Q1 2023 Beyond Meat Inc Earnings Call

Speaker 1: That.

Speaker 2: Should you need assistance, please send a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw from the question to you, please press star then two.

Speaker 2: Please note, this event is being recorded.

Speaker 2: I would now like to turn the conference over to Paul Shepherd, Vice President, FP&A, and Investor Relations. Please go ahead.

Speaker 3: Thank you. Good afternoon and welcome. Joining me on today's call, Ethan Brown, founder, president and chief executive officer, and Luby Kutua, chief financial officer and treasurer.

Speaker 3: By now, everyone should have access to the company's first quarter 2023 earnings press release filed after the market closed today. This document is available in the investor relations section of Beyond Meat's website at www.beyondmeat.com.

Speaker 3: Before we begin, please note that all the information presented today is unordered and during the course of this call, management may make forward-looking statements within the meaning of the Federal Securises laws. These statements are based on management's current expectations and beliefs.

Speaker 3: and involve risks and uncertainties that could cause actual results that differ materially from those described in these forward-looking statements.

Speaker 3: Forward-looking statements in today's earnings release, along with the comments on this call, are made only out of today and will not be updated as actual events unfold.

Speaker 3: We refer you to the earnings release, the company's quarterly report on Form 10Q for the quarter ended April 1, 2023 that was filed today, and the company's annual report on Form 10K for the fiscal year ended December 31, 2022.

Speaker 3: and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made through the beginning.

Speaker 3: Please also note that on today's call, management may reference 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.

Speaker 3: 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.

Speaker 3: And with that, I would now like to turn the call over to Ethan Brown. Thank you Paul and good afternoon everyone.

Speaker 4: And please, at our first quarter results, demonstrate solid progress against our strategy and plan.

Speaker 4: As you would recall, we outlined three central tenets on which we'd execute a full force pivot from the growth above all to a sustainable growth operating model.

Speaker 4: One that delivers on our goal of being cash a little positive, within the second half of this year, 2023.

Speaker 4: These pillars are one. We would apply a laser-focused margin expansion and object reduction to the use of lean value streams across our beef cork.

Speaker 4: and poultry platforms. Two, we would place an emphasis on cash flow accretive inventory management with a near-term focus on profit dollars which is maximizing the percent margin.

Speaker 4: And three, we would prioritize opportunities that support near-term growth and consumer trial and adoption.

Speaker 4: appropriately balancing and streamline activities and support of our most valuable long-term opportunities.

Speaker 4: I will begin the body of my comments by summarizing our Q1 performance in reference to each of these three pillars. One, margin expansion and cost reduction. The company is focused on the deployment of lean management structure and process to drive cost at our operations.

Speaker 4: We continue to rationalize our production network, collapsing processes and eliminating steps.

Speaker 4: generate unnecessary cost while consolidating and optimizing our co-packing resources.

Speaker 4: Though we have much cutting lefty left to do.

Speaker 4: we have much heavy lifting left to do. We are seeing tangible progress.

Speaker 4: For example, even as inflation continues to plague supply chains more generally, we reduce COGs per pound by approximately 15% on a year-over-year basis.

Speaker 4: I'm Mary on the back of solid improvement in manufacturing logistic costs.

Speaker 4: excluding any impact from depreciation.

Speaker 4: This swift production allowed us to cross over into positive growth margin in Q1 2023 from a trough of negative 18% margin as recently as Q3 2022.

Speaker 4: We will continue to apply intense focus on margin restoration and cost reduction versus raising prices.

Speaker 4: as we pursue our longstanding price parity target, the Animal Pro team.

Speaker 4: At this point, we are achieving these margin gains even as our average price per pound is down 6% on a sequential basis and 9% on a year-over-year basis.

Speaker 4: reflecting both changes in mix, as well as delivered pricing programs consistent with our path to price parity.

Speaker 4: More broadly, we are bringing the overall cost of business operations down.

Speaker 4: taking out approximately $34 million for total opex reduction.

Speaker 4: 35% year over year.

Speaker 4: Alongside this reduction in operating expenses, our team continues to focus on sweating existing assets, reducing our need for new investment. The combined impact is total cash use of $48.6 million for the quarter.

Speaker 4: down from 66.8 million Q4 of 2022, this steep 74% reduction on a year-over-year basis.

Speaker 4: 2. Draw down of high inventory levels to free up cash. As with our network, the business has raw material and with inventory levels in excess current demand levels.

Speaker 4: inventory across the balance of the year, more efficient levels.

Speaker 4: Though it's previously noted, the downward curve will not necessarily be linear across the calendar.

Speaker 5: Great.

Speaker 4: By our organization of near-term growth opportunities, it select long-term strategic partners. You're taking a civic action to encourage near-term restoration of growth, even as we continue to nurture our most valuable long-term opportunities and partnerships. Your app shows me to focus my comments on U.S. retail grocery for the garage near-term actions.

Speaker 4: given the segment's impact on our growth, so we're using similar approaches in US Food Service.

Speaker 4: In US retail grocery, we are focused on restoring growth to our food and dinner offerings, where we face our most challenging, neurobe your comparisons through four main actions.

