Q1 2022 Beyond Meat Inc Earnings Call
Good day and welcome.
Neat incorporated 2022 first quarter conference call.
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I would now like to turn the conference over to Toby Kotula. Please go ahead.
Thank you good afternoon and welcome joining me on today's call are Ethan Brown, founder, President and Chief Executive Officer, and Phil Hart, Chief Financial Officer and Treasurer.
Now everyone should have access to the company's first quarter earnings press release filed today after the market close.
This document is available in the Investor Relations section of beyond meat website at www dot beyond meat Dot com before.
Before we begin please note that all the information presented on today's call is unaudited and during the course of this call management may make forward looking statements within the meaning of the federal Securities laws.
These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward looking statements forward looking statements in the earnings release that we issued today along with the comments on this call are made only as of today and will not be updated hasn't.
Vince unfold.
Please refer to today's press release, the Companys annual report on Form 10-K for the year ended December 31, 2021, the company's quarterly report on Form 10-Q for the quarter ended April <unk> 2022 to be filed with the SEC and other filings with the SEC for a detailed discussion of the risks.
It could cause actual results to differ materially from those expressed or implied in any forward looking statements made today.
Please also note that on todays call management may make reference to adjusted EBITDA, which is a non-GAAP financial measure while we believe this non-GAAP financial measure provides useful information for investors any reference to this information is not intended to be considered in isolation or as a substitute for the financial information for us.
In accordance with GAAP. Please refer to today's press release for a reconciliation of adjusted EBITDA to its most comparable GAAP measure and with that I would now like to turn the call over to Ethan Brown.
Thank you Larry and good afternoon, everyone.
Though we navigated significant cost challenges in the first quarter of 2022.
The majority of which relate to scaling or strategic product launches and are temporary in nature. We.
We made strong progress against our long term growth strategy and saw encouraging sides resumed growth.
First we engaged in significant activity across our global partnerships.
Mcdonald's conducting market tests in the plant in the U S.
The offering to all restaurants across the U K and Ireland.
And continued trials in Austria.
And currently Yum brands Pizza hut added beyond meat as a permanent menu item across Canada.
While KFC conducted a nationwide limited time offering in the U S. Noting recently, but its launch of beyond fried chicken resulted in Warner media impressions than any other product launch in KFC is history.
Chi we lost three skus of beyond meat jerky with the planet partnership or joint venture with Pepsico.
Sales of beyond meat jerky since launch has been a resounding success exceeding our initial expectations.
Adjusted for Cherokee, We made continued progress on our cost out program with the garage and material cost per unit and.
Despite short term fluctuations, we do not see any fundamental change in our long term margin targets of 30% plus.
Our cost down program the fundamental driver of this covenants.
Fourth we advanced the century profiles of our platforms.
Platforms, that's part of the beyond meat rapid.
Innovation program.
It's defining focus your after year on reaching our Northstar, but perfect indistinguishable build a meat from plants continues to be rewarded with product recognition.
During the quarter, our products not several accolades, including among others. Those feeds number one spot for plant based chicken tenders, all recipes community Choice Awards best plant based meat brand.
Edge News best New product award.
Chicken tenders, along with best plant based Burger in sausage, the beyond Burger and beyond sausage.
And finally consumer reports highest score taste for the beyond Burger beyond breakfast sausage patties and beyond dinner sausage.
We believe it through innovation, we are on a path.
To deliver against our North Star.
I'm locking meaningful percentage of the estimated 1.4 trillion dollar worldwide market for our brand.
Appreciate the use and other awards, that's encouragement along the way.
Yeah, we saw some important signs of post pandemic resumption of growth. That's foodservice entered Q1 with sluggish results, but exited the solid momentum contributing to March 2022 being among the largest revenue months in our company's history.
Today, we are clearly in a period in which certain decisions that we believe best position the company to capture our long term opportunity and generate adverse short term adults.
In each instance, as we take a decision we align around the path that we believe will build over the long run a profitable business with global scale.
More specifically, we took the following actions each of which negatively and temporarily impacted margin.
First we get interrupted steady state internal production of base products to support the commercialization of innovative new items with key strategic customers a decision we discussed in our Q4 call.
And the balance of the year, we expect to reallocate internal production infrastructure higher efficiency operations.
Second we successfully executed a nationwide launch of beyond meat jerky.
The biggest product launch in our company's history in terms of breadth you.
Using it initially higher cost manufacturing network.
New product and market.
As I mentioned, we are very pleased with initial sales results. We are now transitioning production into higher efficiency operations and have a clear line of sight greatly improved unit economics in the second half of this year.
While we do not take lightly the short term margin impact of these longer term investments.
Confidence that through these actions, we are positioning the company well to capture robust future growth.
Now turning to Q1 2022 net revenue results.
Overall, we posted net revenue growth of one 2% in Q1 2022.
We saw a solid increase in pounds of products sold rising 12% year over year, which was partially offset by a 10% decrease in net revenue per pound driven by increased trade discounts strategic list price reduction E U.
And sales mix and decreases in the value of the euro relative to the dollar.
U S retail, we saw an increase of 7% and net revenue.
However, looking at spins takeaway data for the 12 week period ended March 20th.
Brand saw a decline of three 3%, excluding jerky versus a category increase of two 8%.
We believe this result is driven by four main factors.
First broader softness in the natural and specialty channels continues and we over index in this channel relative to the category.
Context total category sales natural and specialty declined seven 5% year over year during the 12 week period compared to a 4% increase.
