Q2 2022 Beyond Meat Inc Earnings Call
Good day and welcome to the beyond Meat conference call all participants will be in a listen only mode.
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I would now like to turn the call say all that to Lubbock two watt. Please go ahead.
Thank you good afternoon and welcome joining me on today's call are Ethan Brown, founder President and Chief Executive Officer, Phil Hart, Chief Financial Officer and Treasurer.
By now everyone should have access to the company's second quarter earnings press release filed today after the market closed.
This document is available in the Investor Relations section of beyond meat website at www dot beyond meat dotcom.
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.
Actual events unfold please.
Please refer to today's press release, the Companys annual report on Form 10-K for the fiscal year ended December 31, 2021, the company's quarterly report on Form 10-Q for the quarter ended July <unk> 2022 to be filed with the SEC and other filings with the SEC for a detailed discussion of the risks that could cause <unk>.
<unk> results to differ materially from those expressed or implied in any forward looking statements made today. Please.
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 presented in accordance with GAAP.
Please refer to today's press release for a reconciliation of adjusted EBITDA to its most comparable GAAP measure.
I would now like to turn the call over to Ethan Brown.
Thank you Louis and good afternoon, everyone.
We have a clear view of our vast long term opportunity and its ever increasing global importance and a strong confidence in the leadership position of our brand.
In fact in Q2 2022, we recorded our second largest quarter ever of net revenues, even as consumers traded down among proteins in the context of very significant inflationary pressures.
We simultaneously however, recognize the progress for us and for the sector is taking longer than expected.
We now expect reflecting this inflationary pressure on consumer spending and specifically how this impacts higher cost proteins in foods, a delay and post COVID-19 resumption of growth.
Accordingly, we are taking a number of steps to reduce cash consumption to position the company for sustainable growth, while we apply our near term focus on the following key drivers one executing against a planned series of high value market initiatives for strategic and foodservice partners and to strengthening our retail business through.
On other measures bolstering support for our core lines are bringing to market among other new products that will expand our portfolio one of our best innovations ever a delicious and convincing strip mistake.
Cost related actions underway include.
One significant reductions and general operating expenses for this quarter, we reduced opex by approximately $14 million or 15% on a sequential basis.
Other intensifying reduction and production costs to drive continued sequential progress on manufacturing costs, so as to recover healthy margins and reach pricing goals.
Three realigning organizational structures across North America, the EU in China to increase regional focus efficiency and speed.
Four continued focus on managing down inventory levels.
Five and an action that I will now turn to yesterday, we instituted a reduction in force of approximately 40 positions.
Given the high value of our team members and again the tremendous opportunity that lays ahead. The reduction in force is a difficult measure.
Beyond meat as a team are tremendously dedicated passionate and talented individuals who have come together in service to our mission our.
Our customers, our consumers and our shareholders.
I am proud of what our team has built and are building and the resilience that our company has shown over the past two years as well as now as we face like others challenging macroeconomic conditions.
We are committed to treating those employees affected by this reduction in force with the utmost respect.
Providing assistance to help them in their transitions.
The second quarter of 2022 saw a sequential contraction in U S household penetration of plant based meat for the first time in over four years. According to numerator data, even as the number of brands and Skus expanded by roughly 60% and 70% respectively over the past two years.
As consumers are expressly seeking value, we believe that high inflation and the sectors premium pricing relative to animal protein is largely if not fully determined.
Despite intense competitive pricing in the category by existing and new entrants on the one hand and.
And rising animal protein prices on the other.
Category remains a premium one relative to animal meat.
As such it is subject to the same trading down behaviors that one sees during inflationary periods.
Numerator data for the 12 weeks ended June 26, 2022. So those are the primary drivers of volume leakage for our own U S business, where indeed shifts to animal protein as well as to private label.
This dynamic shrinking consumer buying power and grocery stores.
<unk> lower cost proteins and products, thanks, Eric greater than anticipated pressure on category growth and in turn our own growth.
Turning to gross margin, although we made sequential progress on manufacturing conversion costs. This was obscured by the sale of certain inventory items to the liquidation channel as well as increased inventory reserves for the same the combination of which accounted for nearly 10 points of gross margin pushing our gross margin down to negative $4.
2%.
Looking forward, though we do expect growth for the balance of the year, we need to continue to temper expectations, given the clear precedent for consumers to trade down among proteins in grocery stores, when buying power shrinks and inflationary periods.
As I noted earlier, we are indeed begun to see this trading down materialize and expect to continue for the time being.
As such we are issuing revised lower guidance for the full year 2022.
Before closing I want to reiterate my enthusiasm for our brand and our long term growth prospects.
One research firm brand keys surveyed American consumers regarding the world's most innovative companies Apple Tesla and Amazon took number one spots respectively across technology.
Inspiration and consumer goods and beyond meat took the number one spot in food. According to report released last month.
I share this to note that despite the current economic environment. The long term opportunity ahead of US remains as I began vast and substantial.
