Q3 2022 Beyond Meat Inc Earnings Call
Good day and welcome to the beyond Meat, Inc, 2022 third quarter conference call.
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At this time I'd like to turn the conference over to Terry Waterman, Chief Legal Officer and Secretary. 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 Lindsey Cotulla, Chief Financial Officer and Treasurer.
By now everyone should have access to the company's third quarter earnings press release.
Today after the market closed this document is available in the Investor Relations section of beyond meat website at Www dot.
Dot com.
Before we begin please note that all of 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 as actual events unfold.
I refer you to today's press release, the company's annual report on Form 10-K for the.
The fiscal year ended December 31, 2021, the company's quarterly report on Form 10-Q for the quarter ended October one 2022 to be filed with the SEC and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ.
Curiously from those expressed or implied in any forward looking statements made today.
Please 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 that.
Financial information presented in accordance with GAAP. Please.
Please refer to today's press release for a reconciliation of adjusted EBITDA.
Its comparable GAAP measure.
And with that I would now like to turn the call over to Ethan Brown.
Thank you Terry and good afternoon, everyone.
Last month, we signaled that the business continues to navigate a challenging period, where broader economic conditions, particularly inflation.
We're stripping headwinds and increased competition.
Over the past 12 months combined to disrupt what it's been over a decade of growth.
This disruption has been in contrast to the year, we get plant, where you expected resumption of our strong growth trajectory.
I proceeded in the majority of our markets and.
In my remarks today I will briefly unpack what we believe are the key drivers of this disruption in our growth. The elements that we believe are transitory and those that may be more persistent I will then walk through the full force transition underway toward accelerated cash flow positive operations and route to sustainable growth model.
But before doing so I'd like to take a moment to offer a broader perspective.
As is the case with many emerging industries to challenge the status quo.
Perhaps the mainstream adoption Israeli straight and smooth.
Turbulence, along the way generally does not signal a diminished long term total addressable market or Tam.
The history of innovation is replete with examples of this phenomenon capture.
Captured across a host of disruptive technologies.
We are in one such moments of the brand category.
Operating with urgency and decisive action to navigate it.
We do so with an unwavering focus on our one four trillion Tam.
The global meat market.
Continued execution of our long held goal of achieving taste and price parity with animal protein.
As we seek to pivot the business to cash flow positive operations and quick in our path to profitability.
We are committed to transparency and accountability.
To this end in my remarks, I will center on a clear and highly focused set of actions that we're taking which are intended to fortify the foundation of our business.
And drive long term value for shareholders.
For the next several quarters I will return to these actions to track progress and.
As we advanced provide a more fulsome look at the underlying financial metrics, we are using beyond free cash flow.
To form the backbone of a durable financial algorithm and total shareholder return equation.
With that I will now turn to a brief overview of current market dynamics.
Current economic climate has not been times to plant based meat.
The most quantifiable trends, which we believe is transitory as well.
Well established history of consumers trading down among proteins during difficult economic times.
This appears to be in full swing today.
With persistent at 40 year record inflation in grocery stores shoppers are seeking to dial out inflation by among other measures switching out higher cost proteins for lower cost proteins.
Goodbye declines spam rises and so on.
While these items are on either end of the continuum.
You must have a trading down throughout generally from higher cost beef and pork items to lower cost chicken.
In this environment the category beyond meat should be expected to see declines as consumers flock to cheaper proteins correspondingly household penetration for the plant based meat category. According to the numerator data slipped for a second consecutive quarter falling roughly 20 basis points versus the second quarter of 2022.
Recall that Q2 saw the first sequential decline in household penetration for the category since at least Q1 of 2018, which is as far back as the data set goes.
Signing trended household penetration holds true for us and most of our peers as well and we have seen some brands significantly retrench or exited the category altogether in the U S.
Despite the category slowdown there has been a tremendous increase in the number of competitive entrants and activities as.
As we have maintained we believe that healthy competition within plant based meat is a good thing as it brings investments in marketing to the category. However.
However in the current environment, we are not seeing the benefit of competition instead more companies are pursuing the same or fewer consumers.
So we remain the category leader in refrigerated plant based meat the volume competition has eroded some of our share.
As noted a moment ago shakeout does appear to be underway and we expect more brands to either retreat or consolidate a less cluttered playing field to emerge in the midterm.
A less tangible though important dynamic is also present within the category today as consumers intensified focus on making ends meet health and environmental considerations taken back seat.
This phenomenon makes it more difficult to broadly convey our core value proposition to the consumer.
A topic I will return to later.
To summarize the current situation.
We face an economy, where blistering inflation pressure is shifting consumer behavior in the grocery store.
Category, where competition has dramatically increased despite abroad and precipitous category slowdown.
In our consumer base, whose focus understandably turned to fulfilling immediate basic needs pursuing the broader benefits represent our core value proposition.
These trends have precipitated a substantial drop in revenues for our business the impact of which is a series of knock on effects across our income statement.
They include a sizable reversal and expected improvements in gross margin as we contend with lower overhead absorption.
Greater variability of our inventory reserves and excess capacity and related underutilization and termination fees within our manufacturing network.
Path forward in this environment is clear and at its foundation as a pivot from the growth above all operating model that has characterized our business to date.
The one that prioritizes positive cash flow and sustainable growth.
This strategic shift is designed to stabilize the business.
Nurture our most important growth pass and position us to drive and capitalize on renewed category growth.
Economy emerges from its current state we will use the following three tenants to underpin our path to cash flow positive operations and sustainable growth.
I will return to these in subsequent quarters to track progress.
One we.
We are significantly reducing operating expenses, while focusing on a more narrow set of strategic partner retail and foodservice opportunities and utilizing lean value streams across our beef pork and poultry platforms.
For the time being we will be emphasizing cash flow accretive management of our inventory with a focus on profit dollars versus maximizing percent margin.
Currently we are further rationalizing our production network and the context of more moderate volume assumptions to improve overhead absorption address underutilization fees and support margin improvement.
Three we are applying a laser focus to our sales and marketing activities emphasizing those opportunities that we believe strike the right balance between restoring near term growth and nurturing our most valuable long term opportunities.
So all my comments today tend to focus on our U S business and global partnership activities. We are applying similar measures across our EU and China operations.
