Q3 2019 Earnings Call
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<unk> Turner Ma'am. Please go ahead.
Thank you good afternoon, and welcome to beyond me third quarter 2019 earnings conference call and webcast.
Today's call our staff Goldman Executive Chair, even Brown, founder President and Chief Executive Officer, and Mark Nelson, Chief Financial Officer, and Treasurer by now everyone should have access to the company third quarter earnings press release, and third quarter Investor presentation files. The day after market close these documents are available.
On the Investor Relations section of the on me website at Www Dot beyond me Dotcom before I begin. Please note that all financial information presented on today's call is going on at it 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 uncertainties that could cause actual results to differ materially from knows describing these forward looking statements. Please refer to the Companys 10-Q, and other filings the Securities Exchange Commission for a detailed discussion other risks that could cause actual results to differ materially from those expressed or implied in any form.
Looking statements made today. Please note on today's call management will refer to adjusted EBITDA, which is a non-GAAP financial measure for the company believes this non-GAAP financial measure provides useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance.
With gap. Please refer today's press release for a reconciliation of adjusted EBITDA to its most comparable measure prepared in accordance with gas now I'd like to turn the call over to Scott Goldman.
Thanks Katy.
On today's call I will provide a brief introduction.
He couldn't will review our business highlights for the quarter and then Mark will discuss our Q3 financial results.
2019 outlook in more detail.
Finally, he could we'll open up the call for your question.
Today's only report Mark several significant milestones for beyond me.
After 10 years aggressively investing in our science and product innovation. This is the first quarter, we have generated net income.
It is a wonderful validation from consumers, who support our business strategy a building me directly from plans.
And choose beyond me for superior taste and texture, while enjoying the nutritional and environmental benefits of eating our plant based meat products.
It also highlights our ability to generate strong expense leverage as we increasingly scale or operations, both in the U.S. and internationally.
As many of you are undoubtedly aware. This week also marks the end of the lockup period related to our IPO, which will permit the sale of pre IPO shares by some of our longest standing supporters.
While we recognize short to reactions to these milestones are often marked by heightened uncertainty we believe that beyond me to isn't a stronger position today than at any other time in its history.
Our transition to a public company has positioned beyond the wells to be able to capitalize on the substantial growth opportunities that lie ahead of us.
And we sincerely thank our pre IPO investors forgetting up to this point and for their long term commitment in a belief in our company.
Before turning the call over to Ethan I would also like to recognize one of our earliest board members, Greg Bolan, who has resigned from the board as disclosed today and an 8-K filing with the FCC.
Greg has been a strong and consistent supporter and the venture funds. He works with have participated in multiple financing round.
We thank Greg for his service.
With his resignation the company will reduce the size of our board from 10 to nine feet.
Going forward, we believe our brand commitment what you love encourages consumers to eat more not less of a traditional dishes. They enjoy well feeling great about the health sustainability and animal welfare benefits associated with consuming plant based protein.
We look forward to sharing or continued growth and success with you for many years to calm.
And with that I'll turn it over to Ethan.
Thanks, Good afternoon, everyone.
We generated very strong results in Q3 measured both by financial metrics as well as a series of marquee partnerships to position our company well for future growth specifically.
We recently initiated testing Mcdonald, Kentucky, fried chicken and subway and announced national rollout of beyond breakfast sausage at 9000 tuck in locations starting next month.
Looking forward, we made significant additions to our team, including senior leadership in operations and marketing while investing in aggressive international expansion.
Q3, net revenue increased 250% to 92 million compared to prior year period.
We grew up points of distribution to greater than 58000 outlets across retail and foodservice globally.
Further we generate strong velocity growth of 144%, resulting in a roughly 1200 basis points improvement in market share through the end of Q3.
For the 12 week period, ending October 629 team with only six skews in the marketplace beyond me just become the second largest plant. These meet brand in retail nationwide outpacing leading brand in terms of sales grew by factor of nearly 20 ex according to spins data for total U.S. multi outlet.
General and specialty channel.
In addition, during that same period, the beyond Burger with a number one selling plant based meantime across all since channel and was up 162% and units and 155% in dollars.
Gross profit margin expanded over 1600 basis points to 35.6%.
Strong cost and expense leverage leading to the first quarter a positive net income in the company's history adjusted EBIT on fruit more than 16 million to 11 million, representing a 12% adjusted EBITDA margin.
In summary, Q3 financial results outpaced our expectations and as a result of this growth and our outlook for the remainder of the year, we're raising our 2019 full year financial outlook.
Turning to the topic of strategic partnerships, we began Q3 with the beyond breakfast sausage testing dug into Manhattan locations and we'd be expanding to dump it's more than 9000 locations nationwide beginning on November six.
We believe the success of the beyond breakfast sausage sandwich tested Duncan speaks to our brands people you love promise.
From nutrition perspective, when compared to a leading work sauces, Patty elsewhere else basis or beyond breakfast sausage provides malicious and say shooting breakfast meal, while delivering compelling nutritional wins, including more protein in our.
44% less saturated fat, 50% less total fat and 37% less sodium.
The Q3, we teamed up with subway the world's largest restaurant chain, but number of locations to test the beyond me bone marrow ourselves.
This partnership illustrates the versatility of a product platforms in this case or ground beef line and our ability to serve a widening set of market opportunities within our core focus of beef pork and poultry.
We follow the exciting subway downstream of the tested to Kentucky fried chicken location in Atlanta.
On fried chicken Nuggets, and boneless wing form which sold out in less than five hours.
In a measure of the uptake for our brand and the changing American tumor guess purchases much beyond fried chicken and those five hours as KFC would typically sell the topline chicken weak on a single store basis.