We are grateful for the commitment of our partners, including some of the world's most valuable <unk> companies, namely Mcdonald's and Yum brands and one of the globe's largest CPG companies, Pepsico with whom we share the planet partnership joint venture.
We note that the big plant Burger co developed with beyond meat is now a core menu item at mcdonalds in the U K and then in July Mcdonald's initiated a 270 store test of the plant Burger in Victoria, Australia.
Austria following the nationwide limited time offer of a second point plant build and the client Steakhouse Mcdonald's just started a nationwide limited time offer of a third mud plant build.
Tasty, which is inspired by Mcdonald's popular big Tasty Burger.
Also during the quarter the limited time test and the plant Burger and the San Francisco Bay, and Dallas Fort worth areas concluded as planned.
Turning to you we have launched are tested five beyond innovation, thus far.
This year is beyond fried chicken LCL at KFC nationwide.
Beyond Italian sausage crumbles at Pizza Hut in Canada, which is now a permanent menu placement.
Last year's beyond Pepperoni test in the U S and a permanent addition of beyond beef crumbles and beyond poor crumbles.
Deliveries in the U K these.
These ongoing tests are natural progression of our partnership with our strategic <unk> partners take time as well as iteration across product attributes pricing and other considerations and we are encouraged by the multiple introductions that we're seeing with both Mcdonald's and Yum globally as we innovate together.
Finally, we are thankful for consumers, who continue to make beyond meat. The number one brand in our retail category of refrigerated plant based meats. According to spins data and we are planning aggressive steps across the balance of the year to further engage the consumer in grocery.
I've said many times that I believe the rise of plant based meats to a prominent role in the global di is inevitable.
The benefits of such a transition driven by the unique effectiveness of plant based meats and addressing climate and conserving natural resources are powerful.
The Boston Consulting group recently reported the climate return for plant based meats measured in terms of carbon equivalent emissions avoided per dollar invested is unrivaled significantly besting climate returns per dollar invested in green technologies across a host of sectors, including transportation and electric.
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In closing it is our foundational belief that we can usher in the mainstream transition to plant based meats by driving ever more intently towards products that are indistinguishable in taste from are clearly understood by the consumer to deliver health benefits relative to <unk>.
And they are at price parity or below that of their animal protein equivalents.
We are focused intensely on increasing efficiency.
In operations and production, while driving execution of our highest value growth initiatives across North America, the EU and China, and we confidently expect to emerge from today's economic conditions leaner.
<unk> and very well poised to deliver on the promise of our brand.
With that I will turn it over to Phil to walk us through our second quarter financial results in greater detail and our outlook for the full year 2022.
Thanks Nathan.
We achieved net revenues of $147 million in the second quarter of 2022, representing a decrease of one 6% compared to the second quarter of 2021, the highest revenue quarter in beyond meat history.
The decrease in net revenues was driven by a reduction in net revenue per pound of approximately 14, 2%.
Partially offset by a 14, 6% increase in total pounds sold.
Two 2022 net revenue per pound was $4 88.
Down from $5 69 per pound in Q2, 2021, and was primarily attributable to decreased price per pound, including the impact of selling to liquidation channels and other pricing changes, including the U S price reductions instituted in Q1 2022 changes in foreign exchange rates and increased <unk>.
Discounts.
Moving down the P&L to gross profit gross profit. During Q2, 2022 was negative $6 2 million or negative four 2% of net revenues as compared to 47 4 million or 31, 7% of net revenues in Q2 2021 the <unk>.
Combination of sales of certain inventory to the liquidation channel and increased inventory reserves weighed heavily on gross profit this quarter, representing a combined headwind excluding any impacts from beyond meat Cherokee of approximately 10 percentage points on gross margin.
In assessing our inventory during the quarter for certain goods, we did not project adequate demand from full price customers in the U S retail channel and therefore decided to sell the inventory at a deep discount into the liquidation channel inventory.
The inventory carried at cost of approximately $10 $5 million and we realized revenue of approximately $1 9 million and a loss of approximately $8 7 million on the transaction.
As part of our quarterly inventory assessment, we also increased our inventory reserves, which further reduced gross margin.
We estimate beyond meat Cherokee was an additional approximately 670 basis point gross margin headwind and approximate 270 basis point improvement from the estimated 940 basis point headwind in Q1 2022.
The sequential improvement was driven by an increase in revenue per pound, including a one time true up of $1 $4 million.
Primarily for pricing on Q1 volumes and a decrease of Cherokee as a total percentage of the mix.
In Q2 2022 cost of goods sold was $5 nine per pound an increase of $1 20 per pound year over year.
We estimate Cherokee accounted for approximately 57% of the increase with the remainder being driven by increased manufacturing costs, including depreciation increased materials costs higher transportation and warehouse cost and increased inventory reserves versus the year ago period.
