Q2 2023 Beyond Meat Inc Earnings Call
Good day and welcome to the beyond meat into 2023 second quarter Conference call.
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After todays presentation, there will be an opportunity to ask questions.
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I'd now like to turn the conference over to Paul Shepherd, Vice President of P&I and Investor Relations. Please go ahead Sir.
Thank you good afternoon and welcome joining me on today's call are Ethan Brown, founder, President and Chief Executive Officer, and Loopy Couture, Chief Financial Officer and Treasurer.
By now everyone should have access to the company's second quarter 2023 earnings press release filed today after market close.
Cayman is available in the Investor Relations section of beyond meats website, www dot beyond meat Dot com.
Before we begin please note that all the information presented on today's call is unaudited and during the course of this call management may make forward looking statements within the meaning of the federal Securities laws.
These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward looking statements.
We're looking statements in today's earnings release, along with the comments on this call are made only as of today and will not be updated as actual events unfold.
We refer you to today's press release, the company's annual report on Form 10-K for the fiscal year ended December 31st 2022, the company's quarterly reports on Form 10-Q for the quarter ended July 2023 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 materially from those expressed or implied in any forward looking statements made today.
Please also note that on todays 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 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.
And with that I would now like to turn the call over to Ethan Brown. Thank.
Thank you Paul and good afternoon, everyone.
I would be if some of you our Q2 results net revenues in the second quarter came in at $102 1 million, which was down 31% year over year and slightly lower than we had forecast.
This decline in net revenues reflected deeper headwinds than we previously anticipated combined.
Combined with the cycling up one of our largest quarters ever among other factors.
The level and mix of our Q2 net revenues coupled with certain transitory items impacted our gross margin, which came in at two 2%.
These outcomes obscure the very strong progress, we're making in positioning the business for sustainable operations and growth.
We reduced cogs per pound by 14% or 73 cents year over year.
Reduced operating expenses by 33% or $27 5 million year over year.
Slash cash consumption down nearly 50% or $45 5 million year over year.
Selecting a business that is making early strides in it.
The limitation journey.
Simply put as we navigate what has proven to be a more prolonged crossover from early adoption to the mainstream than we anticipated.
We are operating with increasing levels of efficiency.
We're proceeding I should note that as we continue to drive cost out of our organization our products alike.
Our updated and more cautious revenue outlook in the back half of the year will very likely delay our achievement of cash flow positive operations.
Nevertheless, I want to stress that we will continue to aggressively internally manage the business towards the achievement of this objective.
The net results should be sharply reduced cash consumption for the balance of 2023.
We move with pace to complete are cash flow positive Costco.
I will now turn briefly to the three central pillars, upon which we're driving the business to future sustainable growth.
So back to the first pillar that is the use of value streams across our beef pork and poultry platforms to support operating cost reductions and margin expansion. Among other outcomes. We are still in the very early phase of our lean implementation journey. However, the continued emphasis across the organization on the horn.
So on a flow of value to customers is generating results.
Some of the more visible outcomes include progress across Cogs operating expenses and cash consumption.
Yeah.
With regard to the second pillar.
The use of inventory reduction is a key lever towards achieving our cash flow positive objective, we continue to make solid progress in Q2 reduced inventory.
$15 2 million or nearly 7% sequentially.
Year to date, we have reduced total inventory by nearly $30 million or roughly 12% bucking a historical trend, which typically sees a seasonal increase in inventory.
First half of the year.
As we look to the balance of the year, we will continue to aggressively manage inventory levels with the goal of or leasing incremental cash.
Okay.
Turning to our third pillar, which centers on near term opportunities to restore topline growth even as we nurture long term partnerships. We are focused on five main levers.
One <unk>.
Addressing the broader narrative around the category chew continuing to release, new renovations innovations that bring us closer to our northstar or being indistinguishable from animal protein.
Three investing in resetting the retail fresh plant based meat section.
Or.
Implementing pricing learnings for the last 12 months and five <unk>.