Most recently Mcdonald's announced it'd be testing beyond slipped locations in southwestern Ontario, Canada in Atlanta, let us tomato or plc for this important step reflects a dream becoming reality.
As long her sites on ubiquitous availability for beyond meat and years ago us at a goal to my own children will be able to go to major fast food chains in order beyond for the time that could drive.
With both the getting high school this year.
Final testing, that's crawls junior parties Duncan NW del Taco and many others already probably offering the Brad I'm getting in but the skin of my team.
I mean is now available at 53 countries new doors opening like for growth. If you key highlights from the quarter include. The addition of beyond sauces Tesco in the beyond Burger at El Corte things like Spain.
In Canada, we've entered the retail channel in Q2 and by the end of Q3, we are now nearly 4000 stores, including all Soviet locations.
We've also launched a new meteor beyond Burger at retail in Australia across Asia, and important strategic region from be Amit, we have distribution in Hong Kong, Taiwan, Thailand, Vietnam, South Korea, the Philippines in Singapore.
Moving forward, we will continue to grow our sales and operations footprint globally applying the same aggressive pursuit of growth in international markets as we have here in the United States.
As noted central tenant of our mission is to enable consumers that you would they love meat well enjoy nutritional benefits the plant based protein.
I want to reiterate some key nutritional metrics what product lines relative to the animal protein equivalents.
On breakfast sausage adult and it's a good place to start with Attritional wins are worth repeating.
More protein more 44% less saturated fat, 50% less total.
37% less sodium no cholesterol turning to beyond where we offer a slight advantage and total protein along with 32% less saturated fat and no cholesterol compared to the Burger made for maybe 20 <unk>.
Our sodium content of 16% of daily value with 390 milligrams is lessening Mount you'd find in half a cup Mariner sauce, one cup of vegetable soup or two flour tortillas as just a few reference points.
We're generally when we consider nutritional benefits for plant based foods.
No. The cholesterol is not the only component to potential concern, we leave out north south or it is that the only input we seek to minimize for example, our products are free and many other elements in animal protein the subject of medical study into date for the role in inflammation and potential carcinogenic cardiovascular risk.
And what are they contain with U.S.J. refers to as residual contaminants that can be precedent certain but by no means all commercial needs.
Finally at the omni given never claim perfection, we're proud of our products in the market today, we're committed to a rigorous cycle of rapid and relentless innovation.
Includes a continual search for simple.
GML inputs from plant that will enable us to offer better products in both taste and nutrition.
We have long been clear that our intention is to build a global protein company.
One capable of serving a growing world demand for protein.
[noise] to realize this vision at a pace commensurate with the market opportunity and the urgency remission with further investing and best in class talent and leadership throughout the organization.
Q3, we welcome Sanjay saw beyond as our Chief operating officer.
It was honest extensive experience at Amazon, including serving as vice President of North American fulfillment, coupled with a strong background international operations, including in Southeast Asia Spark and sustained our interest in bringing them to the team.
Stuart pornography will be joining us as chief marketing officer. She comes to US with over 20 years of marketing and brand building Congrats Coca Cola Company. Most recently as president sparkling brands, serving as a driving force behind them shortage of legacy brands, such as Coca Cola Coke zero.
Cool Sprague's Infanta.
We've built our company in dialogue with the consumer being inspired by hopefully in turn inspiring them. They are our greatest advocates and most persistent voices with regard to the health sustainability and animal welfare benefits of going beyond.
Our goal remains to serve connect with and amplify the voice of the consumer and what it become a movement and we look forward to Stewart and team scaling our message and engagement to global market.
Turning to outside the company I should also some brief comments on competition.
It is important to establish the way context.
The market we play in its a 1.4 trillion dollar category the largest in food.
It would be naive to expected one or two horse race given the size of this opportunity. So the competitive entrants are not a surprise nor development.
We're not equipped to handle.
This is history, including recent business history. It replete with examples of companies that reset markets right before the odds of incumbents we.
We do not interpret the interest in efforts of large companies to capture our leadership position as evidenced that they will do so any more than Amazon to set the squelched by traditional retailers, who entered ecommerce to unseat them.
In fact, we've been preparing for competitive market for years and I look forward to continue to execute on our strategy.
As has been our practice, we intend to continue to invest and innovate at an aggressive pace, while maintaining our commitment to non GM, though simple plant based ingredients to leverage our first mover advantage here in the U.S. and abroad.
Including rapidly expanding customer relationships and production infrastructure to capture market share and investing in marketing to articulate and amplify our story and value proposition to a broadening consumers.
Moreover, we will continue to fly a singular focus to our singular goal building the purpose implants and making it widely accessible globally, we spend no time to bidding budget allocation between competing commercial divisions, we are not beholden to sunk cost tied to traditional industry.
Or two in trend supply chain.
Instead, we nurture and Aspirationally challenger brand born out of consumers' desires for something new from someone there.
In summary, we believe we're well positioned beyond me today in the future strong brand authenticity and a commitment to enabling consumers to meet with the low robust innovation pipeline supported by a differentiated approach to R&D and a terrific team to execute against our global growth strategy as we increasingly appeal to a broadening group of consumers.
We will continue to invest in our infrastructure, ensuring we have sufficient capacity to meet escalating demand and to operate the global protein company.
I'd like to now turn the call over to Mark Nelson, Our Chief Financial Officer will walk us through a third quarter financial results in detail.
Thank you Ethan and good afternoon, everyone.
We're very pleased with our third quarter financial results and our continued opportunities for future long term growth.
As Ethan indicated net revenue in the quarter was 92 million up 250 per cent compared to the third quarter of last year.