Second across many channels.
Plus natural and specialty and saw a shift in consumer purchase from refrigerated to close.
Refrigerated plant based meats, where we are heavily represented.
We're down three 6% like frozen plant based meats were up seven 2%.
This change from refrigerated frozen in part reflects increased consumption of plant based chicken in the frozen section, which is plant based beef in the refrigerated section.
Third we faced increased competition in the category.
Nonetheless, we are encouraged that beyond meat remain number one branded refrigerated plant based meats.
Velocity, which was two four times greater than the category average ranked highest among any of the top 25 at <unk> brands.
And lastly fourth.
We increased our promotional spending resulting in lower net revenue per unit sold.
This increase in discounting in part reflects competitive dynamics in the category. However, the main strategic driver for US with regard to price continues to be our own price parity goals informed by before matching the cost out program.
Turning to our consumer panel metrics of household penetration.
Irate purchase frequency and repeat rates.
I'd like to first call out at the beginning of Q1 2022 we've switched data provider spin to numerator.
And as such the numbers I reference not be directly comparable figures I've mentioned in the past to.
To be clear, though the year over year comparisons that follow are based on the same no brainer datasets.
We're pleased to see that based on these measures. Our overall brand health remains strong even as our user base continues to expand.
According to new oriented data through the first quarter of 2022 household penetration for the beyond meat brand stood at 10, 3% an increase of 180 basis points year over year.
I repeat rate increased 80 basis points year over year to 46, 3%.
Purchase frequency and buy rate declined by 3% and 13% respectively.
Reflecting lighter new users given the healthy increase household penetration as well as reduced year over year pricing in the latter case.
Within the U S retail sector, we are pleased to secure recent distribution wins.
These gains include the launch of beyond Burger and beyond meat balls at approximately 2000 Rite aid stores nationwide and the expansion of beyond chicken tenders and over 8000, new outlets nationwide at retailers, including Albertsons C. B S.
So lets costal regions jewel osco.
Kroger shop, right sprouts target, Walmart and whole foods markets, among others, bringing our total retail distribution beyond chicken tenders to approximately 15000 locations.
Also in U S retail as noted.
The milestone for us in Q1 was the nationwide launch of beyond meat jerky.
This innovative offering.
But the beyond meat rapid and relentless innovation program.
Took a tremendous amount of work countless iterations and a close collaboration with the planet partnership.
The intensity and duration of this research development scaling reflects the guiding principles.
When we bring a new product to market, we aim to either create the category or when the number one position therein.
Proud of what our team has been able to accomplish together with Pepsico and the market results thus far.
This fantastic on the go snack represents beyond mutes first shelf stable offering.
Thereby opening a new distribution opportunity for our brand.
It comes in three delicious flavors.
<unk> Hot and spicy teriyaki.
Nutritionally beyond meat jerky packs 10 grams of protein per serving.
No cholesterol gmos soy gluten and as always is made with simple plant based ingredients, including PS and bumpy, it's among others.
And just a national launch in late March Yeah. On me quickly established itself as the number one selling plant based jerky brand.
Actually accelerated the growth of the category.
In fact more than tripling the category sales and early philosophy results were trending ahead of initial expectations.
I'm to launch beyond meat Jerky also rose to become number one on Amazon's new releases page.
Further we expect to significantly increase our distribution of these products from approximately 56000 stores today, it's about 80000 at the end of May.
If you've not already tried it I highly recommend this delicious.
And convenient proteins.
Turning now to U S. Foodservice, we saw signs of accelerating momentum late in the quarter.
March posting an 83% sequential increase relative to February and a 42% increase versus the prior year.
We believe that the slow start to the quarter was likely related to Hum.
Labor shortages late return to school among other factors.
In our international business.
Products sold increased 22% year over year in Q1, 2022 of our net revenues were down 7% year over year.
Primarily reflecting strategic price reductions and incentive actions in EU.
We expect to benefit from incremental distribution and velocity of our extended shelf life burgers in the retail channel.
In late Q2.
Working to bring additional extended shelf life products to your grocery stores as soon as possible.
More broadly key developments in our national business continued to bolster our optimism for sustained long term growth.
Beginning in Europe , Mcdonald's we are pleased with the continued strong performance of the plant in the U K and Austria in the case of the ladder. The announcement of a nationwide test of a second big plant build the plant steakhouse.
Steakhouse features at beyond meat co developed Patty served on a sesame seed bun lettuce onions, tangy steakhouse sauce in two places the Cheddar cheese.
We're excited to see this product extension the first of the nickel plant, which demonstrates a simple way to offer more varied menu options as consumers seek to diversify their protein options.
In Europe as in the U S. I am pleased to share that beyond meat products continue to earn distinguished recognition spin.
Specifically the beyond Burger was named good housekeeping to Uk's best vegan Burger and their annual barbecue taste test as well as the best vegan Burger by which the Uk's, leading consumer Association.
There were two time winner the wheels of retail awards from dystrophy.
That's the overall innovation for beyond Knits, and best Meatball substitute brand.
The wheel of retail awards have been the most important prize for product introductions and the Dutch supermarket sector for 44 years.
In China in late March you announced the launch of a flagship store on pin do love duo.
One of the country's largest e-commerce platforms, which closed hundreds of millions of users nationwide.
With our announcement beyond meat became the first global plant based meat brand to launch a store on paint do I'll do them well.
It will feature locally produced beyond Burger.
And be on pork products are.