Porting our largest strategic partners.
Though we recognize that there are broader economic headwinds at play mainly inflation and higher interest rates. They are squeezing spending power of the consumer.
We're also acutely aware that there's ambiguity and confusion around the health benefits of plant based meats.
This is weighing on the categories growth.
As a branded category.
We have significantly more work to do to reach the consumer on the health benefits of beyond meat plant based meats, respectively. There was a considerable gap between the strong health credentials of our products a broader counter narrative that is now a foot and this gap appears to have widened.
The two year period of 'twenty 'twenty to 2022 the percentage of U S consumers, who believe plant based meats are healthy dropped from 50% to 38%. According to the food marketing Institute as was the case trying to a sense of plant based milk. This change in perception is not without encouragement from interest groups.
Succeeded in seeding doubt and fear around ingredients and process used to create our and other plant based meats.
Nor is it without contribution from well, meaning get misguided comparisons of our products to kill salads versus the animal based meats, they're intended to replace.
It is in this latter framing that we belong in excel.
With clear nutritional advantages, including no cholesterol.
Lower levels of saturated fats.
The absence of antibiotics hormel other veterinary drugs.
Absence of carcinogenic compounds, such as head of us like a game in the App.
Since the precursors to T M. A L. A compound that researchers are associated with heart disease and certain cancers.
We are attacking this misinformation by continuing to build a body of research such as our work with Stanford School of Medicine, which as you will recall showed important declines at LDL or bad cholesterol and the aforementioned T N E L F.
Only eight weeks of placing at all meets with beyond meat.
Through collaborations such as that with the American Cancer Society, where we're supporting broader studies of plant based meats and related health outcomes.
Our efforts also include third party engagement such as the American Heart associations first ever certification of a plant based meat beyond stake.
Heart healthy food.
As well as work with registered Dieticians nutritionists for purposes of educating consumers about the strong health benefits of plant based meats.
Last week, we lost a campaign long in the making called Theres goodness here that shares and celebrates the farming origin of our ingredients and describes our process for turning plants into plant based meat.
The first installment of the campaign features one of Osama bin farmers and connects to consumers. The fields were a protein is growing.
Playing the clean and simple steps, we use to build our plant based meats.
As you can likely tell we're proud of our process and ingredients and are confident that the more consumers know the more they will see the goodness and what we do.
Goodness for the soil due to the nitrogen fixing a triple gums that helps keep fields healthy and productive.
Good news for the farmer, who can use less fertilizer as a result.
Goodness for the Earth, given the much lower greenhouse gas water land and energy footprint.
Thank goodness for the consumer who can enjoy the dishes they love while reaping the health benefits of our plant based meat.
In the area of innovation and renovation are key parts of the beyond meat rapid and relentless innovation program is to improve each of our pillars of beef pork and poultry overtime. So that one day they are indistinguishable from animal protein counterparts.
This is a goal that we share with consumers with 53% of all consumers agreeing the plant based protein products should taste indistinguishable from meat. According to recent data from Intel.
The good news is we continue to make strong strides in this direction all against the static target.
Q2 alone, we released a series of important iterations within our core platforms of pork and beef.
One we lost what we internally call sausage III.
The refrigerated plant based meat section.
Amit remains the number one selling brand according to spins the latest 12 weeks and then 716 23.
We are pleased with endpoint too early feedback on our renovated dinner sausage product.
Evidence that despite current headwinds, we steadfastly March forward against our promise of enabling consumers to eat what you love.
Simultaneously, having a positive impact on your health.
On the climate.
Environment and animal welfare.
Earlier this summer the tasting table posted review the captures the results of our latest sausage renovation efforts was apparently went beyond the indistinguishable goalpost title of which reads the revamped beyond brought worst in hot Italian sausage shockingly better and pork links.
We are pleased it is the number one selling plant based dinner sauces and retail according to spins data for the latest 12 week period, ending 716 twenty-three.
And if rolled this renovation out to food service as well.