I will now address each of the three pillars of our go forward strategy in greater detail.
One operating expenses.
We continue to bring our total operating expenses down and expect to drive further progress.
Compared to Q1 of this year, we reduced total operating expenses by 23%.
From $97 8 million to $74 9 million in Q3, and we expect Opex to fall even further in Q4 and thereafter.
To date, we have instituted two separate reduction in force actions one in August and one in October .
Italy, and approximately 240 positions.
Together these actions represent more than 20% of our global workforce.
Our most recent reduction in force, we're expecting operating expense savings of approximately $39 million over the next 12 months, excluding one time separation costs of approximately $4 million.
Although letting go of these dedicated passionate and talented team members was painful.
These actions were necessary to rightsize our organization. So that we are aligned with current business conditions.
Moving forward support the execution of a more narrow set of key priorities, while delivering further opex reductions.
We are implementing lean value streams across the organization.
Alright, three product platforms of beef.
Poultry and pork.
I have along with the team strong enthusiasm around this implementation.
As lean value stream management reports, well with and extends throughout the organization.
Several of the principles of our beyond meat rapid and relentless innovation program.
To aggressively managing down inventory and rationalizing.
Our production network, we are focused on maximizing cash flow generation and profit dollars when it comes to inventory management over a percent margin.
Specifically in the context of a more limited number of segments. We are testing a pricing reduction more quickly collapses the pricing delta between one of our core products and its animal protein equivalent.
We are implementing these programs in a highly targeted manner. We believe doing so will welcome new points of distribution and new consumers to our brand while increasing volumes throughout our facilities and network. We expect these activities to accelerate our drawdown of inventory, which we were already reduced by nearly $37 million since the end of Q1.
And free up cash.
In addition, we are taking immediate steps to rationalize our production network to address what we expect maybe.
<unk> lower than previously planned growth.
These activities include the further consolidation of production activities within our co packing network.
The full utilization of our own facilities by bringing in certain outsourced activities.
And in certain instances redistributing production across our network to address volume commitments.
These measures are critical to improving overhead absorption and minimizing unproductive idle fees.
Restoring growth in retail and foodservice through a series of targeted innovation sales and marketing execution.
In the midst of all the noise in the broader economy and specific challenges facing our segment and brand.
It is important not to forget something.
We remain an innovation engine working on one of the most powerful solutions some of the most serious challenges facing our country in the world.
As you will recall this year, we were recognized by American consumers as the most innovative company in food.
And the same survey recognized Apple Tesla and Amazon as the world's most innovative companies across technology transportation and consumer goods as such even as we continue to reduce our operating expenses and implement lean value streams.
<unk> cash flow from inventory.
And right size, our production network, we will do what we do best.
Innovate as.
As we challenge and push our way into a long term one four trillion Tam specifically in retail we plan to restore growth to our core product offerings burgers beef and dinner sausage in the refrigerated set through exciting product renovation and to leverage and support these renovations by pursuing distribution.
Certain aforementioned strategic pricing activities and targeted marketing.
These products, which generally carry the highest margins across our product portfolio.
Count for roughly three quarters of our total gross revenues and the majority of our retail gross revenues.
Previously to use our fourth iteration of our beyond Burger So I'll speak more openly about that particular item now.
Now we will not give a release date for our retail channel I will say that I am thrilled with the improvements the team has made on the broader beyond Burger platform.
Throughout its development I've watched key customers and stakeholders come through innovation Center try version of this fourth generation products and quickly share my belief that it is a meaningful advance toward our northstar being indistinguishable from its animal protein equivalent.
So we have long emphasized the refrigerated meat case next to animal meats I just wanted to long term engines of significant growth we.
We do not discount the importance of the frozen aisle and grocery.
As such we are bringing an increased amount of innovation to the frozen category.
We are continuing to prioritize expanding distribution for our chicken tenders, which as you may recall on the 2022 people magazine Food Award.
Adding a host of new easy to use delicious offerings for busy families and consumers.
These include the recently announced beyond stake, which truly delivers the juicy tender and delicious bite of seared steak chips with the added nutritional and environmental benefits of plant based meat.
Brand, new product, which like our chicken was also the recipient of a well recognized award which will be announced soon.
Now available at more than 5000, Kroger in Walmart stores nationwide.
As well as select Albertsons and a whole divisions.
With further distribution gains expected in the near future.
Reinforcing our health value proposition.
Beyond stake is low in saturated fat.
With zero milligrams of cholesterol and has no antibiotics or hormones.
And as just announced we followed up on the introduction of beyond stake with the launches of beyond chicken Nuggets and beyond popcorn chicken, which are rolling out at over 5000 stores and national retailers like Walmart and Kroger as well as select regional retailers like hold and Albertsons.
It is expected to expand into more outlets in the near future.
With tenders these chicken products deliver tangible health benefits to the consumer, including having 50% less saturated fat and the leading brand of traditional breaded chicken Nuggets.
Euro milligrams of cholesterol and no antibiotics or hormones.
Frozen plant based chicken is the largest single subcategory and all of the plant based meats and continues to grow at a double digit pace. So we are pleased to be expanding our presence with additional chicken items.
Turning now to foodservice in the last year alone beyond meat has executed an impressive number of launches and tests across the globe with our strategic partners.
Specifically in the last 12 months, we've had 25 trials for permanent menu launches with nine distinct products across our beef pork and poultry platforms in 18 countries.
So these activities do not result in immediate sustained revenues.
It represent very important seeds, we're planting for future growth.
For example across the Mcdonald's network, we have been busy launching the MC plant in Australia. The U S U K, Ireland, Germany, Portugal, Taiwan, Austria, and the Netherlands and as of today.
We are pleased to share that <unk> plant has already become a permanent menu item in the U K, Ireland, Austria and the Netherlands.
Moving on to <unk>.
As you know we tested beyond Kentucky fried chicken here in the U S. Early this year and we've launched beyond meat toppings with pizza hut locations across Singapore, Germany, Kuwait, and the UAE, Canada, Guatemala and El Salvador.
Canada, Guatemala, El Salvador, and Singapore already converting to permanent beyond meat menu items.
Most recently regarding yes, we are excited to be testing beyond currently asada Taco bell locations and around Dayton, Ohio.
On your SATA products represents the toil and ingenuity of many special and talented people across the young and beyond meat partnership.