As I mentioned in our Q2 call we expected the third quarter to be our seasonally strongest quarter of the year in terms of net revenues and profit contribution based on the summer grilling season, as well as product innovation launches and new foodservice distribution expansion.
Based on our strength and net revenues for the third quarter and year to date, we are increasing our 2019 outlook.
We now expect net revenues in the range of 265 to 275 million representing year over year growth of more than 200% compared to 2018.
As a result of this topline strike.
We have also raised our annual adjusted EBITDA outlook would be approximately 20 million up from our prior expectation of being adjusted EBITDA positive for the year.
Growth in net revenues for the third quarter of 2019 was driven primarily by an increase in our fresh product platform across retail restaurant and food service channels.
This reflects our expansion and the number of retail and foodservice points of distribution.
Including new strategic customers, new international customers and greater demand from existing customers.
From a distribution channel perspective, retail net revenues increased 212%, while restaurant and food service net revenues increased 312%.
Versus the third quarter of 2018.
The significant increase in our restaurant and food service sales volume drove net revenues through this channel to represent 45% of our total net revenues in the quarter.
On the product side gross revenues for our fresh platform increased 265% versus the year ago period.
Representing 96% of our gross revenues for the third quarter of 2019.
Compared to 92% of gross revenues in the third quarter of 2018.
Gross revenues for our frozen platform increased 75% year over year. Despite the discontinuation of our frozen chicken strip product line during the first quarter of 2019.
We remain focused on expanding distribution across retail and food service channels and further increasing sales velocity of our fresh products.
Gross profit was 32.8 million or 35.6% of net revenues in the third quarter of 2019 compared to 5 million or 19.2% of net revenues in the third quarter of last year.
The 27.7 million increase in gross profit and over 1600 basis points improvement in gross margin demonstrate the operating leverage and production efficiency gains we were able to achieve on higher net revenues.
Over the next several years, we expect gross profit improvements will be delivered primarily through improved volume leverage.
Greater internalization of our manufacturing footprint.
Materials and packaging input cost reductions tolling fee efficiencies and improved supply chain logistics and distribution costs.
In addition to leveraging our cost of goods sold.
We were also able to achieve strong operating cost leverage in the quarter.
SGN a expenses were 222.8% of net revenues in the third quarter as compared to 39.4% in Q3 last year.
Again, demonstrating strong operating efficiency, which we expect to be a great enabler of strategic flexibility in the future.
We achieved net income of 4.1 million or six cents per diluted share for Q3.
Which represented our first quarter of profitability.
Compared to net loss of 9.3 million in Q3 last year.
As of the end of the quarter, our weighted average common shares outstanding diluted were 66 million.
Reflecting a time weighted average of all common stock outstanding in addition to 5.6 million.
Potentially dilutive options.
The potentially dilutive options are included in the weighted average common shares outstanding because the company recorded net income in the quarter.
As of September 28, we had 60.6 million shares of common stock outstanding reflecting new shares.
She wants and preferred shares conversion in conjunction with our May IPO and August secondary.
As well as warrant and option exercises.
Adjusted EBITDA was 11 million in the third quarter of 2019 compared to an adjusted EBITDA loss of 5.7 million in the third quarter of 2018.
The improvement in adjusted EBITDA was primarily the result of our strong revenue growth and resulting gross margin expansion.
As well as SGN a leverage in the quarter.
Now shifting to our capital structure.
The companys cash and cash equivalent balance was 312.5 million and total debt outstanding was 30.5 million as of September 28, 2019.
Net cash used in operating activities was 18.3 million for the nine months ended September 28.
Compared to 24.4 million for the prior year period.
Capital expenditures totaled 16.9 million for the nine months ended September 28, compared to 18.3 million for the prior year period.
Net proceeds from our IPO and secondary offerings have been invested in short term interest bearing investment grade securities.
There has been no material change from the expected use of net proceeds as described in our registration statement on form S. One.
With that I'll now turn the call back over to Ethan.
Yeah.
Thank you Mark in conclusion, we were very pleased with results third quarter and year to date in 2019, we believe beyond me has significant momentum and we are well positioned future growth and continued success.
Let's now turn it over to the operator for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound CICC. Please standby we've compiled the Q when a roster.
Our first question comes on line of Ken Goldman of JP Morgan. Your question. Please hi, good afternoon.
A few for me if I can first I'm curious.
Y grade left board, if you can add any color there.
Second I wanted to know how your burgers and really all your products are doing.
In retailers that have added the impossible Berger and then I'll have a follow up to that.
Great. Thank you, Ken I hope to doing well.
So with respect to Greg and that was a very natural progression for him and he's an early stage venture investor with with us since I think.
2010 2011 period.
And so it was not a surprise or something that was long or in the making.
On the question.
Regarding the retail environment, we continue to see extremely strong gains in retail or velocity this quarter over the previous up a 144%.
Sales are up 250%. So we've not seen any evidence of any diminished interest in our products or diminished sales as it was all of any competitive entrants in retail.
Okay, but obviously you do see that impossible has come in a enters into some retailers as in those retailers were you play and and possibly.
Is there any substantial deceleration in your velocity or even in your shelf space there.
Yeah, I know, we've seen nothing at all and certainly not in shelf space now.
Okay. Thanks, I know I know my final question would be obviously, it's early days in mcdonalds, but can you give us any color on how things are going any reaction from mcdonalds, obviously, they talked about it in general the other day, but I'm just curious what they're telling you when what you're seeing in the numbers.
Sure and so we can't comment specifically on any tested it and they are going on now.
But we feel very optimistic about the long term relationship there we've been working mcdonalds for a very long period of time.
Deeply embedded in this product development effort with them, it's a collaboration between the two companies.
So I have a every expectation that this test will result in more work with mcdonalds, but it would be up to them to characterize that and share that with the public market.