Two we are providing consumers with a sneak peak of our latest beef formula in the form of a soft launch of the odd stockburger at Kroger and select Albertsons as well as new seasons and Northern California.
Like our renovated dinner sausage. This newest iteration of our broker represents the latest in our flavor and texture. It matches since winning early praise.
We further took this taste and texture innovation to foodservice is to be honest Nashville Burger.
Lastly, even as the beyond Burger was the number one selling plant based burger across retail according to spins for the latest 12 week period, ending 716 twenty-three.
We are actively working on our exploration the beyond Burger for where you're incorporating certain elements of it will be on stack and be honest Nashville Burger.
Accordingly, we were watching consumer and customer reactions closely and are excited by early results.
In the frozen section, we continue to expand distribution of one of our new renovations beyond stake, which is the number one selling new plant based meats item at retail according to spins data for the 12 week period ended $716 23.
Interestingly recent data from a regional chain showed that more than 50% of households bought beyond stake, we're new to the plant based meat category and that two out of three households repurchase beyond stake.
Reinforcing that this is a product that is resonating with consumers.
For our newest renovations and distribution expansions and the balance of our product portfolio across retail.
We're increasing our investment in in store execution, particularly in the U S.
And the turbulence of the last four years with the pandemic changing consumer behaviors high inflation and the entrance and exit of competitive players in the plant based meat section they reset and re grounding, particularly refrigerated case is overdue.
We recognize that the once clearly demarcated plant based sections of the fresh meat case can be certain retailers far less defined today.
In addition to working with retailers on this issue we are doubling down on field resources to focus on shelf availability and presentation as well.
Bring new renovations to market.
As you may recall, a little over four years ago, we set a goal that within five years, we will be able to produce and sell at a cost and price respectively that is.
At parity with animal protein for at least one product.
One of three platforms of beef pork and poultry.
I'm pleased to share that we are indeed doing that now with a meaningful product in foodservice and expect to be able to report more of the same over the next year.
Yeah.
In the last 12 months of pricing exercises, we've learned more about different elasticities across our product lines.
They use elastic cities may support a more varied approach to pricing that will enable us to more aggressively restore margins, even as we move toward price parity, where it matters most.
We are pleased to see the continuation of the new client nugget alongside the big plant Kroger in the German market as well as the mud plant Burger across the U K, Ireland, Austria, Netherlands, Portugal.
Most recent introduction also.
As the Mcclatchy platform takes hold it is fun to see countries, such as Austria build and promote unique MC plant Burger offerings, such as Steakhouse Burger and the plant fresh we believe success within the plant platform in the EU speaks to consumer and government recognition.
Basically it's a powerful tool in addressing climate and broader environmental concerns.
We are investing in team innovation and partnerships in the EU to be able to serve this growing trend.
We're closing out I want to emphasize how at beyond meat, we view the current category trough and how this perspective informs our strategy and tenor behind our response.
Like many innovative disruptions throughout history.
What we initially thought it was going to be a quicker pace. The mainstream adoption has proven to be slower.
In my comments today.
Asides familiar points of focus for us as we navigate the chasm between early adopters and mainstream consumers.
A new and improved products toward our true north.
Oh fire health message to counter incumbent industry positioning annoys educating the consumer.
And lastly, collapsing the cost structure of our product lines to improve margins to where it matters most offer product at parity with animal protein.
We continue to pursue each of these levers are focusing on increasing operational efficiency.
Driving Cogs reductions.
RPC limiting cash consumption, along our path to cash flow positive operations.
Though we believe equally in the for social goods behind our brand human health climate natural resource conservation and animal welfare.
One cannot help but notice the urgent intensification of climate dialogue across global leadership and societies.
With what may be the hottest period on record in the last 120000 years.
Many well covered heatwave storms fires and the other extreme weather events across the planet. This summer.
The abstract notion of climate change is increasingly tangible to the everyday consumer.
The greater use of plant based meat is a powerful tool and a global response, particularly because it targets greenhouse gases, namely nitrous oxide and methane.