It was not easy to bring to life and getting it right with a walk through the halls of real innovation ideas.
<unk> research and development failure iteration breakthrough.
And back again countless times and then resounding success.
It is something new to the world delivering the taste mouthfeel and Satiating experience of its animal protein equivalent.
And importantly, it is being offered at the same price as its animal protein equivalent.
If you are in or near Dayton. It is well worth the trip to Taco Bell to taste the future.
As I round out some of the latest strategic launches I'd like to turn to Panda Express and.
In early September Panda Express brought back beyond the original Orange chicken over 'twenty 300 U S locations for a limited time offering following successful regional launch last year.
As with MC plant to Mcdonalds and.
Beyond carnitas side at Taco Bell.
Courage, you to stop by a Panda express and enjoy the absolutely delicious beyond the original Orange chicken pace.
Tasting is believing.
The final piece in this third pillar of our strategy is a more aggressive and more narrowly tailored application of our taste health and planet message.
Focusing on those consumers, who are most able to hear us during these difficult economic times.
But I think about the first order of business and our long term vision building meat from plants that is indistinguishable from its animal protein equivalent.
Confident that we are advancing here by year.
And when I think about the next critical step in our long term strategy driving down the cost of goods of our products. So that we sell at or below price parity with animal protein in at least one category.
I am equally confidence we are advancing the goal that I set three five years ago.
Where we need to do better and we will do better.
<unk> with the right consumer at the right time around the very real broader benefits of going beyond.
So that we can make the leap from early adopters to the early majority.
I believe this to be the case with both our health and planet messaging as a brand and as a sector.
With health, we've allowed special interest groups to have a field day seeding doubt, but the health profile of what they call fake meat.
I'd like to spend a moment on this point.
We care about our ingredients and are proud of our process because we care about health at the very foundation of our brand.
A return to for example, recent research conducted at the Stanford School of Medicine.
As part of our five year plant based diet initiative with the University.
And the first clinical trial published in the American Journal of clinical Nutrition in August 2020.
Researchers reported declines in LDL or bad cholesterol and TMA L on participants switched from animal protein.
Plant based beyond meat over successive eight week periods.
<unk> is a compound that forms in the gut and has been correlated with heart disease and certain cancers.
As we move forward, we will be announcing a major partnership with the National Health organization and taking other steps to highlight to consumers the tangible health benefits of beyond meat.
Two we need to do better job, helping the consumer better understand the connection between our products and climate again, focusing on the right consumer at the right time, when we have the greatest chance of being hurt.
The climate impact of our food production system exceeds that of our transportation system globally.
Correspondingly plant based meat is one of the most immediate and powerful tools available to the public for addressing climate change.
Here again, I returned to research, which I shared earlier conducted at the University of Michigan in 2018, where the team performed a lifecycle analysis of the original beyond Burger versus a quarter pound usb's Burger and found that producing the beyond Burger not only generated 90% fewer.
Greenhouse gas emissions, but also used 99% less water, while recurring 93% less land as I have long maintained marketing is a lot easier when it's true.
And in our case as these and other data points suggest we have a very real and compelling story to tell consumers on health and planet.
What you would expect from US going forward is more pronounced narrowly targeted messaging around taste health and planet directed towards those consumer segments, most likely to listen to our voice.
In closing.
Last month.
On this call I signaled change in our growth strategy named.
Namely after a long period of investment I have set a clear target for our company to achieve cash flow positive operations within the second half of 2023.
My decision to accelerate positive cash flow operations and ultimately profitability.
Simultaneously, our recognition of today's challenging economy and tomorrow's opportunity.
We are and will be here for the long game.
To reiterate the.
The three main pillars, where youre using to advance positive cash flow and implement a sustainable growth model are one <unk>.
Continued reduction in Opex and a narrowing of focus on key strategic partner foodservice and retail opportunities.
Making further efficiency gains through lean value streams across our beef pork and poultry platforms.
Two emphasizing.
Emphasizing cash flow accretive management of our inventory with a focus on margin dollars.
Versus maximizing margin percent and.
Concurrently rationalizing our production network and the context of more moderate volume assumptions.
Three.
Narrowing our sales and marketing focus to a core set of activities that we believe strike the right balance.
Between restoring near term growth.
And nurturing our most valuable long term opportunities.
I look forward to returning to our call in the new year to update you on our progress across this critically important pivot and plan.
With that I will turn it over to <unk>, our new Chief Financial Officer, and Treasurer to walk us through our third quarter financial results in greater detail and reiterate our outlook.
Thanks, Ethan we recorded net revenues of $82 5 million in the third quarter of 2022 in line with the updated guidance, we shared on October 14th and representing a 23% decrease compared to the third quarter of 2021.
This results fell short of the expectations that informed our outlook on our Q2 earnings call, primarily as a result of weaker than expected demand in the category and especially within our core sub category of refrigerated.
In addition to overall category softness and as we shared in our October 14th press release net revenues. During the third quarter were also negatively impacted by increased competition certain customer decisions such as reductions in targeted inventory levels and postponed or canceled promotions.
Delayed <unk> canceled product promotions and introductions relative to our prior plans.
In aggregate total volumes sold during the third quarter of 2022 declined 12, 8% compared to the year ago period, primarily as a result of the factors I just described while net revenue per pound decreased approximately 11%.
The decrease in net revenue per pound was primarily attributable to strategic but limited price reductions in the U S and broader list price reductions in the EU increased trade discounts unfavorable changes in foreign exchange rates and to a lesser extent changes in sales mix.
Turning to gross profit gross profit in the third quarter of 2022 was minus $14 8 million or minus 18% of net revenues as compared to $23 million or a positive 21, 6% of net revenues in Q3 of 2021.
Gross profit in the third quarter of this year was negatively impacted by approximately $7 2 million or minus eight eight percentage points of gross margin.
Underutilization fees at one time termination costs associated with certain co manufacturer agreements of which approximately $5 9 million was related to beyond meat jerky.
Including such Underutilization and onetime termination costs in total beyond meat jerky contributed a gross profit loss of $5 8 million or minus <unk> seven percentage points of gross margin during the period.
As Ethan alluded to the decline in overall gross profitability is largely emblematic of the swift and meaningful deceleration in demand, which has necessitated a significant curtailment of our production volumes in short order.