Speaker 4: In US retail grocery, we are focused on restoring growth to our food related offerings where we face our most challenging year-over-year comparisons through four main actions. 1.

Speaker 4: As we approach summer, we are rolling out Better with the Odd, a broad marketing program or air game that highlights the great taste and health benefits of our products while celebrating our clean and sustainable process.

Speaker 4: This messaging continues to be a critical point of engagement with the consumer, as there remains confusion around what we make our plant-based products from and how we make them.

Speaker 4: Setting the record straight is a key part of bringing consumers back to the category.

Speaker 4: Two, we are working with our largest retail partners to implement a ground game strategy.

Speaker 4: that features digital marketing, in-store activation, and promotional campaigns to re-engage the consumer around the important themes of taste and health.

Speaker 4: as we seek to narrow the gap between our products and animal protein.

Speaker 4: Or, we plan to introduce certain renovations within our refrigerated portfolio.

Speaker 4: We are intensifying our implementation of each of these four tactics.

Speaker 4: broader marketing programs designed to educate consumers amid substantial noise, tactical collaboration with our key retailers, strategic pricing toward our parity goal, and select renovation as we head into peak grilling season. In the frozen set in US retail, despite its recent launch, the on-stake has quickly risen to the number two skew in frozen plant-based meat.

Speaker 4: 3% and dollars 28.8% when comparing Q1 2023 to Q4 2022. Year over year the on meet through units 31.5% and dollars 36.4%.

Speaker 4: and dollars 28.8% from comparing Q1, 2023 to Q4, 2022. Year over year, the Army crew units 31.5% and dollars 36.4% for in the same period.

Speaker 4: according to SPIN's data, for 12 weeks ending March 26, 2023.

Speaker 4: Moving on to EU retail, we are expanding our product portfolio in the EU to localize innovation that draws on the resources and expertise of our global team.

Speaker 4: In the Netherlands and the UK, we rolled out a new range of plant-based chicken products.

Speaker 4: the existing Beyond Meat portfolio in Europe , which includes Beyond Burger, Beyond Sausage, Beyond Mints, and Beyond Meatballs.

Speaker 4: plant burger and the plant nuggets for seeing success across McDonald's and Germany. But the latter is also offered as a happy meal option in Germany.

Speaker 4: I've had a pleasure of enjoying the plant nugget that various McDonald's throughout Germany. It would certainly agree with the very positive press it is receiving.

Speaker 4: I'm immensely proud of all the members of our global team who have worked so tirelessly to bring this product forward, and I am grateful for the collaboration and partnership from McDonald's that is making it possible.

Speaker 4: Moreover, the plant burger continues to resonate and succeed with the EU consumer and remains a permanent menu item in the UK, Ireland, Austria, Germany and the Netherlands, while also being offered for a limited time in Portugal.

Speaker 4: Additionally, in Austria, McDonald's continues to offer limited-type items like the McPlant Steakhouse Burger and the McPlant Fresh Burger on a rotating basis. Turning to Yum, our products remain permanent menu items at pizza restaurants in Canada, the UK, Singapore, El Salvador, Guatemala.

Speaker 4: and Sweden. In summary, across all segments of the business, that revenues rose 15% to 2021-2023 over Q4 2022.

Speaker 4: which inner of itself is less noteworthy given typical seasonality. However, the increase exceeded the same urologometrics of 8.7%.

Speaker 4: This relative progress was driven by modest financial increases in U.S. retail and U.S. food service net revenues with total sequential growth bolstered by a 31% increase in international retail net revenues and a jump in international food service net revenues.

Speaker 4: which saw 45% growth over quarter. Though encouraging on a sequential basis, our focus and expectation is the return of Beyond Meat to year over year growth on a quarterly basis as we move past Q2's 2023 more challenging year ago comparison and into the back half of the year.

Speaker 4: I would now like to turn from these near-term actions to check in on our enduring longer-term strategy.

Speaker 4: As I have maintained, it is our belief that we will cross over the chasm from early adopters to mainstream consumers by relentlessly focusing on, one, advancing the taste and broader sensory profile of our platforms.

Speaker 4: Two, articulating the health benefits of our products to the consumer in a way that resonates. And three, driving our cost structure to the point where we can match and then underprice animal protein.

Speaker 4: I will focus on each of these crossover elements, taste, health, and price, for much of the balance of my comments today.

Speaker 4: We continue to advance the taste and sensory profile of our products as well as expand distribution of award-winning offerings.

Speaker 4: in food service and in the retail pros and section.

Speaker 4: Both offerings contain strong advances in SENTRI profile, particularly around delivery of any malic and serum-like notes within a convincing, yet neutral beef flavor. Long time in the making, we are receiving very positive reviews from early customer tests.

Speaker 4: Moving to health, the second element of our cross-relativist strategy, continue to develop products that provide important health benefits to the consumer. The on-stake is a great example. As was announced yesterday, the on-stake has been certified by the American Heart Associations Distinguished Heart Check Program, joining the ranks of the select number of foods that meet the American Heart Associations exacting.

Speaker 4: heart-healthy nutritional requirements, including being low in saturated fats, trans fats, and sodium.

Speaker 4: More to the same.

