Q1 2020 Earnings Call
[music].
Starting to zero I would I like to disrupt first conference call. It would be for two or you may begin.
Thank you good afternoon, and welcome to beyond meets first quarter 2020 earnings conference call at webcast on today's call Art, Ethan Brown, founder President and Chief Executive Officer.
And Mark Nelson, Chief Financial Officer, and Treasurer.
By now everyone should have access to the company's first quarter earnings press release, an investor presentation filed today after market close.
These documents are available on the Investor Relations section of beyond meets website at Www Dot beyond me Dot com.
Before we begin please note that all the financial information presented on today's call is on audited and during the course of this call management may make forward looking statements within the meaning of the federal Securities laws.
These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results could differ materially from those described in these forward looking statements.
Please refer to today's press release, the Companys annual report on form 10-K for the year ended December 31st 2019 filed with the Securities and Exchange Commission on March 19th 2020, the company's quarterly report on form 10-Q for the quarter ended March 28, 2020 to be far.
But the FCC and other filings with the FCC for a detailed discussion of the risk that could cause actual results could differ materially from those expressed or implied in any forward looking statements made today.
Please note that on todays call management will refer to adjusted EBITDA, which is a non-GAAP financial measure while 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 it for me.
Nation presented in accordance with gap. Please refer to today's press release for a reconciliation of adjusted EBIT Docs with most comparable measure prepared in accordance with gap now I'd like to turn the call over to Ethan Brown, President and Chief Executive officer of be ought to meet.
Thank you need to be good afternoon, everyone.
Before discussing our first quarter results I'd like to comment on the Cobot 19 global crisis.
Isn't it time extraordinary challenge in so the one that we can emerge from old insights that can make a stronger us communities as a country and as a global society.
On behalf of the entire company I want to extend our deepest sympathies and these around the globe keeping affected by the pandemic.
Cannot overstate, our gratitude respect for the frontline responders risk and in many cases have given own lives to care for the sick and help keep the healthy C.
Hi, each rise in the global tool there are cherished irreplaceable lives that had been lost.
It was more impacted.
And it is this context and meaning that must remain front and center as we navigate this global challenge.
Beyond meet the health and safety or team members and their families and data more consumers customers and supply chain partners is the number one priority.
I'm proud of how swiftly our entire organization has responded to the cobot 19 crisis.
We have established an internal task force and brought in qualified advisors, including an epidemiologist on the faculty you silly to help guide us and planning and the implementation of steps to help minimize possibility cool nights unit currencies within our operations.
Distant would gubernatorial directors, we closed our headquarters and employees working remotely.
Additionally.
For any essential activities that are Manhattan Beach project Laboratory, we are strictly limiting the number of employees allowed in the building.
Prohibiting outside visitors and we have implemented.
Physical distancing protocols comprehensive preventative genic measures.
Likewise at or manufacturing facilities, we've implemented a series of physical distancing in hijacked practices to support the health and safety or manufacturing teams and their families.
You have also modified or tcl requirements temporarily sort of employees do not have to deduct sick time, no Tito they're feeling on well.
Collectively we believe these actions crucial to our thus far successful risk mitigation efforts.
Our task force, which is being led by our Chief people Officer is monitoring information from the World Health organization.
The centers for disease control prevention in the U.S. State Department among other resources, we will make necessary adjustments to existing protocols as the situation evolves.
We continue to strengthen our supply chain support business continuity and mitigate risk.
We source ingredients for multiple suppliers around the world with our plant based proteins coming from suppliers in the United States, you, China and India.
More generally in addition to having improved we're going to supply chain majority of our ingredients, we maintain inventory position near our manufacturing operations as well as core staff agreements with many of our vendors.
Throughout this dynamic situation our operations team has shown flexibility given up the demand for our products, even as we had a significant shift in demand mix and foodservice retail customers.
Nevertheless, even with the best considerations and very strict coated 19 health and safety measures in place like others in our industry.
Still subjects to heightened risk of disruption to for supply chain.
Externally, we continue to offer the highest level support weekend to our foodservice and retail customers. During this period.
We hope it is clear at this point, we view our customers and partners.
Role is being of service to them because they take their lead to consumers and this spirit, we are and frequent communication with a quick serve restaurant partners they address significant disruption to their businesses.
As has been our consistent refrain our focus is on the long term and there are few things more important in that regard the being a truly supportive partner during periods of instability.
Finally, before turning to our first quarter results I'd like to share some comments on or exceed a million plus pledge in late March we lost a program provide more than 1 million beyond burgers and nursing meals at no cost of frontline workers addressing the pandemic as well as to organizations have sort of most economically vulnerable of our society.
It has been gratifying to see our broader family go beyond ambassadors well as friends the brand.
Spearhead this initiative with us, including among others Kyrie Irving Kevin hard.
Dog Lindsey Vonn, Teekay suburban Heliopolis, Karlie Kloss, jewel ludicrous, Johndroe Hopkins and Andrews County.
Todd Girly, and Kenny stills, each of whom have joined us from getting beyond burgers away on my workers and doesn't need.
Reinforcing a sense of community during this challenge like to thank each of them along with our entire team from production through the sales and marketing.
Strong execution of this initiative across the country.
Turning to the first quarter results continue to validate the strength of the broader plant based need movement in our leadership position there and.