Our launch on Penn duo duo represents our third such launch a major Chinese E Commerce platform. Following our previous editions J D Dot com and Tmall.
And in China.
As we were preparing to do in the U S. We are excited to bring new innovation to market.
Reflecting our investment in local management.
Duction and innovation, we're excited to share the product coming later this year in China were developed with significant direction and execution by our Shanghai and gouging teens.
Before concluding let.
Let me touch briefly on some global macro issues.
It's widely reported the recent and ongoing conflicts in Ukraine is disrupting key commodity markets.
Some of these disruptions have a direct or indirect impact on portions of our supply chain.
Although we don't sell in Russia.
Indirectly sold only small quantities through a distributor into the Ukraine.
We have seen increased transportation costs due to higher fuel prices and increased pricing and scarcity of supply for a few commodities that we use in relatively small amounts at this point, we're working through these issues and the team has managed to avoid any significant disruption to operations.
With that I'll turn it over to Phil to walk us through our first quarter financial results in greater detail and our outlook for the balance of the year.
Thanks, Ethan we achieved net revenues of $109 $5 million in the first quarter of 2022, representing an increase of 1.2% compared to the first quarter of 2021.
The increase in net revenues was driven by growth in the U S retail channel, partially offset by declines in our other sales channels for Q1 'twenty 'twenty. Two average net revenue per pound was $5 13 down from $5 70 per pound in Q1, 2021 primarily driven by increased trade discounts strategic list price reductions ahead of expected.
Cost reductions changes in mix and a negative impact from foreign exchange.
Moving down the P&L to gross profit gross profit during Q1, 2022 was $190000 or 0.2% of net revenues as compared to $32 $7 million or 32% of net revenues in Q1 of 2021.
We are thrilled with its early sales performance and strong customer response beyond meat jerky manufacturing still in its infancy was a significant headwind to our gross profitability. This quarter, we estimate the headwind this quarter at approximately 940 basis points of gross margin.
The scale of the beyond meat jerky launches unprecedented for us with the current distribution of approximately 56000 locations already eclipsing our current U S retail distribution for all other products combined and expect it to expand further to 80000 locations by the end of May.
The launch of first time product at such a large scale in prior to the establishment of our own dedicated and streamlined process, we had to do so internet and in an expensive and inefficient manner.
Some cases the initial path to finished good production requires a single batch to be processed across different facilities incurring processing costs and transportation fees at each step of the journey.
As we mentioned on the last call as we look towards the remainder of the year. We expect this will get better.
We have multiple initiatives underway with one of the largest improvements already secured as we recently signed a contract to consolidate operations with a third party manufacturer. They can produce jerky with more automated equipment lowering fees and reducing the need for multiple processing locations, thereby reducing costly shuttle transportation.
We expect this capacity to come online in mid Q3 of 2022.
We also recently secured reduced pricing on mung bean protein one of the key ingredients in jerky and we look forward to locking in other efforts already underway.
In addition to the decrease in net revenue per pound Cogs increased $1.15 per pound year over year, we estimate jerky accounted for approximately 68.
With the remainder being driven primarily by increased manufacturing costs, including depreciation and higher transportation and warehousing costs, partially offset by improved materials costs and reduced inventory reserves and write offs relative to the year ago period.
Manufacturing costs, including depreciation were up 90 cents per pound versus the prior year with jerky accounting for approximately 36 cents per pound and the remainder primarily reflecting expensive inventory created in Q4 and sold through in Q1, as well as higher depreciation and other fixed overhead per unit.
For the non jerky inventory, we manufactured in Q1, although still impacted by new product launches lower foodservice volumes than initially anticipated and variability of demand across products are cost improve later in the quarter as we stabilize the network match labor to production needs and optimize where we produce each SKU based on the overall best economics. The result of the inventory that still.
All reflects elevated production costs, but on a trajectory that is improving for example, Q1 2022 finished goods conversion cost in our east coast facility were 23% lower than in Q4 of 2021.
We are also currently running an RFP process with our third party manufacturers that we expect will result in tolling fee savings. Finally, as you may recall in 2021 and saw a sequential increase in revenue between Q1, and Q2 from $108 million to $149 million and as grilling season in the northern Hemisphere approach.
We expect a similar uptick in Q2 of this year further driving leverage in our costs.
Logistics costs, including those associated with internal transportation and warehousing increased 32 cents per pound in Q1, 2022 versus Q1 2021.
Note. This excludes the outbound freight associated with shipping finished goods to our customers, which is included in our SG&A as a selling expense.
Increase in logistics cost per pound was primarily attributable to increased transportation costs and from increased warehousing costs and transportation.
We experienced headwinds from both an increase in cost per mile and miles driven per pound in this area. We also have an RFP underway to secure improved rates for established lanes. We're implementing changes to further reduce the use of expedited trucks warehouse costs increased primarily due to increased inventory year over year.
Similar to Q4, 2021 before taking into account jerky. We saw continued improvement in our materials cost per pound on a year over year basis, the material cost per pound increased two cents year over year in aggregate. We estimate jerky represented a 26 cents drag implying a 24 cents per pound year over year benefit from all of the products.
As part of our cost down program further decreasing material cost is a key focus area for us we have multiple efforts underway to negotiate more favorable pricing you just utilize less costly ingredients and streamline our packaging. We've seen recent success in one ingredient from eliminating a distributor and going straight to the manufacturer and are especially.
Really excited about the ongoing progress, we're making and using less expensive pea protein isolate or PPI.