Speaker 4: The on-state has received the Good Housekeeping Nutritionists approved emblem. It is the first plant-based meet to earn this recognition from Good Housekeeping's Institutes.

Speaker 4: Nutrition Lab, which accesses foods based on specific nutritional criteria, as well as taste, simplicity, convenience, and transparency.

Speaker 4: Here again, I'm very proud of all the hard work team members at Beyond Meat who've worked for years to bring such a powerful, purposeful, and positive innovation to consumers and families.

Speaker 4: whether the certification is beyond stake of the American Heart Association, or five-year research program for Stanford University School of Medicine, the Plant-Based Diet Initiative.

Speaker 4: for our three-year agreement with the American Cancer Society to advance research on plant-based mutant cancer prevention.

Speaker 4: It should be clear that we are highly focused on helping consumers understand the facts and empirical data underlying the benefits of our plant-based meat.

Speaker 4: Third element of our cross-error strategy remains price.

Speaker 4: In an economy where aggressive price-taking has been the norm, putting a consumer under economic pressure had various important parts of everyday life.

Speaker 4: We remain committed to our strategy of marching toward price parity with animal protein.

Speaker 4: Yet today, we have what is perhaps our clearest line of sight in some time to further cost production.

Speaker 4: between our products and their animal protein equivalent.

Speaker 4: It remains our strong conviction that by providing consumers with delicious plant-based meats with clearly understood health benefits at a price point that is at or below that of animal meats, we can access a meaningful percentage of the $1.4 trillion global meat industry.

Speaker 4: In closing, as we look back on the second full quarter of our transition toward a sustainable growth operating model with an emphasis on achieving cash flow positive operations in the second half of this year.

Speaker 4: We are encouraged by further results, even as we have many miles left to travel. We continue to advance by working the plant.

Speaker 4: driving market expansion and optics efficiency through the implementation of lean value streams across our beef, pork, and poultry portfolio, managing inventory for cash as we push toward much higher efficiency, steady state, inventory levels.

Speaker 4: and pursuing a more narrow set of near-term growth initiatives, even as we support our most valuable long-term partners and opportunities. I look forward to returning to you next quarter to share progress.

Speaker 4: With that, I'll turn it over to Luby to walk us through our first quarter financial results in greater detail.

Speaker 4: as well as our outlook for the balance of the year.

Speaker 3: Thanks, Ethan. Our first quarter of results reflect continues the sequential progress and demonstrate the early success our team is having in executing against our operating plan.

Speaker 3: So, net revenues declined 16% year-to-year to 92.2 million as we continue to navigate the challenging environment. We drove a 15% sequential increased relative to Q4 representing our strongest Q4 to Q1 percentage increase since the first quarter of 2019. We recognize, however, that there is still much work to do.

Speaker 3: as our absolute top-line results and category trends continue to reflect demand weakness amid broader macroeconomic headwinds.

Speaker 3: Within U.S. plant-based meat, our core subcategory of refrigerated continues to experience significant challenges as inflationary pressures have driven a shift towards lower-priced animal protein among consumers. With this backdrop, and as we lap a more difficult comparison from last year, we have a more difficult comparison from last year. With this backdrop, and as we lap a more difficult comparison from last year, we have a more difficult comparison from last year.

Speaker 3: that included strong selling of beyond meat jerky and particularly strong Q2 results in our food service business. We expect to see a more muted sequential increase in revenues from Q1 to Q2 this year than in recent years past. I'll return to this topic momentarily when I discuss our outlook for the balance of the year.

Speaker 3: Turning to the drivers of our first quarter net revenue performance. Net revenue per pound decreased approximately 9.1% year-over-year and volume of products sold declined 7.3%. The decrease in net revenue per pound was primarily attributable to changes in product salesmix, increased trade discounts, and to a lesser extent unfavorable foreign exchange rate impact.

Speaker 3: partially offset by higher pricing for certain products.

Speaker 3: First profit in the first quarter of 2023 was 6.2 million or 6.7% of net revenues compared to 0.2 million or 0.2% of net revenues in the year ago period. So note, gross profit and gross margin included the impact from a change in accounting estimate associated with the estimated use of the net.

Speaker 3: from a range of 5 to 10 years to a uniform 10 years was appropriate to reflect more current operating practices and equipment service periods.

Speaker 3: The resulting change in estimate reduced cause depreciation expense in the quarter by approximately $5.1 million or 5.5 percentage points of gross margin relative to depreciation expense utilizing our previous estimated useful lives.

Speaker 3: However, when considering the roughly 30 cent year-over-year improvement in gross profit per pound, inclusive of the aforementioned change in accounting estimates, depreciation expense accounted for only 2 cents of the increase. The primary drivers of the year-over-year improvement in gross profit per pound are

Speaker 3: were reduced manufacturing and logistics cost per pound, which contributed a combined benefit of approximately 84 cents.

Speaker 3: However, these factors were partially offset by lower net revenue and increased inventory reserves per pound.

Speaker 3: Turning to UPEX, operating expenses in the first quarter of 2023 were $63.9 million down approximately 35% year-to-year and reflecting our ongoing focus on right sizing our expense base.