We achieved net revenues of 97 million in Q1 2020, an increase of 141% compare to the first quarter last year, despite growth being negatively impacted for the ended the quarter independently.
Mark will walk you through our financial results in greater detail, including an estimate of the impact of cobot 19 related demand shifts in our foodservice and retail businesses. However at a high level I will share that began the year with strong momentum across our enterprise selling by meaningful slow down in our food service business. During the latter half of March as various regions around.
In the world implemented stay at home orders.
Although we did see a simultaneous boosting sales to retail customers. This was not enough to offset deterioration of demand foodservice business.
Nevertheless, we believe our dual pronged approach of aggressively expanding availability I mean products, both retail and foodservice outlets served us well and helped to mitigate.
Even more significant cope with 19 related disruptions to our revenues.
And you with retail sales of the army products were up 190% year over year with velocity growth of 158% contributing to a 770 basis points increase in market share. According to spins data. The total U.S. multi outlet natural and specialty channels for the 12 week period ended.
At March 22nd 2020.
While the plant based meat category as a whole was up 54%.
During this period beyond meet continued on the top four best selling skews and all these meat and outpaced is closest competitor in terms of year over year sales growth by a factor of roughly six times. Furthermore, in the four week period ended March 22nd Twentytwenty in which retailers saw stockpiling by consumers as it home mortgage.
If rated sales would be Amit products were up 233% year over year velocity growth of 195% outperforming the plant based meat category as a whole which rose 93%.
First quarter 2020, net revenues in our foodservice doubled versus a year ago. Despite the impact of Cobot 19 in late March. This increase was primarily driven by growth in the number of key tourists outlets care and their products versus a year ago.
As in retail growth in foodservice outpaced that the category as a whole.
According to NPD data for the first quarter of 2020.
Dollar sales of plant based meat products. The U.S. food service locations were up 18.4% on a year over year basis, well beyond these growth was up 51.9% over the same period.
Reflecting the impact to cope with 19 of the Foodservice segment NPD tracked sales plant based needs were down 25% sequentially. During the month of March as compared to February 2020.
As a reminder, NPD data captures approximately 80% of U.S. problem on distribution and excludes cash and carry and direct delivery customers.
As such MPD will not quarterly perfectly with our own reported sales to U.S. food service customers, but as nonetheless, directionally informative after launching beyond breakfast sausage Starbucks in Canada in early March.
April we announced together with Starbucks our entry into mainland China.
The April 20 seconds 2020 launch would be on beef items Starbucks throughout China represents an important milestone will be Amit.
It has long been our aspiration to be a global protein company.
The enough service to the growing demand for high quality protein in China is a key part of our strategy.
We applaud Starbucks and making acting upon a strong commitment to advance health and sustainability.
And are pleased to partner with this trusted brand as they seek to tackle that which matters most.
We believe the new beyond these items and Starbucks mentioned throughout China deliver on our promise of enabling consumers to equal to love, while enjoying nutritional and environmental benefits of plant based protein.
In addition to our partnership with Starbucks, we finalized the distribution agreement with China, leading local distributor notice to unlock and network with distribution opportunities across retail and foodservice.
You get further establish the Chinese language website.
Well as branded we believe we chat accounts.
In order to engage the Chinese consumer and support the brands introduction in this important market.
[noise] remain committed to our goal of establishing the production flipping the nasal before the end of 2020 any further developments with the cobot 19 endemic.
The magnitude of the opportunity in Asia Merit significant investment and reflecting such recent disruptions in the regions protein supply due to African swine flu, we're proceeding with a sense of urgency appropriate for the challenge and opportunity alike.
I've often said at our core we strive to be innovation engine using technology to source of core parts of me directly from plants relying on non GMO plant based ingredients.
Even as the size and complexity organization grows we strive to sharpen our innovation capabilities and quicken the pace the be Amit wrap and relentless innovation program.
We're pleased with the initial outputs of our new center commercialization.
I believe this cross functional initiative will one further strengthen our ability to rapidly innovate on behalf of our QSR partners to accelerate the way, which we improved our beef pork and culture platforms pursuit of upstream or a plant based meet that is indistinguishable from its animal protein equivalent.
In the marketplace, we launched or beyond breakfast sausage and select retailers across the United States beginning in late March previously only available select QSR apartments, including Duncan Hardee's, Carl's Junior and Starbucks Canada.
Beyond breakfast sausage offers 11 grams of protein per serving P. isn't brown rice.
50% less total that 35% less saturated fat and sodium and 33% fewer calories than a leading brand pork sausage bodies.
Furthermore, beyond breakfast sausage, which is certified kosher and allow me to that GE EMOS choice for booth.
And it has no cholesterol, no nitrates, where nitrates no antibiotics, no hormones and no artificial ingredients these nutritional wins and body, what we seek to achieve throughout our products without sacrificing important quality such as taste texture and other century attributes of popular animal protein products.
Although we are excited about the prospects for the retail rollout of beyond breakfast sausage, we do anticipate it'll be slower than normal given the impact of covert 19 on retailer operations.
Before closing I want to be as clear as possible with respect to our view on the impact of the current pandemic on our business.
It is having and we'll continue to has a negative impact in the short term.
This impact was largely due to disruption of normal business operations within the food service sector.
We cannot predict when or and what form normalcy will resume for our customers in this segment.