Thank you.
Thank you. Our next question comes from Robert Moskow of Credit Suisse. Your line is open.
Hi, Thanks for the question.
Obviously, I I see a lot of restaurants up more and more announcements of side of them testing your product a we did see a headline saying that Tim Hortons had decided to I guess not go go any further with a test for burgers and I think there was also a regional reduction.
In breakfast sausage, but just wanted to know if you comment on that and and you know is it within your expectations or not.
Absolutely I mean, these things are truly tests, and we were gratified to see that they're going forward with over 60% of their stores I.
I think it's about a 2500 over about 4000 total that elected to keep it in a in market and I think it's really up to them to.
Make the right decision about which customer base in which demographic they're going to be most successful with.
So I didn't I didnt make much of that a if you look at the number of tests that have gone successful launch.
The very significant whether it's you know T I a friend W. del Taco Girls Junior Hardee's Duncan verified list goes on and on you see a tremendous amount of momentum coming out of these tests. Obviously the test themselves are being very rewarding for the QSR us whether in terms of just brand.
Recognition and traffic into their stores and then you see new tests occurring in new announcements occurring.
Post the a that important.
Decision, so denny's quarter unmarried out et cetera, So I view it as I'm feeling consequential to overall growth than just part of the process of each QSR determining what's the best rollout for their customer.
Got it and could you just remind me seemed like how long do these tests typical typically take and is it common Fred for a restaurant chain to go national right away. After a test is over or would they especially a big one might they consider like rolling it out regionally.
Yep I step. Thanks, I think your intuition is right there that if it's a very very large chain you will see it occur on a regional basis smaller chains will work up more quickly.
And then just depending on how aggressive their management is dunkin did a good example that going from New York City to National very quickly.
So it really reflects back on.
Individual characteristics of the particular, QSR, but but I think that initial intuition is right at the larger they are the more regional they're going to be and their rollout, which is good for us because allows us to scale at a rate that is good for both sides.
And I ask one more if I could you know at Burger King has a branded the the impossible Whopper <unk> after impossible does it matter to you whether your your customers brand there burgers beyond or usually that's a sub heading.
Do you push one way or the other.
So we always like to see our brand used as much as possible.
We think thats not only good for us, but very good for.
The quick serve restaurant themselves. If you look at the reaction that we received the Kentucky fried chicken Atlanta.
That was I think an extraordinary testament not all your execution, but to our brand the number of consumers coming in that day to try the product.
So I think it behooves both of us too to use the Brad as much as possible with Mcdonalds and appeal team. That's a nomenclature today think works best for their consumer, but if you look at how they're rolling it out whether it's in the press release, whether it's in store with US on social media is all over that and that's not by accident you know they recognize the Palbo Brent.
New consumers into their stores as well as excite their existing consumers.
Makes sense. Thank you very much yep. Thank you.
Thank you. Our next question comes from Alexia Howard of Bernstein. Your line is open.
Hey, everyone.
I do and.
Hi, good price.
About the international business are you able to give us lumping them roughly how what proportion of your sales.
19, I liken to be outside of the you often Canada.
You could talk explicitly about Europe , how quickly do you expect to GAAP qualms installs over that that would be my first question and I have one follow up.
Sure. So I will first comment on the European production so.
We're very fortunate to have a a good partner there and then Bergen and we are aggressively putting infrastructure in place with them.
To be able to too.
Certainly you market, which we think is a very attractive one for us more generally if I could comment internationally I have a strong conviction that we should be producing in the markets that we are selling and with on a regional basis and so you'll see us continue to make investments globally in any production into place in the markets in the most.
Attractive to us. So we will certainly won't be stopping was then Bergen and you'll see more behavior from us in that regard.
If you look at the overall percentage of of revenue, it's coming from international.
This past quarter, it's about 18%.
And we think that trend will continue its up quite a bit.
That's about 4% in the third quarter of last year.
So we want to continue to nurture the international market like many we believe that Asia is very attractive market for us and of course as I mentioned to you. So you'll see us continue to to be aggressive there.
Great and I'm, just a follow up how quickly as a company wide level is the co packing capacity, increasing we know that.
Got you currently have maybe about $350 million I've I've capacity from you on extrusion I stat, but if the bottleneck is on the co packing capacity how quickly can scale, particularly as we look out through 2020 , both domestically and internationally. Thank you and I'll pass it on <unk> great question.
So as I've said in the past, we really think about this in three different buckets and those buckets of have individually.
Provided us with bottlenecks at one point or the other but I'm feeling very good about each of the three areas currently going in 2020. So Mueller co Packers for example, we have co Packers and Pennsylvania to here in California, one in Texas.
In the first half of next year, we'll be adding a pullback I just mentioned and you will be expanding our presence there.
The Ohio, Indiana, and Quebec, we'll all be bringing on a co packers.
For us so you'll see.
Doubling roughly of our co packing capacity.
The extrusion area, we continue to bring new lines into existence and you'll see.
Not only between down in the year us and at least two additional lines, but up the pretty aggressive in that regard to in 2020, and then I think the bottleneck that has been the most concerned historically during this period when we've been going public.
Has been around protein and I'm very pleased to remark today that we've dramatically increased our protein supply and diversified.
Our supplier base for that so I feel good in each instance that we can more than serve a expected demand for 2020.
That's great. Thank you very much and I'll pass it on.
<unk>.
Thank you. My next question comes from Adam Samuelson <unk> of Goldman Sachs. Please go ahead.
Adam.
Yes. Thank you good afternoon, everyone.
First question for me actually maybe just continuing on the capacity front and even you just you just alluded to significantly expanding the the the protein get a availability insourcing into next year as we roll it all together I think.