Speaker 3: The year-over-year decrease in OpEx was primarily driven by lower marketing expenses, including advertising, reduced non-production headcount expenses, lower production trial expenses, and decreased outbound freight costs included in our selling expenses.

Speaker 3: Of note, SG&A expenses in the first quarter of 2023 included $3.9 million in non-cash expenses related to losses on the sales of certain fixed assets.

Speaker 3: Moving further down the P&L, we saw a $4.1 million increase in net interest income and foreign currency transaction gains compared to the year-go period, partially offset by a $2.6 million increase in loss from our unconsolidated joint venture, primarily reflecting limited economic activity.

Speaker 3: at TPP in the year-ago period. Overall net loss was therefore $59 million in the first quarter of 2023, or net loss per common share of 92 cents, compared to $100.5 million, or net loss per common share of $1.58 in the year-ago period.

Speaker 3: Adjusted EBITDA was a loss of $45.8 million or minus 49.6% of net revenues in the first quarter of 2023 compared to an adjusted EBITDA loss of $78.9 million or minus 72.1% of net revenues in the year-ago period. Now turning to our balance sheet and cash flow highlight.

Speaker 3: Our cash and cash equivalence balance, including restricted cash, was $273.6 million and total debt outstanding was approximately $1.1 billion as of April 1, 2023. Inventory fell to $222.4 million, a reduction of $13.3 million compared to the previous quarter.

Speaker 3: flows, net cash used in operating activities in the first quarter of 2023 was $42.2 million, or a $123 million decrease compared to the year-ago period. Capital expenditures totaled $5.3 million in Q1 of 2023.

Speaker 3: compared to $21.5 million in the year-ago period. Cash flows from investing activities also included $3.3 million related to investments in our joint venture, partially offset by $2.3 million in proceeds from the sale of fixed assets.

Speaker 3: Let me now provide some commentary about our 2023 outlook. Our guidance remains largely unchanged from the targets we provided on our last earnings call. For the full year 2023, we continue to expect net revenues to be in the range of $375 million to $415 million, representing a decrease of approximately 10% to 1% compared to the full year 2022.

Speaker 3: For the second quarter, we expect net revenues to increase roughly 15% sequentially relative to Q1 of this year. This Q2 outlook takes into consideration tough year-ago comparisons as mentioned earlier, some presumed impact from temporary supply chain issues at third-party warehousing facilities in the U.S.

Speaker 3: an incrementally higher category head width relative to our previous expectations.

Speaker 3: Overall, for the full year, we expect revenue contributions for the first and second halves to be relatively evenly distributed, with a slightly higher weighting towards the first half.

Speaker 3: This implies an acceleration in revenue growth in the second half of 2023, which we expect to be driven by continued distribution expansion of recently launched products in the U.S., including Beyond Steak, Beyond Chicken Nuggets, Beyond Popcorn Chicken, and Beyond Chicken Soleil. Distribution expansion and contribution from new products in international markets and

Speaker 3: First margin is still expected to increase the quenchedly through the remainder of the year.

Speaker 3: We continue to expect total operating expenses to be approximately $250 million for the full year 2023, weighted slightly more heavily towards the front half of the year, and our previous capex estimate of $30 to $35 million for the full year remains unchanged.

Speaker 3: We continue to target the achievement of positive free cash flow within the second half of 2023. Finally, let me provide a quick update on TPP. In the first quarter of 2023, we continued the process of restructuring certain contracts and operating activities related to Beyond Meat Jerky, and we intend to assume distribution responsibilities for Beyond Meat Jerky.

Speaker 3: starting in the fourth quarter of 2023, a move which we believe will support our overall objectives for gross margin expansion. TPP will remain as a vehicle to evaluate a range of plant-based products for potential future business development.

Speaker 3: 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.

Speaker 2: Thank you very much. We will now begin the question and answer session. To ask a question, you may press star and one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.

Speaker 2: In the interest of time, please limit yourself to one question. After that, you are welcome to rejoin the queue with any additional follow-up questions.

Speaker 2: To withdraw from the question queue, please press star then 2. At this time, we will pause momentarily to assemble our roster.

Speaker 2: Today's first question comes from Alexia Howard with Bernstein. Please go ahead. Good evening, everyone.

Speaker 6: I like it. How are you doing?

Speaker 7: Good. Can I ask, I guess the main question is about the return to cash flow positive in the second half of the year. I know you gave pretty good ideas of where the big levers are, but are you able to sort of prioritize those? What are the biggest levers that get you back to that?

Speaker 7: in the second half of the year, given that pricing is coming down and you've got some of the, I think you said, higher category headwinds than previously expected in some of the prepared remarks. Thank you and I'll pass it on.

Speaker 4: net revenue, margin, top X, and of course, freeing up cash from inventory. And so it's just a question of optimizing a combination of those factors. And we are obviously going to lean very heavily into freeing up cash from inventory. We have a significant amount of inventory relative to current demand environment. So we're going to use that as a source of cash.

Speaker 4: We're also very much focused on gross margin improvement. And if you look at what we're able to accomplish swinging into positive this quarter relative to where we were, let's say in a third quarter at negative 18, you can see that some of the kind of systemic shocks that our business went through are starting to subside and we're starting to quarter over quarter get back into a much stronger position with a business that is more appropriate for the firm.