Nor when we see resumption of any expansion plans for our product lines for those QSR customers or in trial for test phase.
For these reasons, we are joining many other companies in the food and beverage industry, who are drawn guidance until further notice.
Nevertheless, we are not really waiting to circumstances to accommodate our plans growth trajectory.
I'm proud of our management team and all of our team members have reacted to this challenging environment.
As a pandemic began to interrupt the world economy, we created offensive and defensive teams across the company to guide or navigation of the changing landscape.
Offensive measures include switching foodservice production lines over to retail products.
Developing value packs for instant retailers and offering aggressive pricing, where the strategic opportunity to encourage consumer trials. During this period of disruption in the animal protein market.
Defensive measures have primarily been focused on trimming discretionary spend and activities in areas, where effectiveness has been intended that endemic for example, certain marketing programs or delaying until later in the year for until 2021 makes sense under the circumstances.
To reiterate propelling perspective that runs through beyond meat, we are only getting started.
Even with our significant traction to date, we represent an exceedingly small fraction of the 1.4 trillion dollar global meat category. Today for example, according to our most recent Nielsen panel data in the U.S. for household penetration stands at slightly less than 4%.
Lower products are now available and approximately 94000 retail and food service outlets and its 75 countries worldwide.
We have only a small number of skews available in retail.
Limited distribution that many of our foodservice partners and our just scratching the surface when the vast majority of the comedies we're in globally.
Despite the current disruption we remain highly optimistic about our long term growth prospects continue to accomplish milestones from our exciting upward trajectory.
We remain focused on the consumer and customer like seeking to delight, the former being an exceptional dedicated service ladder thinking is behaving like long term partner, who is investing in their success as well as our own.
For the balance of 2020, you will see a tell our story on health ingredients and process with content across digital and print media.
She has pushed forward on global growth and expansion.
As evidenced by a recent launch with Starbucks in China.
You'll see us invest in research and development to advance and extend our product roadmap across beef pork and protein platforms, while pursuing long term fundamentals science in pursuit of step change progress across century, nutritional and cost objectives.
And we will continue to keep pace on our steady March toward our long term objected being able to underprice animal protein in certain product lines.
In short in closing.
We remain steadfastly committed to constructing the building blocks today that are necessary to become the global plant based protein company, we envision for tomorrow.
I'd like to now turn the call over to Mark Nelson.
Financial Officer, who walk us through the first quarter financial results in detail.
Thank you Ethan and good afternoon, everyone.
We're pleased with our first quarter financial results, which we achieved the missed an increasingly challenging operating environment due to the cobot 19 Global health crisis.
Our strong Q1 results largely reflect demand that exceeded our expectations in January and February followed by softer results in March as we experienced a deterioration in sales to foodservice customers as domestic and international stay at home orders became more widespread.
However, we did experience a significant boost in retail demand during the quarter as consumers shifted towards more at home consumption, partially offsetting the deceleration in foodservice sales.
Overall as Ethan indicated net revenues in the quarter were 97.1 million up 141% compared to the first quarter of last year.
Growth in net revenues for the first quarter of 2020.
Was primarily driven by an increase in volume sold.
Partially offset by lower net price per pound.
Growth in volume sold was driven by expansion in the number of distribution points, both domestically and abroad.
Higher sales velocities at existing retail customers and contribution from new products introduced subsequent to the first quarter of 2019.
Looking at our distribution channels retail net revenues increased 185% well foodservice net revenues increased 100% versus the first quarter of 2019.
Sales to international customers across retail and foodservice channels represented 25% of our net revenues during the quarter compared to 30% in the prior year period.
As a reminder, beginning this quarter.
We are now breaking out international separately in our revenue by channel presentation.
And we now include sales to our Canadian customers within this international bucket.
Additionally, as we mentioned on our last earnings call, we will no longer be reporting a product category breakout between our fresh and frozen platforms beginning with this quarter.
Our fresh ore ready to Cook product platform now represents substantially all of our consolidated net revenues.
And as such we determined that delineating between sales of fresh and frozen products no longer provides additional insight into the company's results.
Gross profit during the first quarter of 2020 was 37.7 million or 38.8% of net revenues compared to 10.8 million or 26.8% of net revenues in the first quarter of 2019.
The 1200 basis point year over year improvement in gross margin was primarily due to an increase in the volume of products sold.
Production yield improvements.
Direct materials and packaging cost savings.
And improvements in direct labor and other variable overhead costs.
Relative to the first quarter of 2019.
The combination of these factors led us to achieve the company's best ever quarterly cost of goods sold per pound.
And reinforce our belief in our long term goal to take cost out of our manufacturing operations and narrow the price gap of our products relative to animal protein.
While we are extremely pleased with our strong gross margin performance in Q1 2020.
We do expect near term headwinds at the gross profit level associated with volume de leveraging and repackaging cost.
As we re purpose say certain portion of our existing foodservice inventory into retail skews.
In light of these factors, we expect our gross margin to be sequentially lower in Q2 2020 compared to our strong margin performance in Q1 2020.
As you have heard me mentioned previously over the long term. We continue to believe that gross margin improvements will be delivered primarily through improved volume leverage increases and throughput.
Greater internalization of our manufacturing footprint.
Materials and packaging input cost reductions tolling fee efficiencies and improved supply chain logistics and distribution costs.