While we have secured P. P I supply to a previously disclosed multi year contract. We are seeing success in qualifying and utilizing greater proportions of PPI from less expensive suppliers stemming from our strategic sourcing efforts. Our current cost down efforts. In this area are focused on allowing us to mitigate to migrate to exclusive use of these lower.
Cost ingredients and on our initial rounds of testing are looking promising.
Lastly, with respect to Cogs changes in inventory reserves represented a nine cents per pound benefit in Q1 2022 versus the year ago period. Despite a six cent per pound drag from jerky.
Moving down the P&L to Opex operating expenses for Q1, 2022 were $97 $8 million up from $57.4 million in Q1 2021.
The year over year increase was driven mainly by increases in marketing non production head count expenses, G&A, primarily driven by ongoing consulting agreements and increased selling expense driven by higher outbound freight costs.
Turning to our balance sheet and cash flow highlights our cash and cash equivalents balance was $547 $9 million and total debt outstanding was approximately $1 1 billion as of April 2nd 2022.
Inventory increased to $283 $8 million up from $241 $9 million at the end of Q4, 2020 one.
In terms of cash flow for the three months ended April <unk> 2022, net cash used in operating activities was $165 $2 million compared to $30 $7 million in the year ago period.
Note contained in our operating cash flows we contributed approximately $37 million towards the Buildout of our new innovation and headquarters facility here in the L. A area, which was recorded in prepaid rent in the first quarter.
Capital expenditures totaled $21 $5 million in Q1, 2022, compared to $23 4 million in the year ago period.
Next I will provide some commentary about our 2020 to outlook for the fiscal year 2022, we continue to expect net revenues to be in the range of $560 million to $620 million corresponding to year over year growth between 21% to 33%.
Q2, 2022 we expect a similar sequential uptick in net revenues to what we experienced last year.
Led by accelerated year over year growth in the second half of the year driven by recent distribution gains acceleration in international markets. As a result of price resets and broader availability of extended shelf life products in EU anticipated, new product launches and expected <unk> launches and trials both in the U S and abroad.
In addition, we will be cycling easier year on year comparisons in the latter part of this year.
Although we're not providing specific margin guidance at this time, we did want to provide some additional context for our Q2 2022 margins. We expect Q1 2022 margins, where the low point in 'twenty two with continued progress in Q T. Two, albeit still well below historical levels accelerated back into higher margins later in the year.
The high cost of beyond meat jerky will continue to be a headwind in Q2, but we expect substantial improvement in jerky unit economics in Q3 and Q4.
For 2022, our current expectation is to incur capex of roughly $100 million down from $136 zero a million dollars in 2021, although we will continue to look for opportunities to reduce this further by increasing the efficiency of our existing assets also as we disclosed in our 10-K we.
<unk> our contributions to complete the build out of our innovation Center and headquarters facility will be approximately $71 million in 2022.
Which we already contributed $37 million in Q1 as previously noted.
With that I'll turn the call back over to the operator to open it up for your questions. Thank you.
We will now begin the question and answer session.
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The first question today comes from Peter Galbo with Bank of America. Please go ahead.
Hey, good afternoon, guys. Thank you for taking the question.
Sure.
Phil I just wanted to ask some clarifying comments on the Q2 gross margin.
I think it is helpful that the 940 basis points headwind from from Turkey. In Q1. It seems like some of that continues into Q2, but maybe not all so can you just.
Aside from all of the other kind of inflationary pressures just what is the hit you're assuming to margins and in Q2, just from Cherokee because I think that'll help us to kind of set our Q2 margin number that that might be you know more in the range of.
You know given that one he was kind of a bit of a big surprise to the downside so any help there.
Sure sure so I'll take a high level.
Roche and then hand, it over to Phil who can get greater detail, but I think first and foremost the underlying theme here for my comments will be around.
We continue to manage the business to open up the longest.
And the best long term growth.
Outcomes that we can and so when we have opportunities like this even though theyre going to be.
Somewhat challenging in the near term, we're going to pursue them and we did that here because it's a clear line of sight to much better margins.
And jerky as the year progresses.
And so Phil can give some detail on that but.
The other area that was bringing some pressure.
On the cost front it in margin was around the higher priced inventory that we were selling through.
Fourth quarter progressed, and then we will see some continued pressure from that.
For a bit more this year, but not too much longer and in that case again. It was this decision framework that we have whereby we looked at some larger opportunities. So we needed to re orient production away from steady state for a bit to be able to fulfill those opportunities.
Now we're in the process of re launching back toward more steady state production and so if.
If we didn't feel we had good line of sight to restore and over a longer period of time.
30% plus margins, we would feel differently, but we want to try to maximize.
Our ability to grab as much of the total addressable market, we can over a longer period.
So this is Phil that additional color I'll add is on.
On a per unit basis.
We expect the bulk of the improvement will come later in the year. So Q2.
Fourth given talented jerky may look fairly similar to two.
Q1, so that the headwinds should be similar or not there are a lot of moving pieces and one of the things that makes getting more concrete guidance difficult. So obviously number of pounds of Turkey. We sell we also incurred some very small lower of cost or market based on the jerky left on the balance sheet.
We're pretty clean this quarter so it wasn't a lot.
And so those things will factor into the total amount, but the.
The cost per pound, we expect to begin improving more in Q3 with this new facility that's expected to come online. So as you model and you can even touched on kind of the big themes there.
But I think it's fair to assume a similar.
Type of economics per pound.
Okay got it.
And then just as a follow up the.
The cash burn rate.
No.