Speaker 4: where we're adding cash and some quarters where we're not, as we overall continue to orient the business in that direction. But I think the main piece of information that I want people to take away is that we have organized the business around that principle, right? Our decision making is governed by achieving and then sustaining over time.

Speaker 4: cash flow positive operations. So if we get into a situation where some of the levers aren't working as well as we thought, we'll also attack the problem through operating expense. The next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.

Speaker 8: Yes, thank you. Good evening, everyone.

Speaker 8: Hi Adam. Hi there. So I have two questions. I mean, Lluvia, I think in the prepared remarks you alluded to $200 million at the market equity facility. I just would like to hear you elaborate on kind of the decision to pursue that route for financing, kind of the intention of the day.

Speaker 8: or the aim of actually raising that much capital and kind of over what time frame do you think you could possibly do that? And then maybe coming back to the point on cash flow this year just to maybe put a finer point on cash flow positive operations in the second half of the year.

Speaker 8: Is that specifically saying in one specific quarter or the cumulatively in second half in total, you actually expect cash flow positive operations? I just want to be clear on how we're measuring that that will. Thank you. I'll tackle the first one and then we can elaborate on the timing of the cash flow.

Speaker 4: and creating a sustainable business model. So it's in no way a signal that we're needing the cash immediately. So as a result, we're just gonna use it opportunistically. We'll use it as we think the conditions are appropriate.

Speaker 4: But it's really to bolster our cash reserves and put it out there because I think there's a lingering question about what we're going to do. And so this provides an answer, but we are going to be very judicious and…

Speaker 4: It's really to bolster our cash reserves and put it out there because I think there's a lingering question about what we're going to do. And so this provides an answer, but we are going to be very judicious and thoughtful about when and how we use it.

Speaker 3: Yes, thanks Ethan. So Adam, on your question regarding the guidance around cash flow positive, you know, what we've said is, you know, we're targeting being cash flow positive within the second half and so, you know, that can either mean both quarters, Q2 and Q3 or one quarter. Now, you know, we're doing.

Speaker 3: right and so we would of course love to be able to hit that mark in both the third quarter and the fourth quarter but you know what we said was you know within so we think we should be able to do it within the second half and again just to remind you the way we've

Speaker 3: defined that the cash flow positive objective is it is free cash flow, so operating cash flow from operations less capex.

Speaker 2: The next question comes from Rob Dickerson with Jefferies. Please go ahead. The next question comes from Rob Dickerson with Jefferies.

Speaker 9: Great. Thanks so much. Ethan, kind of a fairly broad question just around household penetration. Clearly household penetration's dropped. It was elevated through COVID and then some headwinds obviously now and it's pulled back some.

Speaker 9: And it just kind of looks like, you know, given you're, you know, the largest player, right, is that the category itself has compressed but driven more by you, right, let's say than others. And, you know, if you look at that, you think through that, and then we think, you know,

Speaker 9: that are inherent within that innovation that gives you now kind of a better kind of higher conviction feel on consumer reaction to that innovation relative to clearly the drop in household penetration we've seen over the past 12 months. That's it, thanks.

Speaker 4: No, I appreciate it. Great question. So you're right. There has been, I think, from like 27.8 to 25.5 or something like that reduction. We continue to really look at this in three ways. One, there's the macro issue of the inflationary environment and obviously seeing some moderation there.

Speaker 4: live a hope on that front, but if you look at recent earnings of animal meat providers, they're also seeing that trading down as occurring. So we believe some of that is still at play for sure. Second is there is a induced level of ambiguity, I think, around the health benefits of our products. And some of that is purposely seated.

Speaker 4: through interest group campaigns and some of that is just genuine. It's a new category, new product, people trying to figure out what's what.

Speaker 4: And the third brand specific issues where tremendous number of entrants came into the category and it became a very crowded and somewhat confusing landscape for the consumer and I don't think we did enough to really stand out during that. Now some of that's taken care of itself as the category shakes out and I think the consumer...

Speaker 4: positive side, and I'll get into some of the things that we're doing also on the innovation renovation side, but first, I do want to pause and look a little bit at the frozen category where we saw units up about 32% and dollars up about 36% year over year. And that's obviously from a smaller base, but it shows the power of beyond innovation that when we launch a new product, for example, like Beyond Stake.

Speaker 4: That I think rose very quickly as I mentioned in my comments, the number two position with very short distribution life in a major retailer. So I think we'll continue to see real progress from that. And if you look at in terms of responding to the ambiguity around health, yesterday's announcement from the American Heart Association, that's not a easy thing to do. So we've created a piece of steak.

Speaker 4: That is by all reviews, delicious. It's earning the endorsement and the certification from AHA which is very selective. Now a product that I think it's Cheerios has the endorsement. Now something is a center of the plate protein typically associated with kind of a protein.

Speaker 4: very indulgent eating is now something that people can feel really good about consuming it. It's 62% less saturated fat than an animal protein than the animal protein equivalent.

Speaker 4: It's a terrific source of protein, with carbabenins, etc. So responding not only through our marketing efforts, but through the products we're putting out to this question that's being raised, I think largely by incumbent players around the health benefits of our products. So as inflation starts to moderate, as the health message becomes clear, we're then set up.