We estimate to reiterate we estimate jerky accounted for approximately 57 of the increase with the remainder being driven by increased manufacturing costs, including depreciation increased material costs higher transportation and warehousing costs and increased inventory reserves versus the year ago period Manny.
Manufacturing costs, including depreciation increased approximately 48 per pound versus the prior year with Cherokee accounting for approximately 26 cents per pound and the remainder primarily reflecting extensive inventory created in Q1 and sold through in Q2 as well as higher depreciation per unit.
And the Q1 earnings call, we spoke about the beginnings of an improved trajectory for manufacturing cost and we saw that improvement in the P&L with the sequential decrease in manufacturing costs led by continued improvements in our default, Pennsylvania finished goods manufacturing facility.
Materials costs increased approximately 44 per pound year over year with an estimated 29 of the increase driven by jerky.
Not reflected in Q2 2022 results, but in the last earnings call. We said we were in the process of attempting to qualify our products made from Pea protein isolate or PPI supplied from lower cost providers. We were successful and now have the capability to produce many of our products from 100% low cost PPI. This good.
US flexibility as we balance the introduction of additional low cost PPI into our formulas.
Higher to consume existing wet and PPA inventory and to adhere to existing purchase commitments. We also continue to work diligently across our ingredients and packaging and have recently secured reduced prices on certain packaging components and are in the process of finalizing contracts on multiple ingredients.
Logistics cost, including those associated with internal transportation and warehousing increased 15 cents per pound in Q2, 2022% versus Q2 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.
The increase in logistics cost per pound was primarily attributable to increased transportation costs and from increased warehousing costs.
And although up year over year these costs.
Improved sequentially through efforts like better execution in our recent RFP, where we rebuild our tracking lengths.
Team remains extremely focused on working down our inventory balance and as we reduce inventory we expect to further reduce our warehousing costs.
Inventory was a significant headwind for the business in Q2 in the case of sales through the liquidation channel the entire impact shows up and decreased revenue per pound without driving a degradation in cost per pound, but in Q2. We also had an increase in inventory reserves that created an increase of approximately <unk> 14 per pound of addition.
Costs versus Q2 2021, we.
We are improving our processes to allow faster and smarter responses to changes in demand and are making an effort to reduce the overall inventory levels to curtail this risk.
Moving down the P&L to Opex operating expenses for Q2, 2022, or <unk> $83 5 million up $17 6 million from $66 million in Q2 2021.
The year over year increase was driven mainly by increases in <unk> expenses non people G&A driven by consulting fees marketing expenses and commercialization expenses related to scaling new products.
Opex as a percentage of revenue was reduced from 89, 4% in Q1 2022 to 56, 8% in Q2 2022.
In addition to a larger revenue base Q2, 2022 operating expenses at $83 $5 million were down $14 $3 million sequentially from Q1 2020 to.
The sequential decrease in Opex versus Q1 was primarily driven by reductions in marketing and commercialization expenses.
In recent quarters. The majority of our Opex has been driven by non people related expenses, approximately 61% and 55% in Q1 and Q2, respectively.
We began managing those down in Q2 and expect to drive further reductions as we go through the balance of the year. In addition to direct spend reductions. We recently began rolling out bracket pricing to incentivize customers to order in quantities that more efficiently use our trucks to minimize the outbound freight costs another component of our opex.
<unk> also been heavily scrutinizing, our people related expenses and head count and despite adding additional people in Europe and China. This year. We ended Q2 with slightly fewer non production hedged globally than we started the year.
Well continue to manage down.
Head count through natural attrition and performance management, but to further decelerate spending we announced some reductions in our workforce today, reducing it or yesterday, reducing it by approximately 40 people or approximately 4%.
The reduction is expected to reduce opex by approximately $8 million annually, although we expect to incur incremental onetime separation costs of approximately $1 million in Q3 of 2022.
Turning to our balance sheet and cash flow highlights our cash and cash equivalents balance was $454 7 million and total debt outstanding was approximately $1 1 billion.
As of July <unk> 2022.
In Q2, 2022 inventory decreased to $254 7 million down $29 $1 million from $283 8 million at the end of Q1, 2022 and up $12 8 million from 24 to.
$241 9 million at the end of Q4 2021, we expect to continue to reduce our inventory balance going forward.
In terms of cash flow for the three months ended July <unk> 2022, net cash used in operating activities was $70 5 million.
A $19 $3 million decrease compared to the $89 8 million used.
Used in the year ago period.
Note contained in our Q2 2022 operating cash flows we contributed approximately $6 7 million towards the Buildout of our new innovation and headquarters facility here in the La area, which was recorded in prepaid rent compared to approximately $26 6 million in Q2 2021.
Capital expenditures totaled $24 million in Q2, 2022, compared to $28 1 million in the year ago period.
Next I will provide some commentary about our 2020 to outlook for the fiscal year 2022, we expect net revenues to be in the range of $470 million to $520 million.
Corresponding to year over year growth of between 1% to 12% previously we had guided to $560 million to $620 million. The significant majority of the decrease was driven by three main areas.