Generally speaking it is a combined pace and magnitude of this volatility that presents the greatest challenge from an operating perspective as it is difficult to adjust and rightsize the production network at a commensurate pace.
Overall cost of goods sold per pound was $5 60 in Q3 2022 compared to $4 19 in Q3, 2021, or an increase of $1 41 year over year.
We estimate beyond meat jerky accounted for approximately 47 of the increase with the remainder being driven by increased manufacturing costs, including depreciation increased materials costs and to a lesser extent higher transportation and warehousing costs, the increase in manufacturing costs, including depreciation as pri.
Merrily reflective of the volume deleveraging impact I described a moment ago. As an example, although caused depreciation expense in Q3 increased by approximately 13% sequentially on a per pound basis depreciation nearly doubled versus Q2. While this is a single example of just one component of our Cogs.
The theme is generally true across our other cost buckets and as informative of the potential impact our efforts to stabilize growth and rightsize the network to the house.
Moving down the P&L to Opex operating expenses for the third quarter of 2022 were $74 9 million down two 7% year over year, and down 10, 3% quarter over quarter or.
The year over year decrease was primarily driven by lower selling expenses, which include our cost of outbound freight and non people general and administrative expenses, partially offset by higher marketing expense and restructuring costs, which consist mainly of legal fees. The sequential decrease in operating expenses was driven by reduced people.
<unk>, including stock based compensation, lower general and administrative expenses and lower selling expenses, partially offset by higher marketing expense and restructuring costs.
As announced in October 14th press release, we made the difficult but necessary decision to implement the secondary reduction in force, which impacted approximately 19% of our global workforce.
Through this action, we expect to generate approximately $39 million and the operating expense savings over the next 12 months, excluding one time separation costs, which will largely be incurred in Q4 2022.
As a result, we expect total operating expenses to be in the mid $60 million range in Q4 of this year subsequently falling to the low $60 million range per quarter thereafter.
Moving further down the P&L loss from unconsolidated joint venture increased to $8 7 million compared to $26 million in the year ago period, and $1 4 million in Q2 2022.
This line item relates to our joint venture with Pepsico, the planet partnership LLC or TPP and in the latest quarter reflects an increase in inventory reserves at TPP as well as planned increase in marketing.
All in net loss in the third quarter of 2022 was $101 7 million or a net loss of $1 60 per common share compared to net loss of $54 8 million in the year ago period, our net loss per common share of <unk> 87.
Now turning to our balance sheet and cash flow highlights our cash and cash equivalents balance was $390 2 million and total debt outstanding was approximately $1 1 billion as of October one 2022.
In Q3, 2022 inventory decreased to $247 million as compared to $254 7 million at the end of Q2 2022 and decreased from $283 8 million at the end of Q1 2022.
The inventory decline was driven by continued progress in reducing our finished goods and work in process balances, partially offset by an increase in raw materials and packaging.
In terms of cash flow for the three months ended October one 2022 net cash used in operating activities was $34 7 million, a $35 9 million decreased compared to the year ago period, and a $35 8 million decrease compared to Q2 2022.
As we have communicated cash consumption continues to be a key focus area for us and although we expect to drive further improvement over the next several quarters. We expect cash used in operating activities to increase sequentially in Q4 2022 as the benefit from the collection of receivables in Q3 is expected to meaningfully more.
Moderate.
Within cash flows from investing activities capital expenditures totaled $18 million in Q3, 2022 compared to $52 9 million in the year ago period, and we invested $10 million and our joint venture pursuant to the second tranche of our pre determined capital contribution schedule, we expect to invest a further six.
$5 million in the JV split equally across the fourth quarter of 2022, and the first quarter of 2023.
Let me now provide some commentary about our 2022 outlook as well as some high level comments about 2023, we.
We will provide further details regarding our 2023 outlook on our fourth quarter earnings call as.
As previously communicated in October 14th press release for the full year 2022, we expect net revenues to be in the range of $400 million to $425 million, representing a decrease of approximately 14% to 9% compared to the full year 2021.
Given the implied level of sales for the fourth quarter of 2022 combined with the gross margin pressure as I described earlier, we expect gross margin in the fourth quarter to be negative, albeit sequentially higher than Q3, as we do not expect to incur a similar co manufacturer termination fees for.
For fiscal year 2023 that we shared in October 14th press release, we are targeting cash flow positive operations within the second half of 2023 to be clear. This target implies the achievement of a full quarter of positive free cash flow defined as cash flow from operations less capital expenditures during the second.
Half of 2023, we intend to discuss the building blocks of this objective in greater detail. Following our Q4 2022 earnings call next year, but for now I will share some high level qualitative information.
Our near term pivot to an approach that prioritizes cash flow and profitable growth above immediate market share capture we expect 2023 growth to exhibit ongoing pressures as we transition the business model to drive our cash flow positive objective. Therefore, there are four key levers.
As Ethan described we are focused on stabilizing and subsequently restoring growth within our core portfolio of refrigerated Skus, which in turn is expected to contribute to meaningful gross margin improvement back into positive territory.
Reiterate restoring growth in our core and sales closing existing distribution gaps launching renovated and improved versions of our core skus deploying strategic promotional programs aimed at drawing in new consumers and securing new doors and focusing our marketing efforts on consumers, whose receptivity to our value.
Proposition is believed to be high.
Second we will manage our operating expenses within a tight range by adopting lean business practices and driving greater accountability among individual budget owners across the organization.
Third we will maintain a strong focus on drawing down inventory levels to free up cash from our balance sheet and finally fourth we will tightly manage our capex budget to a level substantially below 2022 and either of the previous two years taken in combination. We believe these measures will serve as key enablers of our cash.
Cash flow positive objective in the latter half of 2023 with that I'll conclude my remarks, and turn the call back over to the operator to open it up for your questions. Thank you.
Thank you we will now begin the question and answer session to ask a question you May Press Star and then one on your Touchtone sad.
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First question today will come from Alexia Howard of Bernstein. Please go ahead.
Good evening everyone.
First of all thank you very much so I really focusing on how do you get back to cash flow positive.
Really given us a quantification of the savings from the two reduction in forces or the most recent reduction in force that you have just put in place.
The.
The level of cash burn is still quite high.