Last quarter, we had been is about a 400 million annualized run rate on the revenue side from a capacity perspective, I'm thinking into next year kind of where would we where would we said today I mean, you were almost at that level on a quarterly basis in threeq here. So just trying to get a sense of how much headroom you've built into the plans as you move into 2020.
Yes, so using that reference point of 400 million, a gross and 2019.
I feel pretty comfortable in sharing it for about three X that number 444 2020 units available proteins.
So in a good position.
Okay. That's on that US very helpful. And then on the sell side I. Appreciate the color you gave on the sales velocity front.
It is there any color incremental color you could give on maybe more mature points of distribution versus newer ones are you seeing kind of the distribution in some of them or establish retailers and geographies like Kroger in southern California, or albertsons versus the newer ones and how the sales velocity is trending between kinda.
Newer and and more established.
Taylor's standpoint on the from service side.
Yes, so on the on the retail side, we don't have this aggregated numbers for you today I could try to give you some additional color and follow up.
But overall, it's a very strong velocity of up 144% growth.
Blossomed before our sales growth if you look at us relative to the leading brand.
In the market by enemies alternative SEC, which again I don't really reference that much but where you know were or sales growth of about 20 ex that Brent.
You know our market share has gone up about 1200 basis points year over year and according to spend so we've been been very successful in continuing to derive the interest from the consumer in our brand. We've also.
Put additional skews to work for us in those stores and in my view that is really just sort of tip of the ice work for us a little very very small skew set for the the level of brand attention, we get and I look forward to growing Sq said over the next year two to drive some incremental sales in each of those locations.
Okay. That's helpful and I guess, one quick follow up you think you'll disclose this into Q, but do you have the tonnage growth they experienced in the quarter.
[noise] tourism overall.
Yeah, I can trust had so we.
Our.
Third quarter pounds 16 million.
Who 016.
Versus Q3, 18 4 million 338.
Great to really appreciate the color.
Sure Great.
[noise]. Thank your next question comes from Kevin Grundy of Jefferies. Your line is open.
Evan.
Hey, How's it going guys and congrats on another great quarter eating question for you and I apologize if I missed this repeat purchase rates can you provide an update there and maybe separate between foodservice and retail to the extent you habit and then I've a follow up.
Yes, so I can shed on the on the retail side, but unfortunately is not a new number we have a for the brand across each of the skews worried about the 45% repeat rate. So it's something that we're going to update in the coming quarter, but we don't have new information today.
Okay. The follow up question is around price gaps.
And how much of a priority. It is for you Ethan in terms of the company's ability to close that price gap versus traditional beef over what period of time, you think you can do it and then how much what is the assumption. That's included in maybe a question for Mark and the company's mid teens EBITDA margin.
How what is embedded in there with respect to the company's ability to close some of that price gap and then I can pass it on thank you sure no great question and there is one where add a lot of fashion for it. Its I think you've heard me say this in the past that you'll be on me just going to continue to be successful by providing the very best product to can.
Rumors around taste.
In around nutritional value those are two of the three pillars that we really need to execute against in the third is around price right. The day that we can get to the point, where we can drop our pricing below that of animal protein in certain segments. I think is going to be a really important day for us as we think about that 1.4 trillion dollar industry that we're going after.
And so it's something that I drive everyday toward here some of the hires you see me, making a in the last quarter have been this expressively around that idea, including with bringing sondra and to tell us on the operation side, we're setting up a center for.
She planning and commercialization one of the key goals of that is around our cost structure and getting the cost structure. The point would support a underpricing animal protein it won't be in every category for sure.
We will offer differentiated product lines, just like a mute industry does itself today with Angus and then with some other offerings.
These value chain.
But it is something it's really important for us to do I haven't given a public comment other than within five years and that was probably about a six months ago, So say with within four and a half but everything about what we're doing and everything about what I think is really important for this company, you'll see us do that earlier and I can't give a particular date, but you can be very confident if something it gets a lot of attention.
In here.
That's helpful. Can you guys comment on on what the assumption is with respect to the mid teens EBITDA margin target.
Yeah, and now just you kind of talking about the topline first our dose per pound net selling price per pound over a year over year went from $6.06 down to $5.74 a pound. So we retain pretty strong price pricing power year over year, where our March.
Second expansion really came from a year over year was a significant drop in our cost of goods sold per pound. So we dropped cogs by 25% going from $4.89, a pound down to $3.69 and that that's the really the driver that will allow us to continue to take care.
Cost out and a allows to truck pricing, while maintaining that that mid to high thirtys gross profit.
Target and then that drops through really to the to the EBITDA.
Line.
We we think the volume growth will increasingly be able to draw can defer to EBITDA and like you saw on third quarter getting to a 12% EBITDA margin really because a lot of.
Momentum towards getting to that goal. So you know it's mid mid to long term you know the will start to deliver some price in retail to.
All of our longer term goal of getting to parity with animal protein, but we're continuing to take cost out.
As well alongside that and the goal is in that same timeline to get to the.
Mid to high Thirtys and also debt to EBITDA in the change.
Okay very good thank you both.
Sure.
Thank you. Your next question comes from John Baumgartner of Wells Fargo. Your line is open.
Good afternoon, thanks for the questions.
Yeah, I guess first off wanted to follow up on Rob's question on the food service side are you on the one hand, you have the pullback in Tim Hortons on the other hand Duncan is going the other way expanding nationally. So I'm curious about what your learnings or take aways are hearing back from these operators in terms of product Appeals are there any distinctions emerging on the basis of geographies.
You know social economic consumer groups or any other aspect you've been able to glean and if so how are those learnings and forming how you choose to expand distribution from here.