Close to $190 million when accounting for Capex.
In the quarter I mean, it at current steady state with two cute.
You know also probably being a challenge quarter.
How are you starting to think about need for future growth capital.
As you start kind of working down the cash number from from the convert from last year. Thanks very much.
Sure sure. So I'll go ahead and follow the same sequence you end up with Phil but wanted to give some quick comments. So I wouldn't take this quarter's gas consumption and then just kind of played out and assume that we're out of cash.
Based on that we are taking several measures to reduce overall cash consumption that is particularly high caskets up in certain areas.
This quarter, but if you look at Opex, we did slow substantially the rate of Opex growth Q4 to Q1.
Do you need to look at reducing opex as the year progresses.
On the Capex side.
We have a reduction from 2021 and are also looking at ways to use it to trim that.
But the bigger one here is also inventory we did build up a lot of inventory coming into the into the summer season, we expect behind a lot of that down across the course of the year and that will generate quite a bit of cash.
And then we do see improving margin as the year progresses. So that will also obviously help and then contribute.
And then lastly, when you've been in this kind of a holding pattern.
For a bit here coming out of the pandemic and we are starting to see some resumption of growth, although again would continue to caution that.
That will materialize in a bigger way in the latter half of the year.
But as that happens we should start to see more favorable.
Quarterly.
Consumption so we.
We feel good about that we deal with plan to manage cash through to a to a.
A point, where we feel comfortable and at that point, we'll look at options, but right now we feel good about where runway. This.
The only other thing that I'll add to that is if you look at our operating cash flows. They include a line for a prepaid leasing expense, which is associated with the build out of our R&D and headquarters facility we.
We can hear you $37 million to that.
In Q1, the expectation for the remainder of the year should be only about $34 million in totality and so we're very front end loaded on some of the costs this quarter.
Okay.
The next question comes from Robert Moskow with Credit Suisse. Please go ahead.
Uh huh.
Hum.
Thanks.
Oh unclear where to begin.
A question about.
The 80% growth that you you talked about from March from February to March and Foodservice sales I mean, it's a big number.
Hum.
Is March your your regular run rate or does it include any benefits from limited time offers.
And then I wanted to know I don't think I've heard about extended shelf life burgers in the EU or these these price reductions can you talk about.
The the reasons for doing that and you know what why extended shelf life in EU, but not not the U S.
Sure.
Robert I'll take the first.
For a crack at this.
So I think on the.
You had a question about March.
I think we're just seeing a fundamental hopefully shift in it.
And consumer behavior and people are coming back in and coming back into the brand.
So we were happy that I don't think Theres any kind of one time hit that is driving that.
And we'll keep monitoring that as the year progresses, but that was a very encouraging sign for us on the extended shelf life that has more to do with the requirements, there and grocery and where we are relative to those and so by extending it to its to meet more of the norm there versus what we were doing.
Previously so it's not our strategy to extend beyond what's what's typical in the EU.
Okay and my follow up is kind of a broader question about.
The price reductions in the U S and getting closer to traditional mi.
We're we're in a time of unprecedented a price inflation in conventional mi and your strategy has been to reduce prices for for plant based burgers and I guess, what I'm surprised about is that that that hasn't yet.
It brought in more consumers to the category. So I'm wondering if you've done any research indicate that that the price is going to be.
It confirms that the price will be that the the trigger that increases the the the trial and repeat or could there be other factors that drive this.
Well I think it's really three things that I've talked about a lot over the years, one is key to driving taste profile, which we really do need to do and have some terrific innovation coming later this year.
And as to continue to communicate the value proposition, which is around health to.
To the consumer and then to a lesser extent environment and then the third is price and particularly in these kyocera environments, we feel very focused on price.
What's happening in the sector overall in grocery.
As you see all these new entrants coming in that many of them are using price as a way to try to capture early market share and so the while the.
The animal protein industry has been able to substantially increase pricing.
Two to essentially offset.
Significant reductions in volume.
In our sector, we have not had the opportunity to do that so if you look at our sales year over year on a volume basis were up 12%.
But because pricing has been so competitive.
That's not showing up it's being offset.
Retail Thats certainly the case.
So it's an environment, where there's a lot of I think unsustainable pricing behaviors going on.
We're weathering and we'll weather fine we're still the number one brand in the retail category our velocity turns at two five times roughly the.
The category average.
It's the highest of all 25 plant basically brands that are covered and so we feel really good about the fact that we've been able to withstand this.
But.
It's not entirely up to us on these pricing things, we have to remain competitive in that environment.
Over time, our approach is not to get too are a parity go through.
Discounting credits to continue to drive cost reduction and so we've done that through our cost program. If you look at the material cost quarter.
We've been able to reduce those theres a ton of noise in our cost again for long term strategic reasons.
Decided to loss of jerky, which was our biggest launch ever to 56000 stores currently and growing that is larger than our.
Our existing footprint and retail among all other products. So it's a very expensive endeavor to scale up to that and get those out there and we did it on a network of production facilities versus the single stock, which we're now.
You Werent seeing a production toward one that's more efficient which is the right thing to do.
And so.
We also launched <unk>, which drove pricing up structure of our cost structure up as we went away from steady state production. So all of this noise in the system, but if you look at what we're doing.
We are taking this cost down program very seriously and we will have we will hit this price parity goal that I set out three years ago.
I got two more years to get it but in fact, if you look at our jerky and you look at the average price of jerky in the marketplace.
Youll see that we already are pricing at parity with the Cherokee and we wouldn't do that if we didnt have clear line of sight to get to that.