We remain committed to passing a portion of these cost savings onto the consumer as we pursue our goal to achieve price parity with animal protein and at least one of our product categories by 2024.
In addition to leveraging our cost of goods sold we were also able to achieve year over year operating cost leverage in Q1 2020.
Operating expenses were 37% of net revenues in the first quarter of 2020 as compared to 40% in the first quarter of 2019.
Net income was 1.8 million or three cents per common diluted share.
Compared to a net loss of 6.6 million or 95 cents per common share in Q1 last year.
The strong improvement was primarily the result of the increase in net revenues and gross profit as well as operating expense leverage compared to the first quarter of 2020.
Adjusted EBITDA was 12.7 million or 13.1% of net revenues in the first quarter of 2020.
Parents, when adjusted EBITDA loss of 2.1 million or negative 5.3% of net revenue in the first quarter of 2019.
We note that the increased level of share based compensation expense, which is an add back to adjusted EBITDA.
Was largely due to appreciation in our stock price as well as substantially higher staffing levels versus the prior year period.
Now looking at our capital structure, the company's cash and cash equivalents balance was 246.4 million.
Total debt outstanding was 30 point Sixmillion as of March 28, 2020.
Net cash used in operating activities was 15.9 million for the quarter ended March 28, 2020, compared to 13.3 million for the prior year period.
Capital expenditures totaled 13.7 million for Q1, 2020 compared to 3.8 million.
For the prior year period.
The increase in capital expenditures in Q1 2020.
Was primarily driven by growth capital production equipment purchases related to our capacity expansion initiatives.
On April 22nd 2020, we announced that the company has entered into a new 150 million five year revolving credit facility, replacing our previous secured credit or.
This new credit facility, which includes an accordion feature for up to an additional.
Sure.
As Mark.
So we saw really good performance in the first quarter.
Improvements year over year for were balanced a portion of that came from.
Like the variable cost inputs direct materials and packaging and.
Balance came from.
Labor efficiencies and some overhead and variable efficiency. So we're starting to see improvement in those variable cost items as well a lot of our earlier gains have been really leveraging fixed costs and we'll still see some of that going forward, but where we are starting to.
Get some traction now was also in.
The material and labor variable cost inputs and that will will.
Be it'd be an area, we can continue to reduce costs.
I think just to add on to that I mean, we what I'm very proud of is the work that the operations team has done and.
To get our pricing to be the lowest it's ever been in trends our cost structure, the lowest ever been rather.
That is an important milestone on our path to.
The underpricing animal protein eventually in so.
We're going to continue to try to protect margin over the long run will make some adjustments in this quarter given the summer situation.
Help us grow our customer base and in consumer base, but we're going to drive at this thing through cost reduction.
Great and Ethan it sounds like you're being.
Organization being very good partner to your end customers right now during this period, how do we think about you touched on the QSR channel specifically, what you guys are doing well what are you doing on the retail angle and more like the independent part of the restaurant or foodservice business. If you will come really.
Hey drive value you mentioned trying generics on of the price gaps what are they asking for in terms of innovation.
Maybe slate that a little bit later in the year.
Any type of new LTL is out there in the marketplace that'd be very helpful. Thank you.
Sure. So I think on the LTL and new innovation both on the on the buffer on the retail side I think again patients being the the word of the at the moment here.
These guys and gals are dealing with so much complexity, even in the retail space right with just a closing their stores early now sometimes just be able to restock for the last thing you want to do is complicated there lies with massive reset and trying to bring in three or four different new items, but where you can be helpful. As where they are in need and right. Now there are in need of basic protein and so I think the move it we're making toward valley.
Are you packs and allowing the consumer that by 10 12 to Taiwan.
Burgers and bring them home I think is the right move and so thats, helping retailers, who have an issue with filling their shelves with protein.
It helps consumers because it provides very healthy and.
Reasonably priced protein for them during this period.
On the.
QSR side I think it's very complicated right now to do LT goes we've certainly been great fluid discussions with with our major partners and I.
I think we're waiting for things to stabilize a little bit more before we begin to introduce any complexity on their menu in terms of pricing schemes and things like that but you will see that from us as the year moves on.
Great. Thank you.
Yes.
Our next question comes from Ken Goldman with JP Morgan.
Hey, good afternoon everybody.
You can you mentioned that Qs ours are not making any major decisions right now as far as your products.
I did want to make sure though on slide 11.
Just looking at the Tech there it says Mcdonald's Canada that that test happened between January and April of 2020, and it's the only.
Customer on that slide with an end date I am I reading too much into that line or get the test and last month I just wanted to.
See if I'm missing something there.
Yes, no not at all I mean that is that the test was for that period and it did conclude.
No.
But no negative reason at all I mean.
We feel very good about religion, and donald's and what's going to be happening, both there and potentially elsewhere, so but by the nature of it being a test.
Beginning in it.
My follow up on that because typically either if the retailer if the tested well the retailer.
I wouldn't ended they would expand it. So can you just help us understand a little bit why it.
It stopped rather than going the other direction.
I mean, I think it requires me to two through open up the broader discussion I can assure you. There's no issue in Mcdonalds me put it that way.
There there.
This is this is a the way that it's been a planned and the ways being executed and Theres been no change at all I can't promise you that.