Great question. Thank you.
So we have garnered a lot of learnings from these tests and I think <unk> less so around demographic appeal, we do feel that our products, particularly because of the health.
Aspect.
Tends to do well independent of that particular region, if it consumers looking to make a healthier choice in store or at the QSR.
They're going to do that regardless of whether they're standing at a cornfield, Iowa or you know in Madison Avenue.
And so we have seen some pretty consistent results I do think that the learning that's been the most strong for me it it's really around the execution by the partner and so if you look at come out here and look at Carl's junior or del Taco or Duncan.
Back in New York that examples it is very clear in the store that they're selling the omni right and it's very clear and their social and it's very clear in sort of additional advertising those test seem to have very strong as results when the partners leaning in messaging and advertising and communication perspective.
And so are the ones where.
That's maybe less clear you can expect maybe a little less robust pick up but it's about messaging and getting a consumer I understand that this is where they get the product.
When that's executed really well it does great and when it's maybe a little bit.
Less pronounced it's a little bit of slower build the night they just learning.
Thanks for that and just a follow up one of the also asking about the gross to net revenue number that discount rate was stable in Q3 year on year, but it's up sequentially throughout 2019, I'm curious how much of it increases a function of just retail becoming a larger part of the mix and and how do you envision that gross to net spread changing from here given the number of new entrants coming into that.
Refrigerated space at retail.
<unk>.
That's exactly right the did a higher proportion of retail in the quarter is where we see most of that trade discount.
And year over year, it's pretty stable and still about 9.7% and.
Third quarter last year, 9.8% this year, but that's a that's a pretty low trade rate.
Spending rate that we have so we do anticipate we'll be doing more promotion through trade and discounts going into the future, but we've been fortunate I'm with you know the demand that we've seen we haven't had to do a lot of promotion so far.
Great. Thank you for your time.
Thank you.
Thank you. Your next question comes from Brian Holland of D.A. Davidson. Please go ahead.
Thanks, Good evening gentlemen, the first course I wanted to follow up on Rob's earlier question about.
The co branding on the foodservice side.
But curious how you sort of defined the Mcdonald Mcdonald's test is that a co brand or is there signage in the stores.
And how else is Mcdonald's sort of promoting the Mcdonalds brand I think you mentioned social media.
Yes, so it is very clear.
Me too is the product inside the plc, they think about that sandwich.
Like they do the big Mac in a sense, it's an overall architecture and they wanted to name that the plc, but it's extremely clear that would be on meeting at the Amit is the brand and we haven't seen every in store execution. So I can't answer specifically to each store, but everything that they shared with us in terms of the.
Social and obviously the press release and some of the point of sale materials indicated their leaning very much into the partnership with our brand and we expect that going forward.
Okay figure I appreciate that color then on the the retailers side. What are you hearing from customers with respect to we're seeing with respect to shelf space a lot, but its you know kind of the recent are ongoing shelf resets.
Oh your plant based competitors getting similar placement to the beyond me brand alongside animal protein and where is that shelf space coming from is that animal protein products donating the shelf space.
[laughter] [laughter] good word so a you know they do you do see certain retailers I think Safeway for example reasons are starting to create a overall architecture for the category with plant based mute.
And you know that that SM simply where that's coming from a my.
Assumption there is that it is coming from animal protein offerings.
We have only heard the same thing that we've always heard from retailers, which is to what other skews can we offer and interest in us getting into a.
Deeper.
Diversity of skews and the need to the categories of beef pork and poultry.
We have not had any pressure yet from other.
Entrance into the market and we continue to feel very comfortable that relationship with the retailers in our position on shelf just to add this OSAT well you know, we absolutely not seen our shelf space shrank, we've seen that the overall shelf expand and so certainly our place then it but not at not at our expense.
Okay got it. Thank you last one from me.
<unk>.
Appreciate the color about the repeat rates I know you'll update those again, so look forward to that certainly the number pretty solid <unk> at this at this rate for the brand based on my experience looking at such metrics I'm curious about purchase frequency I repeat rate is a function of that but I'm. Just curious if you're seeing among kind of your earlier studies.
Chapters, whether a their sticking with the brand is their frequency of purchase going up.
Once we get past trial I I appreciate that's kind of a tough question were so we're so early days here, but just curious if there's anything you can share.
To that Ed.
I guess a great question, we don't have that data, though but it's something we can we can look into we do see there's a tremendous amount of loyalty to this brand and so we are seeing consumers for example in the beyond these came out they flocked to that and and and seem to appreciate the new offerings, but I don't have Pacific data.
Fair enough. Thank you gentlemen.
Yep.
Thank you. My next question comes from Jon Andersen of William Blair. Your question. Please.
Good afternoon, everybody. Thanks for the question.
Yeah.
I wanted to ask about a.
Chicken given the success of the.
The test KFC, which you mentioned in the prepared comments.
How do you think you know how should we think about the role of chicken.
Were you thinking about the potential for broader commercialization of that.
Part of the platform in foodservice and retail.
Thanks, John that good question and I'm very excited about it I mean poultry was the first.
Real internal innovation that we ever did.
And we had I think a very strong product there.
We weren't able to innovate around that over the years and so we decided to pull it in exchange for opening up more.
Production capacity for the beyond Burger at the time.
But but poultry is an important category for us and one that we're doing a lot of development work in.
The kind of Holy Grail in that space is is a you noted.
Fresh chicken breast offering and we have working that in that direction no timeline on it but you'll see us do.
Some of these other offerings like we did with Kentucky fried chicken with a boneless wing.
Or or nugget sooner rather than later deal as it can it's amazing what's happening with the consumer him in the consumer pulls away most quickly from.
Red meat, and then process and the things like pork.