The margins, we want so I know, there's a lot of hand waving in a little bit of wringing of hands regarding some of our quarterly results, but what we're doing is managing this business to create the longest term growth opportunity and in these these are.
Growth opportunities I don't think investors would want us to turned out right whether it's launching.
Soon be 80000 stores with the jerky, whether it's continuing to do trials globally with Mcdonald's, whether it's continuing to do.
Trials with young men across their different brands. These are all things that make sense for a business that is looking to expand into a global protein company over a longer period of time, and it's just going to generate some noise in the near term and I feel comfortable with that and I think the market will catch up with it.
But we feel good about where we are in.
On pricing, we're not going to deviate from that.
Okay. Thanks Ethan.
Yep.
The next question comes from Ben Theurer with Barclays. Please go ahead.
Hey, Yeah. Good afternoon, thanks for taking questions just wanted to.
Yeah.
He stayed within that topic.
Of the three things obviously taste is important that's that's for sure. That's what it all starts with but amongst price and then maybe a little bit of an understanding with what's been going on in the international markets. Because if we take a look at the results. It felt like in the U S. The discrepancy between volume growth and then I'll.
Italy sales call if it wasn't that big but it was kind of stunning to see how significantly you were able to expand volume in the international business be it in retail or foodservice I E by 'twenty up to 30%, but then the international revenues were down 7%. So could you elaborate a little bit.
The pricing strategies international and what's been driving that and maybe try to kind of give a little bit of clarity how much was pricing in local currency, how much was FX and how much was just a shift in strategy into into promotional activities, maybe within retail or foodservice.
Yes. So again this is Phil.
Bill can add to this but this is again, where I think we just have to kind of everyone to take a step back and look at what we're doing so.
We were able to increase volume and retail.
The EU by about 19% for the quarter year over year.
But that was offset by a 21% reduction in net revenue.
But if you look at what's happening ready as we're trying to get in line with competitive pricing in Europe .
While we're also building out capacity there in terms of.
Our own extrusion and downstream manufacturing, becoming more and more efficient so it's not where it needs to be today, but it will get there and so we wanted to continue to grow our market share versus wait until we had four.
Capacity.
Set up and so that's an example of.
Our pricing we're pricing to get into.
<unk> space in that market, even as we go further and go towards animal protein into food service is even more dramatic 29%.
Growth in volume, so really nice uptick in volume offset by a reduction in pricing, but over time that pricing will make sense from a margin protected because of the efficiency that we're gaining in our production network in Europe and so we.
We do think that price continues to be a good lever and it gets back to this perspective shared many times. If we can create products that are indistinguishable from animal protein in terms of taste.
We can make sure the consumer understands the health benefits of our products such as the work, we're doing at Stanford and others.
Then lastly, if we can get the price to be.
At parity or below it becomes an unusual consumer this is not still not going to consume that and so again these things take time theyre not.
Linear per se.
We're gonna have fits and starts and is going to require patients. But these are the right steps to take for our business and they'll generate some near term results. If you don't like and Thats. Okay.
Just to just to add to that we estimate that foreign exchange is approximately a three percentage point headwind, which is predominately euro.
Versus the dollar drill.
Driven the only other thing I would say is that some of the trade discounts are somewhat lumpy, particularly as we're rolling out for lower prices.
So in some cases, you're discounting so you get the product at the lower price for what's already out there as.
As we're selling into the distributor. We're also at that lower price. So you may see.
Some kind of Lumpiness in that line and we'll continue to review what we're doing with trade as we see how the new price points, which are a little different by <unk>.
Country play out so this will be something we learn as we go.
And then my follow ups really around.
And you said about the capacity investments in Europe can you give us an update of where you stand right now how much of the product, that's particularly sold in Europe still needs to be shipped over and then basically packed marketed over there, whereas this when do you expect to have like the level of production call it domestically or at <unk>.
Within the broader region available to improve a little bit that cost headwind.
Yes, so I wouldn't want to give it a.
Timeline right now, but I think the way to think about it as on a finished goods perspective, we're quite good in terms of the.
Production and now it's shifting to integrating the back end of our production process.
We're we're not shifting over.
The weapon things of that nature, and so I don't think it's too too far often so so we feel good about bringing our costs in line with that price reduction.
In the not too distant future, but I don't want give them exactly.
Okay perfect Thanksgiving.
Sure.
The next question comes from Ken Goldman with Jpmorgan. Please go ahead.
Hi, two for me Ethan.
Said on many occasions that your product is superior to competition on a number of levels.
If this is the case why do you need to follow your competitors down on price to this degree I guess wouldn't you have a bit more consumer loyalty.
Maybe should allow you to retain more price I guess, what's the point of kind of reaching price parity with animal based meat if it.
Crushes your margins like this.
Right. So I think first of all.
Okay.
A couple of things.
One is.
This impact on margin is not long term, but we have very good line of sight too.
Commentary on our network.
Not not constantly doing all these losses.
So taking the kind of operating cost out of that and then looking at a material basis, we continue to drive down material costs and I think can accelerate that so on.
On the cost side, I think you'll see some advantages.
Krishnan.
But on pricing I think it's fair fair question.
And our products, it's not in my opinion, we get a ton of awards in the rankings that are number one et cetera, and so forth and we're pleased with that and we should be doing that we spend a lot in R&D and we have this goal of making it a distinguishable as I've mentioned in our <unk>.
Getting closer and closer and it in fact I'm very excited about the opportunity to release from some products. This year that I think are.