<unk>. Thank you for going through the components and I recognize you're going to give you. Some more details on the fourth quarter is there anything else you can tell us about how much you could reduce the <unk>.
So the Cogs ingredients packaging side of things how much the plant.
Come down by reducing the use of unnecessary co manufacturer. It is there anything else that you can give us that will give us an idea of how much those.
All of that cash cash burn can come down by so that we can get to.
Visibility into into what the drivers are.
Thank you and I'll pass it on.
And the speakers' lines or loss.
I apologize we were we were muted.
Thanks for the question.
Although.
I can't provide the exact level of specificity that.
Youre asking for let me try to give some qualitative information here that hopefully will help you.
In your modeling so.
We put out a target to be cash flow positive within the second half of 2023.
Clearly there is there isn't a path to getting there if we don't restore our gross margins back to <unk>.
Positive territory now we're not prepared to just yet to give you sort of an exact target for gross margins for 2023 as I said in my prepared remarks, we'll be providing more.
Detail.
Our fourth quarter earnings call, but clearly restoring the gross margin back into sort of solidly positive.
The territory is high on our priority list and it and it entailed a couple of different things.
Including stabilized <unk> of the core right sizing the network.
Those two initiatives are going to be very important levers to driving continued improvement in the gross margin.
The profile of the business.
And then obviously, we've taken recently the difficult, but necessary decision to really reduce our operating expenses and we will continue to benefit from that as well as we move into next year.
And so.
From a margin perspective, those are going to be the two big drivers and then obviously there is as I said in my prepared remarks.
The inventory reduction and Capex objectives, as well that will help us get to that cash flow positive.
Great.
I can just give some additional color.
We're obviously going to continue to bring cash consumption down.
The biggest.
Broadest.
Explanation that I think is important to drive home.
When you have this drop in volume and associated deleveraging.
Things are going to start showing up in gross margin and elsewhere that are unfavorable and you can either wait for growth to return or we can right size production system in the organization and then once you guys hear directly from me.
We are right sizing the organization the operational footprint to be able to drive to cash flow positive within the second half of next year independent of any aggressive growth assumptions and then I think that is something that is new to our business given the 12 plus years of pretty aggressive growth that we get enjoyed I think.
We will enjoy again in the future, but for now it's really about stabilizing the business based on a more reasonable revs.
Revenue.
Growth trajectory and it's exactly as <unk> said.
In terms of making sure that.
We'll see some growth in the core lines of beef Burger and dinner, but again.
Extra ordinary.
Youll continue to reduce the size of the network and eliminate title fees.
Moving certain parts of our production back in house, so that we can improve overhead absorption.
Really aggressively managing inventory, we always think about inventory as kind of sleeping money and we need to start accessing much more of that and there's two benefits of that right. One is obviously you reduce.
Inventory levels and free up the cash but two is you can use some of that inventory to welcome new consumers into the brand at a time when they're economically stressed and so we're going to some of that targeted pricing and can explain more.
Later on the call we're going to go ahead and implement.
And then we have a whole cost down program, which actually is growing quite well and it's one that we've been driving the challenge is youre not going to see those results until we move through.
Some of the inventory that we have now and start to get to.
<unk>.
Conversion of raw material in the products within the new <unk>.
Production.
System, and where those cost down programs have been successful. So a lot of things are in play to be able to drive us from.
The model that we had which was one of heavy castings up into one that will be cash flow accretive.
Our next question will come from Adam Samuelson of Goldman Sachs. Please go ahead.
Yeah.
Yes. Thank you good evening everyone.
Maybe you can just lose it yet.
And a lot less.
But some of those strategic targeted pricing actions and kind of the ability to target to free up inventory.
Can you provide a little bit more context and scope around what that entails.
What you think the incremental distribution.
Could be and where you think the inventory balance will.
And up either at the end of the fourth quarter at the end of the first quarter.
To help to help you access the cash thats on the balance sheet.
Sure. Thank you Adam.
Im going to give you an answer that probably is one degree of specificity away from from where I think you'd like it just because of competitive reasons and things of that nature.
So part of the push toward.
Cash flow positive and at the same growth model is to dramatically narrow our focus within foodservice and retail.
The unifying theme in terms of what.
Targeting.
Are those opportunities that give us knee.
The highest probability of restoring growth while also nurturing kind of the most valuable long term pathways that we have and so examples of that.
A number of <unk> partners, we're narrowing our focus somewhat too.
A handful.
We're having great success with.
And we want to nurture those I think theres a lot of focus on our U S business and our U S retail appropriately so.
But if you look at what's going on in Europe for example, and just focus for a moment on the.
The launches and the test that I mentioned.
And then as well as a permanent menu placements not all in Europe , Latin America and in parts of Asia.
We are planting seeds that we expect to be pretty significant.
Volume drivers for us.
In the future. So we'll narrow our focus there and then when you get into the retail space again, and narrowing our focus toward what can we do to restore.
Growth in the fresh meat case, where we really believe transformation can occur.
And an enormous amount of energy time and focus has gone into the third iteration of our sauces platform for the fresh case in the fourth iteration of our Burger platform and the platform, we expect to have those out.
I can't give a specific deadline for that but in a way that will be helpful too to restoring growth now.
Within that.
There are select pricing programs to answer your question that we're putting in place to target specific consumers and.
And it really gets back to again, it's a very.
<unk>.
It's a time of distraction for the consumer.
Our story right now is I think several layers away from.
Where the consumers focus in terms of just basic needs.
And so with tailored our messaging to sub segments that are probably are more receptive rather to here and when it comes to health, that's generally 40 and older when it comes to.
Our planetary message around climate water use et cetera, that's the much younger generation.
And Youll coming out with these innovations and then targeting specific sub segments of the population.
With that messaging and offering some introductory pricing that gets people involved is how we're going about restoring that.
Fresh case.
And then when you look at.
Frozen we've had a.
A good success with the tenders that we launched I think we're up.
24% or so in frozen last 12 weeks.
Year over year, and and then of course, we've launched a new stage product.
That chicken tender product as I mentioned, one people magazine award of the year or something that that nature and the state product that we just launched I think is probably.
We will be viewed by many as one of our best products.
Also up for an award that we'll announce shortly.
Going into the frozen section as well as poppers and tenders.