That are not only highly potent but also the removal of which can have a more immediate impact of slowing climate change due to their shorter residency in the atmosphere.
We believe the transition to a more plant based food system is not only inevitable, but gaming urgency.
Spike current challenges of a nascent category and brand we are highly confident that beyond meat is well positioned to play a leading role.
With that I'll turn it over to luby.
<unk> financial officer, Treasurer to walk us through second quarter financial results.
Greater detail as well as update our outlook for 2023.
Thanks, Nathan on the surface Q2 was a disappointing quarter for us as net revenues and gross profit fell short of our expectations. However.
Shortly several factors are indicative of the continued progress we are making in improving the intrinsic operating performance of our business, giving us reason to be optimistic for the long term.
These factors include our underlying gross margin performance when adjusted for certain transitory impacts our ongoing progress on our cost containment and operating expense management, our fifth consecutive quarter of inventory reduction and the steep reduction of our overall cash consumption year over year.
Although the operating environment within our sector is proving more challenging than previously anticipated. We believe the foundational work against which we are making good progress will better position our company to capitalize on the opportunity ahead of us.
Let me now dive into our Q2 financial results in a bit more detail.
Beginning with net revenues volume of products sold declined by 23, 9% year over year, while net revenue per pound decreased eight 6% year over year, resulting in an overall net revenue decline of 35% compared to the prior year period.
On an absolute basis the decrease in volume of products sold was primarily driven by the decline in our U S retail channel and to a lesser extent a decline in U S foodservice.
In U S retail the decline in volume primarily reflected weaker than expected demand in the category.
I'm significant jerky sell it in the year ago period and to a lesser extent the impact from competition.
U S. Foodservice was similarly impacted by weak overall demand and a difficult year over year comparison, as Q2, 2022, with a particularly strong quarter for U S. Foodservice driven by restocking of that channel following its reopening post COVID-19.
With respect to pricing roughly 9% year over year decrease in net revenue per pound was primarily attributable to changes in product sales mix and increased trade discounts, partially offset by reduced sales to discount channels, which depressed price realization of certain items in the year ago period.
As it relates to product sales mix relative under performance of our core products, namely burgers ground beef and dinner sausage generally has a negative impact on net price realization for our business.
As for trade discounts special promotional programs intended to attract new users to our category drove a meaningful increase year over year.
Although these programs showed initial promise they did not scale well at retail and ultimately did not bring about the desired increase in new category users, we will be refocusing our promotional spending in view of these learnings from these programs.
Moving onto gross margin. Our Q2 gross profit was $2 3 million or gross margin of two 2% of net revenues.
Although this represents over six points of margin improvement versus the year ago period, including the impact on depreciation expense from the change in our accounting estimate associated with the estimated useful lives of our large manufacturing equipment fell short of our previously stated expectation to drive sequential margin improvement.
Throughout the year.
Gross profit and gross margin were positively impacted by lower materials costs, lower inventory reserves and lower logistics cost per pound, partially offset by higher manufacturing costs, excluding depreciation and as I just discussed lower net revenues per pound.
Total Cogs improved by 73 per pound year over year, and we are pleased to see our cost down initiatives, yielding savings on materials costs and the reduction in logistics costs that test to some of the early results from our network consolidation strategy.
Within manufacturing costs overall success in reducing tolling fees on a year over year basis was partially offset by under utilization fees, which we view as transitory of approximately $800000 driven by softer demand in some startup delays as we ramped up production lines within a new cold.
Manufacturing site.
And Cogs and this quarter was negatively impacted by the flow through of higher cost inventory produced in the fourth quarter of last year. When we curtailed production volumes in response to weak demand, resulting in the capitalization of inventory bearing a high labor and overhead cost.
Turning to operating expenses, we saw a year over year reduction of 33% from $83 5 million in the second quarter of 2000 $22 million to $56 million this quarter.
The main drivers of this were reduced non production head count expenses, primarily as a result of the reduction in force implemented in October 2020 to lower legal and consulting fees.