Our exceptional.
But we also have to do a better job.
Educating the consumer about the differences among brands.
I think there is still confusion within People's minds.
Particularly us and one.
One other brand, where all get emails asking me about our products and so on and so forth and I'll actually be addressed to the other.
And so we have to do a better job.
English and ourselves and I think at that point that will help quite a bit but one of the main.
Competitive.
The pressure points on pricing is coming from that other brand and I don't think its enough feature differentiation and the temporary mine.
And then question. Two you described the market's reaction is I think quote handling bringing in reaction to some of the investments you're making today and I think the message is that maybe some people are sort of missing the point about what youre doing for the long term, but in reality your sales were up 1% year on year in the quarter and your SG&A was up.
93% and I think I think some investors I've talked to are saying look it's great to hear your vision for a better future understand we understand that the SG&A increase some of it's out of your control, but I guess the question is how do you think about balancing long term opportunities and some of the shorter term considerations for your shareholders is there some.
Point in which you need to adjust that spending to kind of match what's happening in the world today.
Yeah, absolutely and I think.
Raised those points are around we are going to continue to reduce the growth in opex, we have a pretty reasonable.
Reasonable Capex plan for the year inventory, we would take a lot of cash out of that.
Margin, we see improving over the course of the year, but I think you're asking that question first quarter of next year.
And I think it'll be interesting answer I don't I don't think that this current conditions persist.
And I think that the moves that we're making today are really the best for the long term shareholder it is not easy stuff right, but it's the for those that understand the long term.
Value that we're trying to unlock this is exactly the right thing to be done.
Understood. Thank you.
Yep.
The next question comes from Alexia Howard with Bernstein. Please go ahead.
Good evening everyone.
Hi, there.
So can I ask I mean, just coming back to the cash, but because obviously that's top of mind for everybody I'm speaking to.
You'll have way through Q2 almost.
Do you have any sort of read as to what the cash burn is likely to be this quarter I know that you said that.
Prepaid leases the R&D center are obviously going to.
Yes.
Did I hear you say that the inventory cash burn might actually start to reverse I mean, I'd be very curious about that and is there anything else.
We might actually see start to improve.
Whether it's in the the net income line.
We go through Q2.
Sure. Good question, so I think that.
The most precise answer I can give is probably going to be a little bit.
Lacking.
But.
The general trend here.
It gets back to my point that I would not take this quarter's cash burn and replicate it out and so that's when you guys are out.
Taking these steps that I mentioned, particularly on the inventory side, you'll see across the course of the year.
Some cash being freed up there.
And then again, we've had some lower then.
Like sales quarters that doesn't seem to be persistent.
And so we'll generate some some better operating outcomes from that perspective as well so we actually feel.
Pretty okay about our cash position and we're obviously aware of it and are we.
At the point that we would be able to do something we will but right now where we're managing it through just just careful use of pumps.
Pumps.
Great and then my follow up would be just curious about the switch from the spins data team right.
What prompted that and why.
Why the transition now thank you and I'll pass it on.
Yeah like I say this is <unk> I'll take that one.
So the numerator data we actually found.
Probably have better coverage of our.
Sort of total consumer base and demographics.
It does capture.
More omni channel sales, which we think is.
A increasingly important channel for our brand.
Does a capture more.
Millennial consumers as well and some of the younger generations, which again, we believe is an important demographic for our brand and so.
We made the decision to switch.
Panel data providers based on on those types of decisions.
Decisions.
Great. Thank you very much I'll pass it on.
The next question comes from Peter <unk> with J P. I G. Please go ahead.
Great. Thanks, I, just wanted to come back to the conversation around gross margin.
You know just even if you exclude.
The beef jerky impact.
On the margins just trying to understand why and we should really.
See the inflection on on gross margins and should we see a significant inflection in third quarter, and then fourth quarter again.
Just trying to understand what in the pressure that you felt this quarter do you think there's going to be transitory and really kind of eases significantly in the back end of the year.
This is Phil I'll take that one so.
If you look at this quarter from a cost per pound perspective, it's very very similar to Q4.
And you know as Ive been talked about like.
Our manufacturing costs.
Is too high right now on a per pound basis.
So it's ongoing and so theres a lot of work underway there.
We started making good progress late in Q1, we changed some shift schedules made some other changes.
To align the optimal location for the production.
But some of the inventory, especially given the inventory balance we have already exist that will sell in Q2, So I would expect that.
Knowing what I know today Q3 would be when you would start seeing some of those.
<unk>.
<unk>.
Coming through the income statement, we'll see a little bit of it in Q2.
And we will have to see kind of what where we net out on a trade basis as well and some of the other kind of current period costs now certainly volume helps us.
So if you look at things like depreciation cost having.
Having a bigger quarter, which we typically expect seasonally in Q2 Q3 should also be a little bit of a tailwind.
Great. Thanks for that and then just as a follow up I think in your prepared remarks, you had mentioned.
You know more expecting more <unk> trials in the second quarter.
If there's anything you can share on that front in terms of are these with with with your current partners or new partners.
Are we talking chicken or are we talking still on the Burger side anything on that front would be helpful. Thank you.
Sure So I think what.
And then I think that's what I said it was sort of second half of the year.
But yeah I mean, the partnerships we have will continue to.
To rollout tests, and I can't speak for them, but but.
But youll see youll see further activity.
Some of our major partners yes.
Thank you very much.
Sure.
The next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.
Yes. Thank you good evening everyone.