Sausage form et cetera.
But as they get into a decision, making a framework around what proteins to consumer whatnot poultry is increasingly coming into interview as well and we're benefiting from that with the launch of capacity or the tested KFC et cetera, So you'll see us get active in that and return to to some of the platform. So we had in the back.
Yeah.
Great Great I, just wanted to revisit one more one more thing so you mentioned protein.
And that kind of the commitment or your ability to secure additional supply with additional sources.
Yeah, I think you mentioned you had visibility into kind of three times the level of.
Plant based protein for 2020 <unk>.
Is there any reason why you would secure.
More than you are kind of forecasting for your business in 2020, and I guess first is the three times the three times the level.
Right number and then is there any reason why you would you'd by more than you anticipated selling.
Sure I mean, I think it has to do would if you look at our recent history just wanted to make sure that we have enough on on hand.
But it also this has shelf life to it which allows for us to use it over.
Several years, if needed to and so there's just some conservatism in what we're doing based on recent past of not having enough.
But you know as we as we go forward.
Hopefully, we'll be able to get.
Into the cadence that you have the supply contracts, we have more properly matched where our sales expectations are for the year.
Fairpoint, one last housekeeping, maybe for Mark on the points of distribution I think more than 58000 this quarter.
Any any any ability to kind of give us a retail and foodservice figure.
I would add up to.
In terms of the just the split.
Yeah. The split between the two channels. So were so yes. So we're about this this quarter, we went up a wet but actually about 45% now in ER and food service due to due to a some increase in retail activity.
It was last quarter is about 50 50, it's about 40 555 now yeah. So that the upgrade Greektown retail 20000, Foodservice 23000 International 7000, which excludes Canada in that international number.
Excellent. Thanks, so much and congrats on a great quarter.
Thank you very much.
[laughter].
Thank you. My next question comes from Bryan Spillane of Bank of America. Your line is open.
Hey, Brian Hey, good afternoon. Good afternoon. Thank you. So just a couple of follow ups a first.
Ah you know the tonnage growth, which is you know up a lot a ton I guess do use about upon.
Okay can you give us [laughter] [laughter] for how much of it is.
Like been pull through so just consumption versus how much of it is just is.
Filling the points of distribution any sort of way to color that would be helpful.
It's it's harder to think of it that way I believe you know some of our newer points of distribution may not have the same volume, we think about some of our kind of more.
Longer term.
Say retail.
Customers like whole foods their volume is not only up its up per store and so we're selling more through existing points of distribution, but then we have all sorts of new distribution coming on as well and within that you have the overlay of more.
More skews being sold at retail as well so some of the where we had a couple we now have three or four skews that some of these retail points of distribution. So it's.
Don't know the precise answer, but I think there's there's growth definitely in both certainly in.
Our existing a year over year comparison, but also driven a lot by the new customers as well.
Okay, and then as you went through the summer the summer season, just service level how did that.
Back up versus your your expectation.
It was better certainly better than last year, not perfect, though but I think that is you know quite a bit stronger than than last year, we filled as opposed to seeing NT shows I think in last summer we had more full deliveries retailer.
It is weren't werent seeing the outages, which is really helpful. And also you know is a very high service level requirement in the QSR space that we're excited to be able to achieve so I'd say it was it was quite a bit better than last year.
But not in a position where you had customers on allocation or anything like that.
No no.
Okay, and then just the last when there was a couple of questions around the margin then I guess is I was listening.
To the prepared remarks, and you talked a bit eat it about international expansion.
Well so.
If you going higher so people bring some more people into the into the company just how linear should we think about margins because if you're expanding into new markets in your I don't know, bringing more capabilities and more people into the organization.
Oh.
Well the margin expansion necessarily be linear or would there be you know some you know reinvestment or you know some revenues next year that or maybe not at scale, because you're pulling out markets and still building capabilities.
Yeah, I mean, I believe you're right, we probably won't see isn't linear growth I mean, the year over year increase in margin was really driven on the cost side Weve I'm thinking forward, we think about.
Some of the price that we may.
Deliver in trade promotion some of the this mix shift into our the QSR space, which could also drive margins tighter [noise], but we still have a lot opportunity I think to take cost out we look at what we did and it was a lot of just.
Volume straight volume leverage we really haven't started to work on a material costs packaging, there's quite a few things that we can continue to drive cost down on but I don't I don't know that it would be a linear thing I think we'll we'll step function and another big initiative. We are looking at as you know in the contract.
Manufacturing space looking at how we can you know balance that with some internal capacity as well that will do a lot to.
Take down the tolling fee costs in the bomb. So did there may be some steps as we.
Deliver price, but then as we achieve additional cost savings to matching.
Okay, great. Thanks for taking the questions.
Thank you.
Thank you. My next question comes from Benjamin Theurer of Barclays. Your line is open.
The vendor.
Yeah good afternoon.
Good afternoon, and thanks for taking my question wanted to follow up on the international Peace. So clearly you.
Hello.
Sure Hey, we're here.
No.
Yeah, you up you can hear me right.
Yes, yes, yes.
Okay no much my question is more on the international side. So clearly you have your your two products, maybe the sausage and the Burger and the ground beef basically but within Europe , I mean, clearly that would take settings. You go to front you guys, just which led to go to Germany, you go to Spain.
So with all the co manufacturing if your something you've also saw it about more like.
General type of product plant based salt pictures that are more within the taste of the deferred nation that are clearly different not only within for example trial that was in Spain within Germany.
More broadly speaking to that Youre production to what the actual consumer and Europe is looking for and how that how you're thinking about that rollout.
Yes, that's great question better. Thank you and so I hope that what's coming through in my comments in introductory comments and then my answer to these questions.