First reductions in our outlook of Europe , and the Middle East, where according to Nielsen data plant based meat across all our brands for Burger mince meat balls and sausage in our key European markets has decelerated from growth of approximately 7% in 2021 to shrinking approximately 14% year over year in the first.
Half of 2022.
Although we continue to gain share the sustained headwind of the contracting segment is bigger than was anticipated.
Also we successfully launched extended shelf life for our burgers in March but have been delayed in getting extended shelf life versions of other products out to the markets that we continue to target doing so in the near future.
Second reductions in U S retail as a reminder, the majority of our U S retail business is for our refrigerated product versus frozen.
According to spins data refrigerated plant based meat has accelerated its rate of contraction from negative three 6% in the 12 week period ended March 20th 2022 to negative 12, 5% in the 12 weeks ended July 10th this broad pressure in our primary sub category has more than offset.
That any benefits gained from recent expansion of distribution.
And finally reductions in the forecast for beyond meat jerky as a reminder, we recognize revenue and Cogs in our P&L as we sell into the planet partnership and then further recognize our share of the netcom or loss of the planet partnership in the equity and losses of unconsolidated joint venture line of the P&L.
Although beyond meat jerky is approximately quadrupled the size of the plant based meat snacks sub segment, we had very high expectations for this product and velocities are now trending below initial forecast due to the length of the supply chain. This forecast decrease will have a disproportionate impact on new production and revenue recognized at beyond meat and the second half of 2012.
Two.
For gross margins in Q3 2022, while we do not expect similar liquidation inventory headwinds to Q2, the decreased revenue forecast puts additional pressure on gross margin versus earlier forecast by negatively impacting capacity utilization, which could also give rise to termination fees to exit certain supply chain arrangements.
Driving less leverage on fixed costs and delays the speed at which cost savings initiatives make their way into the P&L. We expect these challenges to result in an anticipated gross margin in the low to mid single digits for Q3 2022, increasing in Q4, 2022, but still well below historical norms.
For fiscal year 2022, our current expectation is to incur capex of roughly $80 million down from $136 million in 2021, Although we will continue to look for opportunities to reduce this further by deferring additional spend we expect additional cash contributions for the build out of our innovation center in.
This facility will be $12 million in the second half of 2022 with the expected $15 million remaining to the completion now deferred into 2023.
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.
Quick question you May Press Star then one on the attached on follow.
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This time, well pause momentarily to assemble our host.
And our first question comes from Alexia <unk> from Bernstein.
I think we everyone.
How are you.
Thank you Sir.
Hi, Brian .
Okay.
Yes.
Sort of looking at the guide down.
For the second half and that does imply a slowdown I think some.
We score.
Okay.
And what do you think you can take to reinvigorate the great, particularly in the U S and in Europe .
I mean is this something that is obviously going to be a work in progress at some time, but while keeping the key factors there and how long it can take.
Do you actually see some sort of turnaround.
Sure. Thank you again for the question and.
So I think to start.
A key data point.
Data points are the following that if you.
Look at the price of our ground beef today on a retail averaged 12 weeks using spins data.
We're selling at $8 35, a pound.
If you look at the USDA ground beef data.
For the month of June .
The price per pound was $4 90.
So you have $8 35 per pound price versus at $4 90 per pound price.
I can talk a lot about all the different influences and things that are going on in the economy.
That is a very difficult proposition when consumers have.
Very high levels of.
Inflation going on in their buying power in grocery is.
Declining.
So I think.
There are a number of confounding factors, we went from a pandemic into.
Record inflation highest in 40 years.
And before a sector that is still gathering it's feeds and is still in sort of the first set of downs.
It's a very difficult set of conditions to navigate now the good news is our strategy has always been about three things.
Then.
First and foremost about getting the taste right. So that we are indistinguishable from animal protein.
The second has been about making sure that consumers understand that our products have health benefits relative to animal protein.
And the third and most relevant here is price. So we've always known that we need to drive our cost structure down and offer the consumer.
Price point that is the same as animal protein so the pullback you're seeing against our sector.
It's very consistent with that belief and so and it kind of unfortunate way.
It is reinforcing our strategy and it's propelling us and challenging us to try to wring costs out of our system as quickly as we can.
And while there's a lot of things that are obscuring our cost down initiatives.
We are seeing progress, particularly on a sequential basis on manufacturing costs and logistics costs and things of that nature, what we need to be able to bring it into the market is a resumption of volume growth. So that we can spread out those costs.
Among more more production.
So what's.
Whats needed to reinvigorate the category one is to get out of this economic situation, where consumers are trading down on proteins.
Very well understood that for example, spam rises during periods of recession spam is having its.
It's a record year I think the seventh year in a row.
They continue to grow and you see that be accentuated in particularly difficult economic times.
You see consumers trading down to lower cuts of meat.
So we have to get through this period to see a resumption of growth and I think it's pretty simple.