On the foodservice side I mentioned, the <unk>, but theyre also sub segments of the foodservice.
Industry.
That are going to resonate our messaging is going to resonate more.
Then another sub segments, and so were tailoring, our messaging and our focus in terms of our sales to those sub segments and it has to do with younger consumers that has to do with consumers, where maybe in the health care system things of that nature, and I don't want to get too much into it but.
Offering pricing in those segments that will attract the largest number of consumers to our brand at a time when pricing really matters is how we're going to deploy this pricing program.
We have a lot of inventory, we want to work through it and we will.
Want to welcome people into the brand so.
I can't give you specific numbers on exactly how much inventory, they're going to draw down, but you can expect us to be aggressive.
In a way that maximizes profit dollars versus margin percent at the moment.
Our next question today will come from Robert Moskow of Credit Suisse. Please go ahead.
Yes.
Hi, Ethan.
Take care.
Yes.
The script today in the the task at hand.
Very different tasks and then what.
Hi, Yuri.
Our vision of the company was originally and I also think the culture of the company that you've built.
And I'm just wondering.
Do you have the right people in place to execute.
This new kind of approach.
And.
Are people ready to make this kind of pivot.
Do you need do you need to bring in different people to do it.
Yes, well that's a great question, thanks, Rob for asking that.
It is a it is a pivot for sure.
Want to be very clear that it's coming from me.
Feel very passionate about this change that we're making.
I have no doubt about the long term opportunity facing our company and our ability to go get it we continue to produce the very best products. All these other things right, but we have to do is change our mindset from one where it was growth above everything else to now pushing very quickly the business into cash flow positive and profitable.
And that's not because I feel that I need to produce better numbers for people right now or things of that nature. It's because it's what's going to allow us to endure this current economic situation and reached that longer term goal and so in terms of the people that I have around me.
I do think that we have a lot of the right pieces in place.
A lot of the language that I was using you could obviously resonated people who are aware of the lean literature.
And things of that nature, we have folks that have come out of that school.
Lean principles and it's not a manufacturing mindset.
Organization wide mindset right.
And so we are pushing that out throughout the organization.
But is the number one goal is the hallmark of the way I manage our business.
And we have a high level set of goals for three year period, we have a three year plan. We've got a one year annual operating plan, but those boiled down into a set of discrete projects. The number one project for this company is to push this into a cash flow positive position by the second half of next year.
Order to accelerate profitability anyone who is not willing to sign up for that is not going to be very comfortable here. So it is a it's coming from the top I'm very passionate about it.
We have the energy here to get it done.
Just all the intensity and focus you saw on our signing of the very best partners in the World.
Putting the best products out.
And growing the movement, we are now shifting to two to achieving this goal again, so that we can realize that long term.
The vision, we have for the company I had no intention of shifting gears in terms of what our long term.
Our goal is.
We will be.
Very large protein player globally.
And this is a difficult period economically across the country and across the world. So we are going to right size the organization to get through and it's coming from me and we'll get it done.
Our next question today will come from Cody Ross of UBS. Please go ahead.
Hey, good evening, Thank you for taking our questions.
I first wanted to touch a little bit will be.
Talked about good part of your goal to become cash flow positive as to turn to gross margin positive.
Can you just remind us or give us any color on what percentage of your cogs are fixed versus variable.
I'm not sure that we've quantified that specifically.
But.
The vast majority of our <unk>.
Of our Cogs.
Basket is variable of our Cogs cost is variable and thats a function of the.
So the.
Cole manufacturer sort of model that we have today and obviously.
A fair amount of our finished goods production is still done Lewis.
With our co manufacturing partners.
Therefore, the only fixed costs that we have embedded are associated with our own facilities, where we do the extrusion.
Our next question today will come from Peter <unk> of <unk>. Please go ahead.
Great. Thanks for the question Ethan I just wanted to come back to comment you made you said you guys are going to focus on gross profit dollars and not necessarily gross.
Margin percent. So maybe just if you can provide a little bit more detail on that.
What will you be focusing on in terms of.
Products that drive gross profit dollars and then are there any products or channels that you'll be cutting that maybe were higher gross profit percent, but lower on the dollar side, just trying to kind of understand that comment in the context of what you guys gave us today.
Sure. So so it has to do with pricing program, we're putting in place on.
One of our items that is kind of in our core.
And again, it's not going to be a blanket pricing.
For all segments, but.
But we think it will be meaningful for those that we apply to.
I wanted the team to understand that the goal there is to.
To drive conversion of inventory bring new people into the.
The category without us having to do anything that would be on a per unit basis negative.
But it has to do with that program.
I also think the days again it gets to the change in mindset that we've lost the jerky product.
Great partnership with Pepsi.
I think it's a $30 million contribution this year to revenue I think.
We grew the category.
Forex or something of that nature.
And we finally crossed over into a breakeven situation on the margin on that it's being obscured by these breakthroughs.
Asian fees and legal fees and things of that nature, but those days are over like you know, we're not going to be launching any products that.
But arent.
Cash flow positive in Barton.
Profit dollar.
Contributors at the onset.
And so it's really about flexing, where we have room in margin duplex to drive more volume and that gets down to our core lines.
Again, I don't want to specify which one.
Or which segment, we're going after but thats. The reason that I'm asking the team to focus on profit dollars right now versus versus ASP versus for that Martin.
Yes, I would just add on top of that.
We're being very targeted with these programs and we're looking at number one.
I alluded to.
We're looking at some of our core Skus where are we.
Continue to have pretty strong margins on those already and so these won't be.
Negative margin from a unit.
Respective but we're also looking at our core products, where there are existing distribution gaps and where we have an opportunity to maybe secure a new points of distribution by doing some some kind of a special program.
Bring in new consumers, who maybe haven't tried.
These types of products or our brand before so.
It's a targeted type of program.
And it.
As Ethan said it is these are cash flow accretive.
Get the lift right.
This is still cash flow accretive.
Activity, because we'll be covering.
Variable costs.
Our next question today will come from Michael Lavery of Piper Sandler. Please go ahead.
Thank you good evening.
I just wanted to come back to fixed costs.
<unk>.
We've touched on this a little bit but for some of these underutilization penalties or for the new headquarters, which I think the rent starts at around $15 million a year and then builds so there's it's it's a meaningful outlay in terms of your spend how much flexibility do you have on terminating their changing.