We'll see a massive expansion tomorrow, but there's been no change in information since we began this test and got good results and beginning a good resulted in.
Okay.
I'll leave it there thank you.
Yes.
Our next question comes from Alexia Howard with Bernstein.
Good evening everyone.
Hey, let's say you doing.
I think.
The pricing dynamic you know hyperlink, regardless of the Corker are you able to quantify.
I guess well out.
But you're correct.
Correct.
I want to be between sort of good.
Okay, that's kind of a different.
Oh, good Tony Hawk recruits are preliminary coal fired.
I'm just curious about whether we would expect to see.
Carl Carl Lukach, Heartland Ralcorp out there not have oh.
For sure and so Alexa.
In the quarter, we look at a volume we actually.
Sold 16 million 652.
Thousand pounds.
And if you calculate our set our sales per pound was 3.5 dollars an 83 cents.
Year over year, that's very similar two years ago, we were at about $5. An 88 cents. So we haven't seen net sales price erosion in that period.
I think some of the discussion around what we saw and you just counting was was lighter in the first quarter, which allowed us to kind of maintain that net sale price per pound.
And maybe.
Looking forward some of the things we talked about is introducing.
Or value pack oriented products, and possibly increasing discounting.
We still feel confident in our ability to kind of match that.
With our cost reduction.
But as we look to deliver some of these more value priced items and.
Deliver cost savings to the consumer we're going to look at.
Continuing to drive that cost them.
I'm just a quick follow up on given an update pretty rocky quarter about what.
Numbers look like I said, the lapping that Mike.
Medical going on.
But when you have another number and so in the mix.
Yeah, I believe that was I think last year, we had some information and talking about repeat purchase activity.
As a 46% that's correct I don't think we have an update to that.
Thanks, very much more profit on.
Sure.
Our next question comes from Robert Moskow with Credit Suisse.
Hi, Thank you.
Hi, I might've missed it but I think at the beginning of the Gary you said that you had some significant spending on consumer education programs about.
I guess that the.
Health and wellness heavier of your product and and I want to know what are those still happening or did you say that you're going to kind of taper that was off.
And put those into put that spending it to price in staff and then I had a follow up.
So we did a lot of work to develop content, which were holding a given the complexity of the global situation.
We will release it at the point at which we feel.
The environments right.
So I wouldn't say essentially trade off between doing that and putting directly into pricing. We've held off on on discounts in the past and then just feel now, but we actually don't feel any competitive pressures you can tell about 38% margin we enjoy enjoyed.
This quarter.
But we.
We do think it so right opportunity to take advantage of chicken beef announced $4.10 a pound wholesale.
You know assuming retail markups take up about six 680 or so.
We're in pretty good shape to begin to to make some inroads toward.
Honestly price parity, but I'd be in the same consideration set for the consumer.
So you will see a spend and have more trade.
As a result.
Okay, but he and I thought I thought what you need to do is kind of defend the ingredients is in your process either against some targeted campaigns that had been leveled against you is that.
What you're referring to buy that's kind of in your back pocket now is that right, 100%. Yeah. We get we have a ton of good development work going on their content and I just think people don't want to hear that right now.
Global Contrarians or elsewhere between.
Plus us clashing our stores with the coming industry, it's probably not the right, but I do.
Right and then my follow up as I saw a headline today, saying that's impossible is launching and Kroger.
Said that your your price efforts here are really to to show that value versus beef.
But you're going to what extent to what extent you are are you in impossible able to both grow together at these Kroger stores is that is that your expectation and or do you have to be price competitive against I'm also.
Hi, my honest expectation as to when there for sure, but I think there's a place for both of US and I think that is two different consumers that are probably looking at those products.
I think we impossible does a nice job the great company could people I think it's a different value proposition, we've been very clear on non GMO and and they have been and obviously in another can't not better good truly I mean.
But I think that does appeal to different consumer set so it'll be interesting to see how that that unfolds as they increase their distribution I think we're now in.
90, plus thousand points of distribution 75 countries. So.
I think at pretty good headstart and keep it that way.
Okay does that mean that that your your price cuts will fall into place in those stores in which your head to head.
It depends I mean, so you know I want to give the right impression here. So I think that one of the biggest focal points for me. During this period as around these value packs and I want to make them available to any retailer who will take them.
We will do.
Heavier discounting onto robotics as long as this disruption and continues in the animal protein market.
I haven't really even thought about it relative to possible to be honest and much more focused on the animal protein market.
I did want to clarify just on this on the idea that a test somehow.
Beginning and ending.
Signals, you'll good or bad information.
That's really just not the case if you look at KFC for example.
You know that that was a very successful test at the beginning in an end. So I don't want people to read into that it just it's part of the maybe ask than that on the next call. It's part of their process of evaluating information that game. They don't always go from testified to launch.
Hi, Thank you.
Yes.
Our next question comes from Brian how the David too.
Thanks. Good afternoon I was curious if you could talk about you know there's been some commentary that consumers are migrating towards familiar products and brands in this environment, whether that's just a pressure wallet or migration towards comfort foods.
On its face that seems problematic current emerging categories such as plant based me can you share any insight on what the consumer engagement is telling you about their willingness our Dod plant based adopters willingness to trial in this environment.
I think we have snuck in just in the right amount of time into the national dialogue and consciousness on this.