Creased production trial expenses and lower outbound freight costs.
Also represented a sequential quarterly reduction of 12%.
We are pleased with our team's continued diligence in keeping costs contained reflecting early success in our ongoing adoption of lean management principles.
Moving further down the P&L in other expense income, we benefited from meaningfully lower realized and unrealized foreign currency losses, as well as higher net interest income year over year.
In addition loss from our unconsolidated joint venture TPP was lower year on year, reflecting very limited economic activity in the JV. This quarter as we continued to transition our jerky business to beyond meat.
Overall net loss was therefore $53 5 million in the second quarter of 2023 or net loss per common share of 83 compared to net loss of $97 1 million or $1 53 per common share in the year ago period.
Adjusted EBITDA was a loss of $40 8 million or negative <unk>, 40% of net revenues in the second quarter of 2023 compared to an adjusted EBITDA loss of $68 8 million or negative <unk> 46, 8% of net revenues in the year ago period.
Now turning to our balance sheet, our cash and cash equivalents balance, including current and non current restricted cash was $225 9 million and total debt outstanding was approximately $1 1 billion as of July one 2023.
Inventory fell to $207 1 million a reduction of $15 3 million compared to the previous quarter, demonstrating continued progress against our inventory drawdown and initiatives.
As I mentioned this represents our fifth consecutive quarter of inventory reduction and we remain highly focused on driving further reduction in the balance of the year.
Turning to cash flows net cash used in operating activities in the second quarter of 2023 was $46 2 million or a $24 $3 million decrease compared to the year ago period.
Capital expenditures totaled $1 8 million in Q2 of 2023 compared to $20 4 million in the year ago period.
And our total cash consumed in Q2 amounted to $47 7 million or 49% less than the year ago figure of $93 2 million.
Together these improvements in Cogs operating expenses inventory drawdown in cash consumption demonstrate that we continue to make real strides in managing our business more efficiently.
However, where we are experiencing greater than expected pressure is on a net revenue growth and its attendant implications for gross margin.
We attribute this at least in part to persistent weakness in the categories that transcends beyond me, but as Ethan discussed earlier, we continue to pursue several growth strategies to drive better outcomes on our top line.
Let me now provide some commentary about our 2023 outlook Ethan mentioned, we do anticipate a return to modest year on year revenue growth in the second half of 2023, as we cycle, notably weak comparisons from a year ago and as we expect to see continued expansion of newer products in the U S.
Some growth in international markets and continued progress with key strategic accounts internationally.
However, greater than expected category headwinds, particularly in the U S is resulting in a more cautious outlook for the balance of the year and as such we now expect net revenues for the full year to be in the range of 360 million to $380 million, representing a decrease of approximately 14%.
Two 9% compared to 2022.
Gross margin is now expected to be in the mid to high single digit range, reflecting both the Q2 outcome as well as the expected impact from reduced revenues.
Operating expenses are expected to be approximately $245 million or less.
And capital expenditures are now expected to be in the range of 20 million to $25 million.
Finally, with respect to the company's previously stated target of achieving cash flow positive operations within the second half of 2023, we now believe the subjective is unlikely to be met in light of the current operating environment, which points to greater category headwinds than previously expected.
Nonetheless, we remain committed to significantly reducing our rate of cash consumption in the second half of the year as compared to the first half and we will be prudently managing our cost base in the coming quarters to move towards our ultimate North Star are cash flow positive operations with that ill conclude my remarks, and turn the call back.
Over to the operator to open it up for your questions. Thank you.
We will now begin the question and answer session.
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On today's call. We ask that you. Please limit yourselves to only one question you may rejoin the queue. If you have additional questions.
Now at this time, we will pause momentarily to assemble our roster.
And our first question here will come from Adam Samuelson with Goldman Sachs. Please go ahead.
Yes. Thank you good afternoon, everyone.
Yes.
Hi, So maybe just talking about the updated sales outlook and maybe specifically in U S. Retail you alluded to some challenges in scaling some of the trial and promotion activity in the U S.