<unk>.
And we're focusing on that.
Our next question comes from Peter Galbo Bank of America.
Hey, guys. Good afternoon. Thank you for taking the questions.
Sure.
Phil Thank you for the comments on the gross margin cadence I think thats helpful. Just in terms of setting expectations for the rest of the year I was wondering if you'd be able to kind of do the same with just the revenue phasing in the back half if theres any sort of split you're imagining whether that's at the midpoint of the range or just anything else to help us there.
At this point, we're just providing full year revenue guidance and so you obviously know what the first two quarters are so we're not providing additional detail.
Fair enough I would try.
And then on the.
The cash burn guidance I guess, you did see pretty significant improvement at least quarter on quarter and even year over year.
Yeah.
As you continue to kind of liquidate some of the inventory in the back half of the year should we see that number continue to sequentially improve I know youre talking about.
Some of your Opex spend being down further sequentially, just just anything to help us on the cash burn going forward. Thanks very much.
Yes, we're very focused on the rate of cash expenditure.
Inventory is a key one for sure I think.
Hopefully, we will be able to.
Not necessarily liquidate but sell.
<unk> inventory and use existing ingredients and the teams are working really hard to make sure we're being very smart in our supply chain and managing our inventory really well. So yes, we anticipate towards the rest of the year that we should be able to continue to drive down the inventory balance.
Similarly, we're working to also drive down Opex, we had a pretty big step down sequentially.
And we're particularly we announced.
Some layoffs recently I think theres a lot more we can do in the non people.
Opex as well and so that's a big focus area for us, but the intent is that we continue to reduce the rate of cash consumption as we go through the year.
Okay. Thanks very much.
Our next question comes from Adam <unk> from <unk>.
Aardman sacks.
Yes, Thank you and good afternoon, everyone.
So.
I guess Ethan I wanted to come back to your point you made about the price competitiveness of your product versus versus ground beef and you gave that roughly.
Three and a half or so dollar kind of price gap.
On the shelf at retail and I guess I'm kind of thinking about that in the context of your gross margin. So.
Just help us think about the pathway not only for you to lower the price gap versus ground beef to improve kind of the consumer appeal.
The tough consumer times or not but to do so profitably and help us think about some of the levers on the cog side that you have and you've got line of sight to that.
Give you.
That magnitude of not only get the gross margins up from where they are now, but the unit cost down even more to enable the price reductions.
Sure. So I'll answer that and then I also wanted to maybe a bit of a more complete answer to this question.
So yes.
I think you can see the sequential decline in manufacturing costs, you see similar sequential decline in transportation and warehousing.
And particularly on the transportation warehousing I think this is being driven by better execution. We just did a recent RFP on our trucking lanes and we're taking other measures to really start to bring down.
Overall manufacturing cost structure.
And in part.
We're also looking now at a design to value strategy, where we have such expertise.
In our understanding of ingredients and processes throughout the world of plant based meat and we're looking at how do we strip cost out from a design perspective out of our products and potentially offer portfolio strategy into the market. So that we can get more broadly and more quickly to a profitable lower price point.
So the idea is not to.
To Orient the business toward.
Lower pricing without improvement on on margin or cost structure, but rather is to allow the cost structure improvements that we're seeing to help drive that lower pricing we.
We do need the volume to pick back up and we have some strategies there that we're going to try to deploy even during this difficult economic time.
But it does get down to just continued blocking and tackling quarter after quarter, bringing these costs down and we're starting to see some good results again little obscured by things like depreciation in this lower volume we have but.
It is an effort to make sure that we're doing that.
In tandem driving the cost structure down as we bring our pricing but to get back to the original question about reinvigorating.
So the thesis remains the same the need for the sector remains the same and in fact is increasing in importance year. After year. We've made a very significant amount of investment over the last three years.
In commercializing and scaling.
<unk> for large <unk> and for our partnership with Pepsi The planet partnership as well as new retail products or shifts now is really toward a model, where we can introduce and support those.
The sustainable growth level.
And so we're focusing on harvesting the investments we've made over the last several years. So what that doesn't mean that we're pulling back from launches or test with <unk>, you'll see a lot of activity from us in the next 12 months with our <unk> Youll see not only here in the U S but globally.
And thats really bringing to market the work that we have already done.
So we're looking forward to that you'll also see us.
Really focus on strengthening our retail presence.
I believe so strongly in the benefits of these relationships with <unk> to be able to create.
An environment, where the mainstream consumer.
Ken.
Can experience our brand that we've invested a lot over the last several years in that.
I think one of the.
Side effects of that is our retail presence has probably been less powerful than it could be and so we're making some investments in the retail space to better build out our brand block. If you think about what happened to the category over the last three years in retail. So we started with the fresh category beyond meat really pioneered.
That we have these products.
Berger sources et cetera, and then a number of brands came in and it got kind of disorganized and disjointed as a category, particularly in the breast space.
And so what we need to do is allow the process to occur which does.