Our aided awareness now brand awareness about 52%. So I think when people think about plant based me, they're thinking about beyond.
And ER and so if they're going to make any kind of trial. During this period, we favor or we come out pretty well in that because of the familiarity with our brand.
So we're not campbell's right, but but we're not so knew that it seems a foreigner novel in some regards.
Okay Fair enough and then you know I guess.
You talked about pulling back on some of the marketing so but it sounds like Youre, you'll go to price discounting I understand that.
But certainly with the.
You know reduced foot traffic or impacted consumer mobility as it pertains to the foodservice channel, which which I believe is a huge driver of awareness and trial for you guys.
How else can you off I mean is it just pure just get the traffic that's come in the retail see you know the price discount Supervalu pack CD availability.
If you feel comfortable that's enough is there other are there other.
Alternatives you can look at here.
I'm, just sort of drive traffic and engagement right now.
Yeah, I mean, I think you're going to move off some conventional.
Methods sorry.
Yes, yes, no great question. So yes, there is an area that I love and and.
Well I really think that the way to market.
Particularly our products is around the authentic.
[noise] integration of the product into People's lives, and particularly people who have captivated the public's imagination. So we use a lot of athletes for investors and the company. There are advocates for us we use a lot of entertainers and they're making changes in their own lives that are beneficial and one example that actually love is.
Chris Paul is that as a great friend of our brands. If you looked at him in the into 2020, All Star game got 35 years old just about 35 catches have done right and that you see is maybe six foot too and so after the game he says.
I have a attribute this to shifting over to plant based diet is given me a lot of.
More legs, essentially right you know not the ice as needed somebody time et cetera, So you're going to see us to keep entering home on that got milk message right that you consumer product you're going to feel better.
It's gonna do great things for you.
And we're going to people that are out there in the public guy.
Leaving.
Ah proof of that and so you'll see more and more about doing that I think this giveaway campaign. It wasn't just beyond me put up in a truck in the middle Tonight and dropping off burgers.
Partnered with some of the very famous people, we work with whether it's you know Kyrie Irving Snoop Dogg.
Et cetera, I mentioned many others.
This is the way to market, it's a genuine approach and it works because it's true.
Got it appreciate the color best of luck.
Yes. Thank you.
Our next question comes from Adam Sandler same with Goldman Sachs.
Yes. Thank you good afternoon, everyone.
I was hoping or to first ask about the international business and I appreciate the new disclosure this quarter.
And just trying to think about.
More of the sequential performance and the the bases on your on years are a little bit the started but sequentially. It looks like the international business are going through retail and foodservice.
Was growing slower than the domestic U.S. business, which I kind of interesting because I would have thought there was a greater kind of distribution point gain potential internationally. So just any color there are issues around distribution issues around logistics.
Seasonality just help me think about kind of the international business and the trajectory of that as we move into second quarter.
Yeah.
I think the international business. The reason that you're seeing a run rate basis somewhat of a decline just has to do with the really heavy amount of foodservice. Its represented that about 80% of the the Oh.
Businesses.
What was foodservice now about 76%.
So you are seeing just an l. weighted.
Contribution from from the Foodservice declined globally. We don't think this is a something that's going to persist we can't predict the future of course, but you're going to see going forward from us launches internationally in both retail and food service for the balance of the year, we're pretty excited about.
So overall, we look to foodservice, assuming we looked at international.
As you continue to be a very very strong pillar of our because.
Okay. That's helpful and then.
I guess the second question relates on the capacity side and clearly in coming into the year you had.
Pretty.
Meaningful aspirations on growth.
Hi, new procurement, new raw material supply agreement on Pea protein isolates demand environment is a little different today than it might have been 60 days ago, how do you feel about.
Just from a capacity perspective, and you are you now maybe a little further had on the capacity front than you need to be for the time being willing to absorb that are.
Just help us think about that balances you tried to balance growth and capacity.
That's great I mean, my first plan of attack on this is offensive strategy, we put together and that really is around repurchasing assets that may have been dedicated to foodservice over into retail, but keeping them nimble enough to middle switch back as they.
Situation improves so we haven't yet encounter that issue I mean, we I'm not suggesting that we're going to be completely unscathed by this we're not we did take a hit on the foodservice side, but overall if you look at all the different segments when it all different opportunities for growth both from a foodservice perspective, all the way to retail lots of different types of retailers, whether its club versus.
Regular grocer international with some parts of the world recovering more quickly than others I don't one thing I'm not worried about is are we going to have excess capacity. This year. We've we built the appropriate amount of infrastructure and then we of course use commands for some of our processes. So we can flex there. So I think we feel pretty good about where we are.
Okay I appreciate the color I'll pass it on thank you.
Thanks.
Our next question comes from Rob Dickerson with Jefferies.
Great. Thank you so much.
I guess just first question.
You know.
Maybe to direct not sure.
It sounds like Q2, you know you said gross margin should be lower relative to Q1, given volume de leverage repackaging cost.
Sounds like there could also be some you know I don't know pack sizing or pricing effect too, but not as much.
When you say volume de leverage.
Obviously, you know, there's probably that might the March you reference you know that trend and in March off for Q1.
Obviously the mix in the U.S. side in the food service channel was higher would be more of an impact in Q2. So are you kind of saying you know or let's say by saying that the margin key to be lower kind of given that Martin de leverage which would be coming from foodservice and retail that Q2 revenue in foodservice would actually did.
