years, but by making these changes and creating a sustainable baseline from which we can grow, we're going to create some room for ourselves to execute and get back on track for growth. Thanks, everybody.
spk09: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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