Lot of evolving industries there'll be some brands that fall away there'll be consolidation.
And things of that nature, but let's get back to a really clearly identifiable brand block in retail.
Let's make sure that happens in refrigerated, let's make sure that happens in frozen so to beyond brand offers consumers a lot of choice across both categories. So the new products that we're bringing into the market, particularly later this fall we'll start to do that and the products. We're beginning next year in 'twenty three will start to do that so reinvesting in the retail space to strengthen our.
Our retail.
Lines is something that we're really going to focus on as part of the effort to bring growth levels back to where they were but again I don't want to dismiss the larger macroeconomic environment, we've got to get out of this particular.
Phase with the consumer where there's so much pressure on their wallets.
And get to a more normalized more normal economy.
And if I could ask a quick follow up if I looked at the Cogs spend.
Do you want to do this year or last 12 months, how how much would you characterize as fixed that would have the more obvious leverage.
If you got the volume throughput higher.
But I think even among the variable cost one of the areas. The teams have done great work on in the cost downstream is running the machinery faster.
But you've got to have the orders to take full advantage of that even from a variable cost perspective. So obviously you can you can use the asset more fully if you run it harder, but it's also easier to produce with your variable costs, if you're if you're running full speed.
And so obviously there are obvious things like depreciation that are fixed but volume drives fuller trucks, it drives better utilization and the co manufacturer network and so it really.
Is a significant benefit to both the fixed and the variable cost. Okay. I appreciate that color I'll pass it on thanks.
Sure.
Our next question comes from Matt Taylor with Barclays.
Oh, Yeah, Hey, good afternoon.
One quick one because I think we need to ask it so you've talked about some of the rollouts with mcdonalds and some of the.
The termination of dose.
Can you share an update on some of the initiatives or some of the potential plant things, particularly in the U S. Like second waves I mean, we've seen it in other markets. So it feels like normal, but if you if you could add some additional color on that Ethan there would be great. Thank you very much.
Sure as much as I'd love to I can't we.
Our supplier and really want to be respectful of Mcdonald's and how they want to analysts I think you've heard us both the silent on the recent speculation and that's all I need to say.
Okay I had to try it so with that in mind.
So if we if we look into the Capex and things you're delaying.
And basically reducing in this year and then pushing into next year. What are the things where you think you can actually safe on the Capex side in order to improve that free cash flow profile and where do you think this is a must invest on the capex side innovation product development et cetera, and capabilities. There I guess is <unk>.
Of that but if you could give us a little bit of a sense of what you're postponing what what's behind that so that we understand what the potential implications of that capex delays. Thank you.
Sure. This is Phil so.
First I think a lot of the build out has been to build capacity both for kind of existing products as well as new products.
And.
We really we have a lot of capacity now and so, especially as the forecast falls and.
And as we can sort of better run our existing equipment.
It doesn't necessarily necessitate as.
As much investment as you've seen from us in the past because we've invested quite a bit in capex previously so.
We don't see it as a major hindrance I think the teams have been very diligent in going through and are being appropriately frugal to make sure that we're managing the cash carefully.
But we don't see it as a major hindrance for the business at all at this point given the amount of installed capacity we've already got.
Okay. Thank you Phil.
Our next question comes from third parties.
Hey, Mark.
Good afternoon, and thanks for taking my question. So I just wanted to touch on some of the pricing efforts that you guys discussed in your press release and I think what we saw in the U S retail market. So firstly you talked about list price increases just curious if that was originally contemplated within your guidance and you expect to make further adjustments in that market and then the U S market. We did we did observe price reduction dot com.
<unk> just wanted to get a sense of if youre starting to do price reductions as well in the U S retail market.
Yes, so I'll take that on the.
<unk> side of things, we actually so we saw a nice volume increase year over year, but that was more than offset by an actual reduction in pricing, which caused revenue down 22%.
So we've actually tried to calibrate better our pricing too to what we're seeing from <unk>.
<unk> and <unk> in the EU.
In the U S. We have run deals and promotions across we.
We did across the second quarter.
And again I think thats in keeping it as a very.
Unusual phenomenon going alright, everyone else is taking price, but our category continues to do a lot of discounting and things of that nature. So again.
Puts.
Emphasis on the importance of continuing to get the sequential.
Gains in cost reduction, but in Europe , we actually ended up reducing that ratio.
Okay, great. Thank you.
Our next question comes from Robert Moskow with Credit Suisse.
Hi, Ethan.
Hi.
Given the changing your outlook for sales and your commentary that.
You need volume to go up a lot higher and there really arent any catalyst to get it higher in order for the model to work.
Why not reduce the workforce further 4% doesn't seem like.
A very big number.
And I guess the reason I ask it is you say you've scaled up to support large <unk> for big chunky launches, but it doesn't look like those are on the horizon.
So if they aren't on the horizon would that would that does that mean, you would know necessitate bigger cuts to come.
Right.