Can we maybe.
Thank you.
Look at the long term profitability in Houston, you talked about reaching 30%.
30% gross margin.
What.
Revenue level, you think you need to be at to actually reach EBITDA and EBITDA profitability.
And the free cash flow positive.
I guess the spirit of the question as I look at the <unk>.
Opex structure of the business, whether on an absolute dollar basis on a percent of sales are on a per pound basis.
And I'm, just really struggling to see the pathway to get to EBITDA or cash flow profitability.
In the near to medium term.
Given where the Opex spend is today.
So.
This is still I think.
Certainly more volume helps us in that regard, we're not giving multi year guidance here, but.
The first thing is to get our cost.
Back in line with what we think it should be and we spent a bunch of time talking about the reasons why it's not right now.
And then over time, yes, we've got it we've got to grow into this opex basically we also have to take a look at all the Opex and make sure. We're happy with what we're getting for the spend and Thats an ongoing exercise that we continue to evaluate.
Oh.
Okay and then.
I look at the guidance for revenues for this year can you maybe just.
The first quarter, you talked about new products in the second half of incremental <unk>.
Kind of trials and activity in the back half of the year, how much of the revenue guidance contemplates new product introductions in 2022, and I guess inclusive of that jerky.
And how much of that encompasses kind of incremental U S. Our activity than what's in the marketplace today.
Yeah.
Im not sure we can give that level of color on it.
I think the important thing to look at is whats coming out of a period for a variety of reasons has been slower on the revenue side than we want.
But for us to continue to reinforce the growth targets that we set for the year, we're going to have a pretty big quarter over quarter.
Performance as we get into third and fourth quarter.
So we're.
We're not backing away from that we feel good about that and that has to do with.
Where we see some of the core business going in and the opportunities that we're pursuing today.
Yes, thats pretty impressive growth on a quarter over quarter basis for the second half of the year.
So no.
Part of my sense of like I, just think there's a need for people to take a step back here.
We're not talking about long term, there's also some some immediate curve.
Intermediate.
Performance coming up that I think is pretty promising so.
Have a very different perspective.
And that's why I use the term hands than I think some that maybe are less close to the business.
Okay, and then I just have to clarify an accounting question than anything yourself.
The equity loss of joint venture was $670000 and I'm, just trying to square that with the losses or the costs. You've described on jerky and I guess why are that wouldn't that be fine through the JV line.
Yes, sure so jerky.
We treat the planet partnership is arms length.
So gary or joint venture.
And so you see the revenues and the costs flowing through the beyond meat and then the prop.
Profit or loss from the JV that other line does that makes sense.
Okay, Yes.
I can circle back offline. Thank you.
The next question comes from Ryan Bell with consumer Edge Research. Please go ahead.
Hi.
Think about the strength and importance of brands overall in the alternative meat segment retail.
The degree to which the category for broadly convinced that's the push towards commodification.
Kind of like traditional need are there anything that you can do.
We have incremental value add to.
To help mitigate some of the potential for us.
We're seeing pricing being a key driver of share gains.
Yes, that's a good question.
I think it just gets back to continuing to innovate.
So it's a really clearly explain the value proposition around the ingredients. If you are using so.
Our case, where we're using very clean ingredients, it's a pretty simple process, we don't set a classification.
So there's all these characteristics and we need to keep explaining the consumer around what differentiates our product and our brand.
But again I don't think that this pricing that youre seeing in terms of what other companies are doing is sustainable so I.
The only other publicly reporting there too and one of them had a negative 14% margin right. So this is something that.
I don't think will persist in the long run.
There will be some.
Private label's success.
History for sure, but as long as we continue to innovate at the rate, we are and deliver better products year after year.
So far we haven't seen that be a me.
Ager issue for US our brand continues to have enormous recognition I.
I think brand awareness increased recently.
Household penetration increased recently so.
I think there's a long way before we face that question at a service level.
And just one more for me in terms of <unk>.
Innovation.
The beef jerky, you said, you're pushing it out on a national level.
There were cost of getting fat scaled quickly when we're thinking about future innovations.
There's something commission endpoint that was unique about the beef jerky and that relationship the JV Pepsico.
Or is it more you just want a push to get scale and that advantage getting share within a specific niche category.
Rather than sort of starting small and focusing on costs.
Sure sure no I think it was unique for us in the sense that we had never done a shelf stable product like that.
We wanted to do something that would be disruptive to that category.
And special because you know when we enter a market we want to try to be number one or <unk>.
Create the category.
And so we did it in a pretty unique way and we've been able to over time get that could be really repeatable process that can be scaled.
Scale that made efficient.
It was just it was a major undertaking right we.
Went from again 45000 stores on the retail side with regular product over 12 years right. We had to go into 56000 stores.
Very short period of time, where the product would never produced before and did it in the number one spot in it so we feel good about that.
And again when I get back to this.
You want us to to Ken's question.
New investors want us to run the business.
Waller level and focus on maximizing margins, let's say on a retail burger or do we continue to make the decisions they're going to create the longest term value for the.
The investor in a decision like this is going to do that simultaneously, we're getting ready for launches where strategics in other parts of the world Theres, just a lot going on and maybe there is some.
Some people that that's not the right approach, but that's the approach we're taking that will create the longest term value in it.
It's very consistent with the goal that we set out to do when we went public and we will continue to do that.
Yeah.
Thank you that's it for me.
Yes.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Appreciate the good questions and look forward to chatting to folks with folks.
Second quarter results.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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