Cline year over year, right and I I also asked because we we didn't talk about year over year, all the time, but the most emerging growth companies revenue sub 100 million, we really are watching the sequentially.
And revenue statically did decline by a million by Q4 to Q1 I'm trying to think about what's that sequential impact potentially from Q1 Q2 on the revenue side.
Yes.
So.
Yeah, we specifically will will probably stay away from giving guidance, but then the as we go into the second quarter, we're definitely going to have more of an impact.
On the foodservice channel specifically.
Versus the first quarter first quarter was.
Through you know into March.
We were relatively unimpacted.
We started to see this impact in in the month of March and as we go into the second quarter, we're going to see more of this impact.
So.
Well, maybe let you make your assumptions off of that but we would anticipate the foodservice.
Impact would be would be felt more wholly in the second quarter.
Okay Fair enough and I guess, you know more broadly for anything.
Yeah, I've been a lot recently that kind of round alternative proteins space, it's highly fragmented still even though you are the leader.
The refrigerated side, a lot of smaller players right potentially might be entering kind of more challenging economic backdrop.
It would seem like some of those smaller players might not be as well capitalized right. You said strong balance sheet. You still you have probably more scale than most of the industry right. Now. So if you step back you know like <unk> and look forward, let's say a.
A year from now even.
If you kind of go through the tougher economic backdrop.
How do you think that affects the industry like my first question was hey, you could be more pressure and food service in the near term I kind of longer term. It seems like if you had scale and the opportunity now that you actually could potentially be picking up more share.
Going forward in a category that remains highly competitive.
Yes, that's exactly what we are.
Pursuing and and we don't look at this moment as a survive in advance foam and it's really about how do we strengthened our position overall and.
And we think that relative to higher prices in the protein market today, we can make significant inroads into to consumers and help them expand their choice of proteins and so we look at both on the animal protein market Morsel NIM protein market them then on on the deposit base meet side I think it is we do have a very significantly relative other play.
Layers in Atlanta, which makes him a group even the number one incumbent in this category we grew six times their rate.
Well last up 12 week period.
10, you to really advance more quickly than others.
And that's by design, we move very quickly.
The biggest thing for US right now around growth is how do we provide solutions for the consumer as there are other protein source arising in price and having supply disruption. That's the biggest focus for us for growth. We think we come out of this a much stronger company as a result, if we pay attention to what's going on for the consumer.
Very helpful. Thank you so much.
Our next question comes from John Bair gotten with Wells Fargo.
Good afternoon, thanks for the question.
On the marketing side as you launch you ask your base, we built in this category from scratch and as you go into Europe Middle market, where you've got some plant. This compares already pretty entrenched in Asia, where it's a different different product how does the market entry strategy differ I mean, how are you personally conclusions different with consumers and retailers know sampling promos.
It's on.
Yeah.
So first of all I wish it was over there now minute just be such an exciting time and up in watching from afar the launch.
We've had some really great advisers around us with a lot of experience.
In Asia them, helping us to understand that mark on the consumer and we will be announcing.
At some point it really terrific higher we've made over there I was hoping to guide us as a ton of experience.
In the market. So it is entirely you know there's a lot of differences and we got to be super sensitive to that and so I think it's also about picking the right partner Starbucks is a good partner to go with initially they've done a very good job of translating in American brand into the fabric of that country and up.
Well received by the Chinese consumer, but you have to be very sensitive even to the pallet right and making sure that we're doing a resonates from that perspective from Attritional perspective from an ingredient perspective.
So we're all in that part of the World you know we aren't taking it lightly.
We're gonna be investing a lot over there.
And we expect to be part of the solution for for what is.
It constrain protein.
Environment over there as well I mean, if you don't have to be sort of systems analyst to look at what's going on in a world and see that there are opportunities here for us to move more quickly it whether it's the.
Run a virus in the impact is had here on on the U.S. meet industry or whether it's the African.
Swine flu and the impact.
Calling Atlantic 60% of the Chinese on population.
Or.
Or more recent the avian.
Flu.
Occurrences in South Carolina in Ireland, there, there's an opportunity for the consumer to become aware of a different model of doing us and we want to be as aggressive as we tend to provide the consumer would that that additional option and so we need to do that in the parts of the world.
Most relevant and certainly right now China is off from center.
Great and then just follow up wanted to come back to the aggressive pricing in the value pack you mentioned that retail I guess for products that were very much in the trial phase you. How do you start getting a consumer to buy 10 Packer a 12 pack for the first purchase and is there anything in the consumer work in terms of trial versus repeat where you're looking to kind of lead into here or is it more just a neat.
Quarterly audible on just moved up from service volume as quickly as possible club gives you the best chance.
Yeah, I think it's I mean it to me.
I think really thing happen for us. So if you look at our household penetration. So July of 2019, we were about 2%, we're not about 3.6% something interesting is happening along the way our buyer rate, which is the that's just the amount that each individual's buying each household as buying is also increasing substantially right. So we have a group of consumers.
That are not only.
Conditionally buying but can certainly by more and so to the extent we can.
Some as available to them, but also get close enough on the.
The product that we're competing against in the Beast category itself.
I think is enough momentum around our brand that we can get people tried now they probably won't first by the 10 into the by the.