So I think we have taken some pretty significant reductions in overall opex I think.
The sequential decline was something like 14% or 15%.
Quarter over quarter, and we're going to continue to drive that.
The extent we do.
I don't want to continue to cut into our people costs and we have an incredibly talented team we have.
Obviously.
Tremendous amount about each and every employee here.
But the more important thing is that I.
I would probably dispute.
Yeah, there's no catalyst.
For resumption of volume there.
Our catalyst and we just can't predict the macroeconomic environment.
But I think to keep an eye out for activities across the globe from us and from our strategic partners.
It may make more sense.
But again the big thing is lets get through let's show some patience around this.
Through a difficult economic environment.
And then let's let's get back to some more normal conditions and growth in.
In retail.
In our foodservice business, but I wouldn't say that these <unk> relations are coming to fruition I think.
I think that will be.
So I think it'll become clear in the next 612 months.
Okay. Thank you.
Yeah.
Our next question comes from Ken Goldman with JP Morgan.
Hi, Thank you, while we're on the subject of <unk>.
<unk> and partnerships, we have seen with other companies trials with a particular <unk> come to an end as expected.
And sometimes those turn into expanded partnership several months later so I.
I wanted to understand a little bit better about how the trial.
You mentioned mcdonalds, so I guess, it's okay for me to kind of mentioned the specific customer how did that go relative to your expectations what were the learnings maybe.
Especially could you kind of compare maybe contrast, why the UK Ireland market was one that was ready for expansion when it seems maybe in the U S was not I'm just curious for some color there. Thank you.
So I don't again.
I just can't comment on the Mcdonald's stuff in that to that level of detail but.
I also.
Wouldn't necessarily argue to the U S market is not not ready I think there's a real desire among watching our company too.
To have a binary outcome at.
At a very early stage in the development of this sector of our business.
Tests are done for all kinds of reasons Theyre done determined pricing they've done to determine.
Build that are done to check out incrementally.
And they get the results.
They make assessments.
So I think theres a lot of noise in the system and the media right now about what's actually going on.
To speak more generally about.
Europe I think Europe is pretty advanced in terms of the plant based.
Market I think that the governments are more proactive in terms of.
Encouraging this shift.
The thing about this is.
It's going to happen the reasons.
This is so important only increase on a daily basis I don't know if you saw the economist, becoming COO catastrophe and things of that nature that we have an issue we have to solve it.
One of the major solutions to help solve it.
And so efforts to try to call the outcome of this game during a recessionary period during a pandemic in my mind are kind of Folly, I think we need to focus on continuing to execute our strategy our strategy to drive toward taste to drive toward health and communicate that and ultimately drive towards pricing.
The day that we get the products to be indistinguishable mantle protein get the consumer to understand that these have health benefits above that youll get from animal protein and they can buy it at the same price we will have a very very promising part of the market.
It's going to be distorted while things are going on in the economy that we can't control what we can control is how.
Secondly, we drive towards US we have an amazing team we've brought people over from industry that are.
Very expert at running lines at low cost.
For example, Doug and Bernie from Tyson.
And many others within our company.
So what I do is stay focused on the things we can control.
Stay focused on serving our customers who were lucky to have we have some of the best customers in the world.
Donald.
<unk> brands and Pepsi.
So many others.
And kind of.
<unk> and.
Over time, you will see I think tremendous growth in this sector at the same thing happened electric vehicles.
Joy, sometimes reading the 2019 commentary on Tesla.
And just the abuse of desktop.
I think it's premature to make that kind of calls that people are making in.
The kind of spurred us on actually.
Thanks, Ken.
Okay.
Yes.
Our next question comes from Peter Kelly BTG.
Great. Thanks.
I just wanted to come back to the conversation around jerky for a second I think you guys said the velocity trends are a little bit below forecast could you guys give us a little bit more color on what youre seeing there.
A couple of quarters into this but.
Just a little bit more color on where it's selling well, where it's not performing as well and maybe any changes you are perhaps you might be making to accelerate the sales there. Thank you.
Yes, I think the one thing I can comment on on that is.
First of all it was an enormous launch right.
Can't remember the exact number about 80000 plus locations.
And.
I think they did an excellent job at that.
What is happening is that they have a more significant percentage of their budget, they're going to be spending. This is I'm talking about the planet partnership spending on shopper marketing activities going forward than they have thus far because they are waiting for sort of full distribution. So we just have to watch and see but it's a new space for us.
Partnership for us as a new product for us.
So the build may happen slowly more slowly than we thought but it's a great product.
Great to see it out there in the marketplace and people like it.
I think I would add to that.
Beyond meat jerky makes up the significant majority of the plant based meat snack sub segments. So obviously, it's very very big in the category.
Great and then it was nice to see that the opex kind of moderated pretty meaningfully I guess sequentially.
Can you just talk about any other reductions you guys are expecting or how we should be modeling that in the back end of the year.
Yes, so we are expecting to further reduce opex as.