Speaker 4: with both the renovation and innovation that we bring into market to really re-engage the consumer. So talk a little about the renovation. So some of that renovation is targeted directly at the refrigerate case where we've had the most significant issues. So you'll see something later this year coming out which in all the CLT, the consumer test we do, scores well above the current product in the market.

Speaker 4: Second, we're introducing some really exciting products, which I mentioned a new iteration of the burger, which all the testing that we've done with customers, for example, on the food service side, we've gotten really good reviews on the consumer side, people in all the time looking at it. And it's a true, I think, advance in taste and sensory experience.

Speaker 4: So that will actually go into the frozen section and I think will give us a lift. Further down the year, you'll see some innovation in some categories where we've been quieter and so I'm excited to get that out. And then this price parity program. So we're not going all the way down to the price of animal protein, but we're starting to tease out that elasticity. And as you do that, in the stores where we can really control for noise, we are seeing some very good results. Now that's not in any way a broad statement, right? These are more limited efforts and the data is still pretty rough.

Speaker 4: with the lower comps, I think we're finally going to get this business back to being a pretty decent margin and seeing growth again in the second half of the year, which I'm really excited to do. The next question comes from Peter Galbo with Bank of America. Please go ahead. Hey guys, good afternoon. Just one quick clarification and then my actual question.

Speaker 4: I wanted to understand the change around the depreciation impact to the gross margin. Is that something that continues throughout the rest of the year or was it pulled into just one queue? That's really the only flow through to the higher gross margin.

Speaker 3: would be my first question. Yeah, sure. So it does continue throughout the year because essentially, as we mentioned, we've...

Speaker 3: done a reassessment of the useful lives of our large equipment and where previously we had a range anywhere from five to 10 years across a number of our large manufacturing equipment. We've now moved to a more uniform sort of 10 years which actually moves us more in line with some industry standards.

Speaker 3: And so there will be a benefit and that actually is the reason for us, the primary reason for us taking up the gross margin guidance for the full year. Now it won't be the...

Speaker 3: The benefit won't necessarily be the same throughout the year, particularly when you look at our second and third quarters of the year, which tend to be our strongest quarters from a revenue perspective just due to seasonality. So we would expect depreciation as a percentage of total net revenues to be lower in those. So...

Speaker 3: We did increase our gross margin guidance for the full year. We said it would be higher than previous guidance by one to two percentage points. And it is primarily driven by that. Okay, that's helpful. And then maybe Ethan, just if we could go back on the quarter, just some of the sales trends. I've gotten a few questions.

Speaker 10: Just one on US retail, you know, obviously underperformed a lot of the scan data. Just trying to understand the gap there and then in International Food Service where I think there was a pretty large positive Delta, I know you mentioned some of the factors around McPlant and some of the others, but just whether there's any kind of load-in factor there to be conscious of on the first quarter would be helpful. Thanks very much.

Speaker 4: Yeah, no problem. So I think you're referencing your year, I think 100% growth in international food service. And that's obviously some performance in mom and pops, but also the TGICs are really driving that.

Speaker 4: And while we've had a lot of turbulence in the last several years, I think that the overarching trajectory of the business remains exactly as it has been in a sense of.

Speaker 4: We want to make this transition to plant-based meat. All factors are pointing to it. There's been some disruption to that. But as you look at the progress we're making with strategic in Europe , and you spend time over there with the European consumer, you begin to see, I think what I see, which is a sort of inevitable transition that's occurring. So let's tactile canal transition to baby fish food.

Speaker 4: to have a major customer like the McDonald's or the show that kind of progress in a very limited market and do it so profoundly, I think, is really encouraging. So no, there wasn't really load in. It's just progress, quarter after quarter progress. It hasn't been a straight line, but I think the arc of the thing is going to continue to be impressive.

Speaker 4: On the retail side, it kind of gets back to the issues I talked about. It's a tough retail quarter for animal meat as well. There's just a lot of noise in the system right now. We're making the steps that you should make to do this. We're putting in marketing programs at a high level around taste and health.

Speaker 4: doing tactical store programs, we're concentrating very much on our top retailers and have great relationships working there. If you look at the pricing actions that we're experimenting with and seeing some decent results around, that gives us some encouragement. And then we're doing an overdue renovation of some of our key products and putting in products that are terrific. We're both defending our existing products in terms of our core approach and putting the information out there that consumers need to make informed decisions rather than decisions driven by propaganda or by...

Speaker 4: F-assault and I think this is even more meaningful. So it's not just LDL cholesterol dropping but TMAO drops which is the compound in the gut they're increasingly associating with heart disease. So you see that benefit and then you see organizations like the American Heart Association endorsing the product then you see the partnership American Cancer Society and there's more to come. We are not doing what others do. We're not putting propaganda out there.

Speaker 4: in retail, we have to continue to communicate that. So pricing, new products coming in, clear marketing around health and taste, those are the things that are going to drive us back to a growth position in the second half of the year. And again, we get to a week where we make a progress here. It's kind of a big sighting and fun.