Are these contracts or.
Do you are you committed to the headquarters building is there a better way to think about how to.
Set that up what some of the flexibility you might have.
Yes, that's a great question.
So we have kind of four buckets that we're looking at.
Kind of agreements and things that we entered into.
Several years ago.
That imported more with the kind of growth curve that we're seeing then that we're just going to have the tough discussions with those partners about about how to address it and we're doing that now on.
On the headquarter question itself, we're just consolidating a bunch of leases. So we're pushing forward in that direction getting out of the buildings we've been in.
Subleasing, some of that and things of that nature.
And so I don't think we'll change course on the headquarters, but we will consolidate and do them and Thats I think an important step in the people.
I think many people have commented on the disruptive aspect of the pandemic.
Distributed workforces and our kind of work, we're pushing and churning out the best products in the world in doing and undertake timeline we needed altogether.
And so.
Very much committed to making sure that happens.
But kind of Idaho fee things and things of that nature.
We're doing a few things there.
One would be good.
Trying to consolidate.
Production to areas, where we do have idle fees to make sure that we're not.
Spending anything thats unnecessary for production.
And then having those conversations right I mean, I think that the world has changed and everyone needs to play a part as our partner.
It's a big Big focus for me.
Our next question today will come from <unk> Parikh of Oppenheimer. Please go ahead.
Good evening and thanks for taking my question. So just on international markets. I was curious if you guys have reviewed the business any thought of actually exiting any international markets to more quickly rationalize the business.
Yes.
Good question I think in Europe , you'll you'll start to see some of the inventory.
Sure.
It's eroding.
I can't predict the future there obviously, but.
We see some trends that we like.
There is an overhang of inventory.
In China, it's so early to tell what's going on there because they are just coming out of all of these.
Lockdowns.
They come out and then they go back in and and things of that nature.
We are doing though is reducing expense throughout.
Our global operation and relying more heavily on partners.
Terrific partner in Europe .
I've been working very closely with them.
To continue to serve.
And grow the.
The longer term opportunity for beyond.
In Europe , but do it in a way that is maybe a little bit more asset light than in China.
We are getting into too much where we're looking at some similar opportunities there.
The next question today will come from Peter Galbo of Bank of America. Please go ahead.
Hey, guys. Good afternoon. Thanks for taking the question. Louis just just a really quick one I appreciate that you've given kind of a qualitative look at 'twenty three revenues, but maybe just.
So that we're all on the same page can we kind of just outlined some of the puts and takes that get you to.
Still kind of compressed revenue next year I think I heard from you.
Obviously rationalizing some of the footprint across <unk> and some retail partners focusing more on the core.
I think you'll be lapping the jerky kind of load in from the first half of this year going into next year, but then I would think on the positive side of the ledger youll have some load in on steak and popcorn chicken. So just wanted to understand all of the puts and takes as we start to think about again from a high level.
Where revenues could shake out for 'twenty three.
Sure I think you actually answered your own question.
There is certainly if you look at where the.
Trends have been in the business recently, and we started to see.
Some increased pressure in our international markets as well.
That.
That stuff is not going to turn on a dime right and so I think in the near term there is going to continue to be some some pressure, particularly you look in the in the first half of next year, but then as we've been discussing right. We have a number of these initiatives that are really focused on.
Stabilizing and eventually restoring growth within that within our core.
This includes things like.
Launching the new iterations of some of our key core Skus and so when you look at those activities as well as to your point start to layer on bigger contribution from things like steak and popcorn chicken.
And potential other new launches, we do expect that.
The some of the pressure that we expect to feel in the first half of the year should abate as we get to the second half so I know that.
Not overly specific but hopefully that gives you some sort of idea about how we're thinking about it.
Our next question today will come from John Baumgartner of Mizuho. Please go ahead.
Good afternoon, and thanks for the question.
Thank you Ethan I wanted to dig into entities, because it's hard to think that there isn't cannibalization, whether it's meat balls versus ground beef ground beef patties and youre renovating products, but you're also launching the fourth iteration of ground beef and the competition has moved onto frozen meals protein bowls, theyre hitting new need states going from.
Commodity to value add why is it beyond also moving away from commodity products and.
Why wouldn't that benefit even more than trying to migrate consumers from like <unk> III pointed out to be four point out I'm just trying to think bigger picture about what you can do need state wise to get revenue growth back into the model.
Yes, yes, very good question. So I think the move you've seen from us on frozen is in part responsive to that and you'll see more of that from us in the frozen space in terms of convenience and things like that without revealing too much.
I don't think that that.
Part of your question is in any way.
Now consistent with where we're headed.
On the question about the core.
We really do believe and we've seen this.
Yes.
Our products continue to get closer to animal protein right in terms of the taste and texture and sensory experience.
As we drive down the cost in BCP did a nice study on this.
Tumors wanted to do this they just won't pay more for it and so we have to continue to drive toward.
<unk> parity, which we're getting closer on.
And then realize this this cost or that we've had which I think we're still going to hit with the timeframe that I specified in at least one product in one category and the Taco Bell currently.
A good example on the menu the same prices stake.
And so I'm not going to walk away from that massive global opportunity around beef pork and poultry with just the core cuts of that probably the grounds things of that nature.
Because.
Certain of that.
We hit price parity with that as the products become.
Indistinguishable.
The climate situation worsens as people get a clearer sense of.
What the real health benefits are I don't want to.
This is a moment to talk about that real health benefits of our products.
This conversion will happen and.
So I got to make sure I'm very committed to making sure that beyond has the absolute best in that category.
There's huge volume.
Value creation opportunity if we can do that so in the near term Ive seen competitors go and launched value added meals things of that nature that's fine.
I'm, not saying, we're not going to do that and I'm not saying, we're not going to invest in frozen, we certainly are but the transformative growth.
In refrigerated meat case, and it's in these <unk> relationships those are the ones that are going to drive home. This transition.
<unk>.
Acknowledged that probably swung too hard at that.
Many of the companies.
Entry into those markets.
Didn't expect it depend emmick or this high inflation.
But that doesn't mean that over the long run those things aren't going to come to fruition and again I would point everybody to.
And we've done one as I mentioned on the call.