Is that Oh, I am very focused on building this into in international brand.
And if you look into the folks we've hired in the last quarter, including Sanjay and Stuart.
These are folks that have helped to build international brand.
Supported those in the markets.
That they're serving.
So you will not see us new this lightly will not be an export model I want to be in the regions are producing and selling with their own staff and and management I think the opportunities that big and it deserves that much care and attention.
So we're we're actively pursuing that in and you and you'll hear from US later about our plans for Asia.
But you know the opportunity for example to produce and sell.
Pork dumplings for example in Asia is significant.
And not one that's lost on us.
Different flavor profiles throughout Europe also not lost on us so you'll see us get to know these markets well and serve the consumers in those markets.
Products they will.
Appreciate what we've done here in the United States is to build this brand with the consumer and I have every expectation will do that international.
Okay, just just to follow up or down I mean, you always talk about the size of the U.S. market in comparison to the global market, but.
At least from ceiling perspective, I guess in Europe . Most of the per capita consumption really goes over sausage whatsoever would you somehow I agree you got business and more goods easier product could be replicated then the baby Stakes in whatsoever and that clearly you actually have a girl.
But you can see outside the U.S. and maybe in the U.S.
What's your products.
Well I think could be the first part of your comment around what's an easy extension for US is one that I do focus on and for example sausage.
I've said this publicly I feel is easier to do of course and stake or even certain ground products on the beside because there's such a reliance on the flavor systems and spices.
And so to the extent that we can get very meaningful penetration in Europe , and Asia by extending our existing product lines with different flavor profiles and slightly different mouth feel that fits the the consumers interest you'll see us do that wont lose sight of these longer term initiatives around steak and.
Bacon et cetera, but.
We're not going to pursue those are the expense of tailoring our products to the local talent.
Okay perfect. Thank you run like <unk>.
Thank you. Your next question comes from Kim Goldman of JP Morgan Your line is again.
[laughter] back for more.
Oh yeah.
Yes.
[laughter]. He said I just wanted to ask one last question because you did highlight Amazon as an example of a disruptive extended off competition.
So I'm sure gone, but you on the spot right Erica.
Totally fair right Amazon's, a great Anthony but yeah. There's a lot of you know polaroids and blockbusters in beta macros out there too right.
And.
Obviously I have a buying your stock I think you're more Amazon then blockbuster, but since you raise it has a subject I kind of wanted to just ask you know how deep have you gone into this analysis right have you looked at some of the Disruptors that didn't succeed what mistakes that they made what are you doing to avoid that I guess is where I wanted to maybe just pushed back a little bit yeah, no. It's a very fair point here and.
Okay and I'm obsessed with this question right I mean, it's something it's just fascinating and you don't you mentioned polaroid, so you're giving the opportunity to bring up Edward land.
Edwin land.
I really do think it's important to learn from history than you learn what companies have done to stick around.
And beat the competition, you know that they're gonna have to wrestle this from our hands like we there is the every intent here is to remain the leader and we think we have what it takes if you look at into you asked for sort of principles of how to stave off.
Competitive pressure from incumbents and really begins with innovation right you have to be myopic and almost manic about the pace at which we innovate right and so we bring that intensity in that focus and there's a disregard for the products. We have on the shelf today and that's something that I think is unique to our company in many ways. We want so desperately to replace those would.
New products that are better and so every year, we seek to do that and so if you're a incumbent.
Presence of wants to come in and maybe replicate we're doing said this in the past you'll be chasing that goes to because we are moving so quickly.
We shy away from any notion that what we've done is good enough and when you're deciding whether or not to allocate capital between.
Baby food and Pip plant based meet product if you are large company.
You are going to potentially stop a good enough, we will never stop the good enough and that needs to be understood.
Brand, we have built our brand with the consumer.
We built it with some very famous consumers and users that.
Our lending their name and their voice to our brand whether it's the many professional athletes who use or the celebrities that work with us those are investors and they are users of our products in a way that's very unique to our company. We will continue to support that and grow that the authenticity around as of values different band, we do not have baggage associated with.
Very industry that we're trying to disrupt we the first mover advantage that we continue to exploiting use and a nimbleness and quickness that as it is very hard for incumbents to two to copy.
And so it's a singular focus there is an appetite for risk within our company.
And in a willingness to take chances I think that that others are not able to take those are not something that we've just dreamed up that comes from a long study and understanding of companies that have been successful no longer allowed to use test a little bit I'll say it today.
Because.
I got a little flat going to use a phone investors now this but I asked that question of incumbents in that space why you, allowing test what to do this and I'd ask it from the analysts and why you, allowing or why did Tesla have the impact of sat on the automotive industry, when general motors and poured and everybody else could see it coming.
And then have yet to to provide a credible threat to them and that may happen right and I'm not time my horse to to their outcome.
My cart, rather outcome, but I am saying that there's a playbook here and we're exporting every angle that weekend.
Fair enough. It is the you mentioned horses in cards I won't mention buggy whips or will really [laughter].
Thank you guys very much.
Thank you can very much appreciate it.
Thank you at this time I like to turn the call back over to eat in Brown for any closing remarks Sir.
In less Ken has more questions I'd, just like to thank everybody for.
We're calling in [laughter], we've had a great quarter, we're really excited for the ended the year coming with the some of the additional work we're doing 2020 looks very good for us.
We keep building this brand.
Keep investing in the team keep investing in the consumer we love the consume we love the consumer loves our products and we're going to can you to grow with them. I. Appreciate you guys covering the company and our stock and look forward to working together next quarter. Thanks very much.
[noise], ladies and gentlemen, this concludes todays conference call. Thank you for participating do you may now disconnect.
[noise].