Speaker 8: The next question comes from Ben with Barclays. Please go ahead. Good afternoon, Ethan and Lubbe. Thanks for taking my question. I just wanted to follow up on the international food service piece, which clearly was one of the...

Speaker 11: better growth stories in the quarter. And if we kind of look into what you've printed just in 1Q23, it's kind of the level that we just had before the pandemic hit back in the first quarter of 2020. So, one on to stand if you can help us maybe put that into context where we are 1Q23 versus at 1Q2020 as it relates to outlets.

Speaker 11: in Europe , the volume itself, and how much some of these partnerships you've highlighted have helped you to basically back at those levels and what we should expect for that particular line item, international food service, as it relates to the cadence for the rest of the year. Thank you. Thank you for the question. So one of the rules that I've always tried to follow is to let our partners speak for their progress. I will say we're just, as I mentioned in my remarks.

Speaker 4: I'm really proud to be working with McDonald's in Europe and really proud to be working with Yum and select European markets as well as globally. And to see some of the traction we're making where you see the McPlant burger come out, you see the good results there. And then you see the McNugget, the McPlant Nugget come out and see good results there in the press. They can't share their results to share, not mine.

Speaker 4: But if you look at the press reaction and the consumer reaction in Germany, we're seeing some things we really like. So, to see after the years and years of investment, to see that start to pay off is something that's very gratifying for us. And what we need to do is continue to work with our supply chain, continue to work with our partners.

Speaker 4: to provide these products at a price point that the everyday consumer can afford. And again, I've always maintained this is around to get the taste right, get the health message super clear, and then get to the price to the point where it's a parity or below that of animal protein. And in each one of those cases, as I mentioned in my prepared remarks, we're doing that, right? We're making it taste more and more like animal protein.

Speaker 4: We're getting clearer on the health benefit for the consumer and we're driving price reduction. I think I said in the prepared remarks, year over year, we're down 9% on average price. That's a mix in and some of the pricing programs. But I really want to call out the operations team on this. To be able to deliver products, restoring to at least some positive margin while we're also putting price pressure on it is impressive. And it shows, I think, that there...

Speaker 4: just scratching the surface. And as we continue to optimize our network and continue to gain scale globally, that will be easier and easier. So the success of the strategic in Europe , I think, is again from the tip of the iceberg. It's been a successful test and we expect those to...

Speaker 11: to roll out can't be for any one of them, but we do expect those to roll out into other markets over time. The next question comes from Peter Solae with BTIG. Please go ahead. Great. Thanks. I want to come back to that conversation around international.

Speaker 12: food service real quick. You guys seem to be finding some success over in Europe with your product. I was hoping to give us, and I know you don't want to provide too much detail, but maybe just give us a sense on how much of the success that you're seeing there is trial versus repeat purchases.

Speaker 12: Any sort of details you can provide around the characteristics of the customer who's buying it there are they older, younger, lower income, higher income. Anything that can just help us kind of identify what might work here in the US that's already resonating over in Europe . Yeah, so I can't really dive too much into the repeat data and things of that name.

Speaker 4: While we're hammering on health here and the true and amazing benefits that we think we can deliver with a piece of stake, for example, that again, as such strong health credentials. In Europe , it's really about the environment. And so consumers that are maybe less focused on the category for health are going to come into it because of climate. And there's so much progress.

Speaker 4: be more health driven. But certainly here in the US, we try to lean into those categories, or there are those consumer segments where we see very strong interest in the environment and climate. So younger people here in the US, college age students here in the US, those folks actually care about climate and we're working very closely with them.

Speaker 4: And the way they embrace a product is very different from someone who's in their 50s, right? There are far fewer kind of...

Speaker 4: traditional roadblocks or ways of thinking that might get in the way of it. So we do take the lessons from the European consumer and try to find pockets here in the US that maybe are more dialed into some of the urgency of the environmental crisis that we face.

Speaker 2: The next question comes from Andrew Strelzik with BMO Capital Markets. Please go ahead. OK, Can someone read the last part?

Speaker 11: Good afternoon, everyone. This is Matt on for Andrew. I wanted to touch on pricing quickly. When we think about some of the challenges to consumer adoption and plant-based, it often comes up as the premium price point relative to animal-based proteins. Understanding price parity is a long-term goal. I wanted to ask how you think about price parity.

Speaker 4: balancing that move to price parity while also protecting near-term margin growth as we execute the turnaround strategy? Thank you. Sure. That's a great question. But I think first and foremost, it's really around, we are emphasizing total profit dollars versus percent margin. And so getting some of these bigger programs going, whether in Europe or here in the US with some of the grocers and things of that nature.

Speaker 4: We went from I think eight now to three co-packers and doing that while also lowering costs is really hard. You know there's just so many variables that are moving and so I'm really excited to see what our team is going to do now that they kind of have some pathways that are more stable.

Speaker 4: We start getting around some of the leaning out that we've been doing in a more stable environment. So I don't think we're in a position, for example, with a more stable company would be where we've kind of already squeezed a lot of the juice out of this. I think that the industry has been who today puts SoloLou to last.