And to the by the two back, but but we'll see what we can offer more aggressive pricing on that as well. This summer so you'll see you'll see both approaches from us.
Great. Thanks, Thanks with appreciate it.
Yes.
Our next question comes from Michael Lavery with Piper cinema.
Thank you good afternoon, I could you give a little bit of color on your retail expectations, you already had really strong momentum there running up around 200% even before the the virus really had an impact.
We're seeing a film or pace hold up but how do you think about what the had should we expect an acceleration or some upside just especially as you ship capacity or see shortages of of meat protein or is the volume lift likely offset by lower price. What how do you think about just the next built up in near term runway there.
Yeah, I think it's going to be frustrating answer for me to give and frankly, we received we just don't know yet I mean, there's so many different moving pieces there shouldn't does foodservice recover.
In a reasonable at a time.
New consumers go for the value pack do they go for more aggressive pricing.
I agree to we think that they will so there's just so many variables what I can promise that we're going to the Ami is fine throughout this process throughout this issue thankfully because we have just split between foodservice and retail will continue to be fine, but where would whenever we can to try to.
Via solution during this period and.
And hopefully the consumer will gravitate towards that but we can't we can't make.
Christians now.
Okay. Thanks, and just a follow up on the margin side, you've obviously got really strong momentum in the first quarter, but and and recognizing there's plenty of uncertainty still ahead, but any specific watch outs, maybe we should have in mind is there a magnitude of operator, an operating leverage hit that maybe we wouldn't expect or an impact from some other key.
Costs. It sounds like you don't expect margins to turn negative, but you know just.
A reasonable thinking be some at some deceleration in margin momentum, maybe a little less positive.
Yeah, I mean, once again to the.
Turning to stay away from guidance the for the second quarter, we do think is going to be sequentially down.
Q1, and that's driven by.
Probably overall volume and then also some of the.
The volume leverage.
We will be looking at increased levels of discounting and so discounting was pretty low in the first quarter and so that would be also.
Having impact.
You know the move to kind of different kind of value pack sizes those are probably.
Phase in over time, so that's not going to be something immediate and no probably match our.
Cost reduction initiatives, but you know really just in the very near term, we think second quarter would be sequentially.
Of it down from Q1 very strong result, we had here in Q1, but.
We probably couldn't comment further beyond that.
Thank you. Your next question comes from Jon Andersen with William Blair.
Hi, good afternoon, everybody. Thanks for the question yes.
Two quick ones, putting the putting the second quarter gross margin rate aside for a minute I'm, hoping you can talk about gross margin longer term makes so much progress on that line in the last a year or so.
How are you know today thinking about.
Margin rate again longer term.
In the context of your unit productivity.
That you expect and it also though the reinvestment you know in price in order to try to achieve parity.
Yes, so I think the number one answer in that regard is just around we're going to continue to drive the cost structure down and that's where we're gonna see the most progress and so you're not going see a sacrifice a ton of margin of 38% is amazing. So so we think we do have room to to get back a little bit there and no ourselves be more competitive but.
We don't look at doesn't say, how do we drive ourselves into commodity position, we want to very much take advantage the efficiencies throughout our system and I wish I could take you guys through I mean, if so much that we can wring out of the system still and we have the right people and there were issues now to do it and they're doing it and I think again I'm very proud as milestone of the Cogs we met this.
I'm around but.
Thank you to drive that cost structure lower.
And we will reinvest some of that margin into pricing tool to allow for more competitive.
Outcomes, but I don't think you'll see us take a dramatic change from some of the margin that we've discussed in the past. When this was a particularly good outcome, we're not going to try to always meet that for sure and as I mentioned to summer, we're going to be very aggressive on pricing. So.
Theres another piece of data, but overall, you know I'm pretty comfortable with with the dialogue we have about the margin don't expect that's changed.
Great that's helpful.
On E Commerce.
You talked a little bit about it in your prepared comments or.
How.
You know there's been a shift to online it's been accelerated as a result of cobot 19 pandemic.
How are you position down line, how do you plan to broaden our reach there and you know kind of take advantage of of the momentum that you have to make sure you're really available anywhere that consumer wants to.
Correct and kind of transact with your brand.
Yes, so theres a lot of energy in this building around that pretty good because our COO came over from a long career, but Amazon [laughter] first burst amazonfresh right I mean, so that we're doing a lot there.
That launch and then we are looking at our own system, but who knows on that right we'll see.
But overall, we're trying to change with the consumer and and.
Are we going to become a almost stakes I'm not sure, but but all the work again try to reroute every way that we can to make sure that we're getting our product to consumers want it and online is obviously a big part of that I think you'll see the most divide to guess most traction right now of near term out of Amazonfresh.
Okay. Thanks, so much.
No.
I'm not showing any further questions at this time like turn the call back the management.
Okay. Thank you guys very much for for the terrific questions in for following the brand over the last.
This quarter as I mentioned, we do feel very strongly about this an opportunity in time for us to be aggressive in offering a consumer expanded protein options and so.
Look forward to seeing how we wrap the second quarter here and getting back on the phone discussing results. Thank you very much most importantly, due to stay healthy and and and say thanks.
Ladies and gentlemen, just conclude todays presentation you may now disconnect and have a wonderful day.
Good bye.
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