As we go from Q2 to Q3 I think there are some moving pieces that make it difficult to predict exactly what are these costs like the.
Outbound customer freight.
Some of the marketing, obviously, if we find lower funnel marketing with a very high.
Return on AD sales that were confident as incremental we'll choose to invest there, especially given some of the commentary around volume but.
We're targeting something in the mid to lower <unk>.
As sort of the Q3 number and again that can change as we get into the quarter, a little more but thats. The current kind of model built.
Okay.
Thank you very much.
Okay.
Our next question comes from Cody Ross with UBS.
Hey, good afternoon, everyone. Thank you for taking our questions.
I just wanted to touch a little bit on the sales that you've had through the liquidation channel this quarter and we appreciate the guidance or commentary you gave there.
How do you feel about your inventory position today and how much more sales do you have if at all to go through this channel in the back half.
Sure. So we're putting a lot of work around our process to make sure we're identifying inventory.
As it ages and this was a very unusual sale for us based on kind of where we are now we're not anticipating this kind of volume.
Next quarter.
We feel like we've reserved appropriately. So obviously, we'll have to continue to watch.
What our outlook does as well as kind of how we are managing inventory as it goes through our system, but.
We're not anticipating this size of an impact going forward, but I would look for us around the edges to continue as things become at risk, we would far prefer to realize some value rather than destroying the product.
So just to clarify you will have some product go through that channel and just not the same magnitude in the back that that's our expectation.
Got it but nothing nothing anywhere near as large likely as what we saw here.
Got it and then I just want to turn quickly here to your cash burn situation you significantly improved this quarter burning roughly $90 million of cash you have about $450 million on the balance sheet. It's probably the biggest question we get from investors I know you will be more tightly managing expenses going forward, but with the reduced sales out.
Look it's hard to see how you won't need to access the capital markets. In the next few years is that your assumption or do you see a pathway to an inflection in profits and cash flow on the horizon.
So I'll take it in a general sense, and then turn it to bill.
I think that the change in tone that I hope people are picking up on for me is that although our strategy remains the same.
We really are moving into a phase right now given broader economic conditions.
<unk> existing investments.
Reorienting toward a more sustainable growth model for the time being we're executing these plans to Srs and foodservice launches focusing on lifting our retail sector back up again that our retail brand rather than we're doubling down on cost and price and all of those things, we're doing with an eye toward reducing the consumption of cash.
Driving the business toward a more sustainable position.
So I don't think were going to offer.
The direct answer on future cash rates, but we are working extremely hard on bringing the business into a more sustainable position I don't know nothing further.
Got it thank you I'll pass it along.
Yes.
Our next question comes from Michael Lavery Piper Sandler.
Okay.
Thank you and good afternoon.
Okay.
You touched on some of the things that influenced your change in thinking on the guidance.
Just the jerky velocities.
A couple of those.
Specific things was there any change in your foodservice expectations that was the driver of that as well.
Well, we update the forecast really are kind of bottoms up level and so obviously there is always movement, but it was definitely not one of the top three that we called out as a key driver.
And we explained the significant majority of the.
The reduction in the outlook.
Okay. That's helpful and just on the gross margins you gave some nice.
Color on how that should progress, but the jerky piece, specifically that you've called out the last two quarters.
What's the sort of end game, there is that going to.
The.
The headwind that you just sort of live with or is there room to really.
Group, how that impacts the gross margin overall as well.
Yes, so I think the.
It's going to come back to the same answer I gave before around once volumes start to materialize. There youll start to see some of the reductions that we've put in place.
But until that point you won't.
And so.
We have integrated that production process more fully.
So.
Going forward it is much more efficient, but we saw some inventory to sell through in some volume that we need to see materialize.
To show that but no it won't be once we're back into kind of a full swing.
Volume.
It will not continue to be looking ahead.
Alright.
Yes.
Can you say how much your sales to the planet partnership how much sales came from Turkey This quarter.
Yes in <unk>.
Q2.
Our jerky volume.
Was about $15.9 million.
Okay, great. Thanks, so much.
Yes.
Sure.
Yes.
Thanks concludes our question and answer session I would like to turn the conference back over to Ethan Brown for any closing remarks.
Hey.
Thank you.
Thanks for the very good questions.
Well I think the.
General feeling we have here has been echoed by other companies.
This is a difficult economic period.
And that's kind of it it does not color are tremendous enthusiasm for the long term opportunity I think it does force us to.
Bring in.
Greater focus the need for a more sustainable position.
But our strategy serving these terrific kyocera our partners we have re.
Reinvigorating our retail brand.
Doubling down on cost and price.
Including through.
Designing new products to value.
All of these things are ways that we're reacting to these conditions and strengthening our business. So we look at this as an opportunity to get stronger to come out a little leaner.
And resume the growth that we expect and look forward to showing.
Thanks, everybody.
The conference has now concluded.
Thank you for attending today's presentation you may now disconnect.
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