Speaker 4: we don't have much more room to go. We have a tremendous amount of low hanging fruit to grab from here. And so we can do this where we're taking a 9% reduction in average pricing over the course of a year and achieve these margin targets. If you adopt the lean methodology that we're adopting, you eliminate waste at every step you can. You drive profit across product families and you create a nice entree.

Speaker 13: Two possibly related questions. Can you just touch on, you mentioned your inventory came down a little bit. What's the outlook there in terms of just overall, and is there any spoilage risk or write-offs that you might have to wrestle with? And maybe related, maybe not, but can you also just talk about the decision to...

Speaker 4: But in this particular case, again, like once you start to really focus on this goal of cash flow positive, change the operating model to a more sustainable growth, it made more sense for us to have that in-house. Did some good things. I think we increased the size of the plant-based turkey market in one year, I think six-fold. It's a good product. We like it.

Speaker 4: But let's get the margin right. And so that's why we're bringing it house and that'll help take that drag off of our overall margin. Your question about the levels of inventory and are we looking at any spoilage, we have a very active program there. We have...

Speaker 4: It's a specific program to make sure that we're putting all that to use. We can't control for everything, so we obviously continue to have reserves. But the goal there is to monetize any excess ingredients we have.

Speaker 4: as well as keep a very tight control on any aging inventory to avoid that write-off. So being very proactive about that, looking ahead several quarters to make sure that we don't get caught in a situation we don't like, but you never know. But feel really good about that and have some good people in the company focused on that. So if you take those things where you're looking at...

Speaker 4: Even toward levels very proactively both finish goods as well as with and ingredients and making sure that you're managing toward a good outcome there You look at increasing volumes and the kind of fixed overhead absorbs and you get it as you do that This collaboration we have throughout the supply chain to get lower lower overall costs we go to business You know we're increasing throughput on our equipment and then just trying to eliminate waste again at every turn within our system

Speaker 3: trying to move as much as we can away from batch into continuous flow. All of these things are helping us drive the type of margin improvement that I think you've seen over the last couple quarters. And I think you'll see the next few quarters going forward. What was the first question? The inventory outlook, which you sort of addressed, but I'll just add to that, Michael, that Ethan mentioned that the trajectory of total inventory balances will not necessarily look like a straight line down, in part due to

Speaker 3: levels. We've said quite frankly that our inventory levels are too high and we're very focused on lowering that. And I think our team has done a great job and we absolutely do still believe that we will end this year with substantially lower inventory levels then.

Speaker 14: Thanks for the question.

Speaker 10: You know, Ethan, just back to your commentary on temperature state. You know, this category is performance and frozen. I think would suggest that pricing and even the product itself may not be that central of an issue. There's other premium categories in the store doing okay right now as well. But I think what you do have in refrigerated is this really big entrenched competition from animal meat.

Speaker 10: that culturally could be a lot harder and more expensive to lodge over time. So I guess how do you think about refrigerated going forward in the tendon of price point? Is there a strategic pivot here to get more involved in the frozen case? Is there one way to dislodge the animal meat eater much longer than you would have thought three or four years when you started out? I look like your high level impressions there. Thank you.

Speaker 4: Yes, that's a great question.

Speaker 4: So, a bunch of ways done packet. And again, I think some really good stuff in there. So, first and foremost, our strategy in our goal, right? Our goal, rather, is not to be a high price niche item, right? But is to be an ageier player in the $1.4 trillion global protein market. And so we're going to go after that every way we can.

Speaker 4: possible if we're successful at doing that. The frozen case is interesting. It would be not very interesting if it were just the frozen meat-alt case of 10 years ago.

Speaker 4: successful at doing that. The frozen case is interesting. It would be not very interesting if it were just the frozen Medalt case of ten years ago, which we kind of referred to as the penalty box.

Speaker 4: But if you have the data, look for example, how our cook out classic product does relative to, I think it's a bubble burger, you know, as a percentage of sales, and it's a pretty interesting ratio. And so the, what's interesting about that is two things. One, it's in the pros and section. Two, that's, our cook out classic is one where the price point is closer to animal protein than in the fresh section.

Speaker 4: And so, if you were to shouldn't do this, but like just to dream a minute, if you were to extrapolate that ratio, you could see how powerful this can be once we get the proposition. And so in the press section, I think that's where consumers obviously shop for animal protein and for mainstream protein percent of their plate. I think we do have to be successful there. It is going to take longer than it looked like two or three years ago, but you never know what's going to turn it. So is it as we get to the right pricing? We're certainly seeing in some cases.

Speaker 4: uplift there? Is it when we do the next iteration and bring more consumers in because the taste profile is closer? Is it these breakthroughs like the American Heart Association endorsement of one of our products? All of those things start to come together and the next thing you know...

Speaker 4: It's something that is, again, coming off the shelves in the fresh section. So I don't think we give up on it, but we clearly take advantage of the traction that we're seeing in frozen. This concludes our question and answer session. I would now like to turn the call back to Ethan Brown for closing remarks.

Speaker 4: Thanks. So, as I said, I think this is a business that is turning a corner. You know, this next quarter of the quarter we're in is a high comp, but we're looking forward to really the second half of the year. Getting back growth, getting back growth with a reasonable margin and instituting some of these changes we're making.