We have 25 distinct launches in the last 12 months nine different products in 18 countries.
That listed the different permanent menu placements, we are getting that.
There the $30 to $40 billion revenue company is going to come from I don't think it's going to come from.
The next spaghetti in Nepal Frozen Bowl.
I'm going to do it but I think this core focus is the right one.
Our next question today will come from Ben Theurer of Barclays. Please go ahead.
Thank you very much and good evening everyone.
I wanted to follow up on the comment you just made around.
Pricing and getting to price parity and it really feels like if we just look.
And again the sales versus volume thank you.
Sure on the press release that their speed already a lot of investments, particularly on the international side.
And it's tough to.
Paulo data points. So maybe you can help us understand where you stand right now in terms of its price premium.
Ill call it commodity.
Particularly on the international.
Yes.
With a couple of things.
One of the.
<unk>.
Thanks, This is requiring patients is.
We've been able to effect alright, we've been able to.
Realize.
Pathways to significant savings in our production that are just congested right now because we have inventory that we have to draw down in order for the.
New production, new sourcing all of that stuff to come to fruition and so there's just a.
Backlog in terms of being able to show the cost down measures that we've taken.
And internationally I'm not to be very honest.
We're just too expensive right right part of the pricing action, we took in Europe is because of that.
But I was just getting at I got a text early this morning from trend from a colleague.
Sales on.
One of our divisions here who was in.
Israel.
And he was saying just how incredibly expensive products are there and I heard the same thing about Singapore.
And so.
We have to drive better coordination across our distribution network across our retailers.
Not driving the price up.
Even in the U S.
I think a lot of the contracts and you've seen as not all but a lot of contracts that you've seen.
Onto the store on average $3 more than that.
Then.
Pound of beef.
The consumer is clearly signaling as I go to the dollar store and everywhere else, but thats just not what they are going to do today.
So again I get back to the <unk> study it back to the vision that add to the company since I started with it we've got to get this to be at price parity.
I think it's interesting.
So much.
And I understand it sort of human nature.
Desire to call this thing in one way or the other right.
<unk>.
Yet the dynamics are not yet in place to answer that question.
Let the economy settle let us get our price points at parity then, let's see what happens and so.
If a launch doesn't go well with the kyocera or the sky is falling but how about maybe it was priced too high maybe it wasn't the right built right things of that nature. So it's not binary and we just have to keep chopping away at this thing.
And we will get to the point, where youll see that kind of accelerated growth again, but <unk> got a lot to navigate right now and I want to make sure we stabilize the company and we will do that and that's what I'm focused on.
Our next question will come from Rebecca gentlemen of Morningstar. Please go ahead.
Oh, great. Thank you for squeezing me in so my question really stems from the $7 2 million dollar fees that was in.
The gross margin.
I'm trying to get a sense for how much of that will be continuing into other quarters or how much was truly one time. It. It seems like there's a termination fee that that would be one time, but you know maybe some of these.
Underutilization would be ongoing so I would just like some clarity on and how much of this weekend.
Back to continue forward as long as we're in this kind of softer environment. Thank you.
That's a good question so you're right the majority.
Termination, but doesn't but there are these continuing.
Capacity fees, and we're reorienting the network to be able to absorb some of those so they're not just going to.
Could use.
And then we are also in negotiation right.
But if you look at what's happened in the industry and find.
That's interesting because from a disruption perspective and help categories expand and then contract and expand again you saw GBS close entirely their plan Taro.
The effort here 125 people all facility in Denver.
I don't know who listened to our friend Michael.
The commentary yesterday.
At Maple Leafs.
I think they took a $190 million.
Goodwill charge on.
On their plant protein business and <unk>.
Impairment rather.
And.
Also by 22, 5% negative margin. So there's just there's.
So much volatility right now.
This is in this category given the broader economic issues and things of that nature.
And so youre going to run at if you design a business for the year to say youre going to get I'll make up a number of $150 million of revenue or something for a quarter and it drops dramatically.
To have idle fees youre going to have excess capacity youre going to have lower absorption of overhead all of these knock on effects and we're feeling those and instead of just saying I'm going to cross my fingers and hope for growth to return in that process of negotiation in that process of reducing this operations footprint temporarily to be able to.
It produced better margin without any significant resumption of growth.
Our next question will come from Ken Zaslow of Bank of Montreal. Please go ahead.
Yes real quick question.
Your program, which of the four steps that you have do you think is most at risk or out of your control and which ones do you think you have the most control over.
So I think Louis was referring specifically to two to four of the kind of financial levers just like that.
Program that we have is three steps obviously to drive home the.
Production.
In it ops.
Opex.
And that one I think we feel.
Comfortable with I think.
Get into cash flow positive really depends on.
Not only discipline there, but also working through our inventory, which is a second step.
And then third which is probably the one that we the least control over.
As the result of the execution of our focused growth strategy, we're narrowing down our focus too.
Some key retail activities in some key foodservice activities in some key <unk> partners, it's a much narrower scope than we've had in the past.
But we think those are the kind of 80 20 rule those are the ones that are going to drive growth.
If the economy continues to worsen.
If we don't connect with the consumer in the right way.
That could be something where there's risk, but again were not structuring the business for that whether it has to happen at some sort of a dramatic level, we're going to structure the business differently right.
If there is even if there's some moderate growth I mean, very moderate we'll be able to achieve the goals that we're talking about what I like about that is that as these things that have been percolating that we've been planting the seeds quarter after quarter. The 25 distinct launches nine distinct products 18 countries.
Taco Bell stuff here in the U S. The Panda express here in the U S. Mcdonald's in Europe .
Pizza Hut in Latin America, as those things start to move from kind of a test phase into much broader utilization does is kind of upside for business that has been right sized and I think thats, where the value creation in this environment will occur.
And ladies and gentlemen at this time, we will conclude our question and answer session.
I would like to turn the conference back over to Ethan Brown for any closing remarks.
I think I've said it all what I wanted to convey it as a pivot in our business model.
It's a pivot from kind of growth above all to too.
Cash flow positive and sustainable growth.
I'm very excited.
Cited about it.
It's something I think is going to produce long term results that we've been after do so in a way thats.
That's more efficient.
And I look forward to building it together.
The conference has now concluded and we thank you for attending today's presentation. You may now disconnect your lines.