How should we think about that.
Moving forward and as we think about the need to accelerated kind of volume volume consumption kind of as a pathway to future growth kind of what where is the pivot from a from a marketing and product and distribution perspective that that's going to enable that.
Sure no. Thank you for the question and I'll I'll maybe.
Start.
It over to Luca for some additional detail.
First and foremost I want to stress some of the things that we covered in our prepared remarks.
Despite bringing down the forecast somewhat for the balance of the year.
Very excited to be coming out of what we view as a trough in the category.
And resuming growth in the third and fourth quarter. So I don't want to lose sight of that you'll also see an improvement in gross margin. We believe in the third and fourth quarter, particularly as we move further away from higher cost products that we produce.
In earlier quarters and could take advantage of some of the lean work, we've been doing around cost down on Cogs.
You'll also see us continue to make really strong progress on reducing operating expenses down 30% as I mentioned year over year, and then cash down about 50 near.
Near 50.
On top of that you can can you see an improvement of products as a core part of the answer that I'm going to give you an answer to how we are thinking about.
Growth.
First and foremost if you look at whether it's the state product in all of the reviews is getting the facts in the morning.
New plant based meat product in the category look at the recently renovated dinner sausage where that also.
As the number one.
Based on such.
In the category and then you look at our burgers continues to be the top selling plant based Burger.
And we're shifting into both a new formula texture that we're releasing in foodservice.
Smash Burger, we have released and just.
Demos.
Trialing in retail something called a stockbroker what you capture some of those improvements so continuing to improve the products continuing to operate the business much more efficiently I think the last piece is attacking head on this ambiguity that exists around the.
Health benefits of plant based meat, particularly beyond meat. They are extremely strong and it is something that we've attacked.
Research and through partnerships, whether it's C.
Society work, we're doing more of the certification from the American Heart Association or understate.
The work with Stanford School of Medicine, and all the things I mentioned.
Third remarks.
But we're now taking a step further.
I'm going to be much more aggressive in our marketing.
Around the goodness within our products.
Looking at some of our marketing recently last week, we released there's goodness here, which is a campaign focused on celebrating.
Ingredients, we use the farmers, who grow them and the process that we use to turn the plant material into to meet all of these things are part of our health message in the whole story so.
Look at the second half of the year.
<unk> see that continuing throughout the organization the reduction in cost of our goods.
And then the restoration of the message around the entire category, we view those as key to the resumption of growth. We're also looking at some more tangible things as we offer this forecast.
You bet and both in the U S.
In Europe .
And things of that nature.
Yes, Adam I would just add that.
I think.
Just given some of the pressures that we've seen in the broader environment.
We are I think navigating some challenges that are reducing the overall effectiveness of.
<unk> spending and it's an impact that transcends the plant based meat category I think.
Others are more broadly in the industry have.
It sort of similar.
Phenomenon going on in the areas that they play in and so.
In relation to your question and sort of how we're thinking about this is we're definitely taking learnings from.
We are we had some targeted.
Promotional programs early in this year, which were really intended to bring more consumers into the category.
But I think what we're seeing is for various reasons some of which Ethan mentioned in his prepared remarks.
There are things that are putting a lot of pressure on our category in particular, some of which is related to messaging, which we're starting to.
I think <unk> be a little bit more vocal about.
If you look at our recent campaign that just came out.
But certainly we are our goal is to be sharper in terms of how.
How we deploy our promotional spending and so we expect to.
To see some benefits from that in the latter part of this year and Thats, what about Florida, just add a little bit to that I mean, I think one of the key issues.
Category itself.
Are you seeing some headwinds and so if you look at if I kind of start off more broadly and you look at it.
The overall consumer.
Some of the.
Diminished outlook, the consumer has around their own financial situation and then you look at.
What consumers are doing in the protein space, including animal protein, where they're trading down among proteins and also buying less protein.
When you get to our category, where we are a high priced and so not that do particularly well in that environment, but also they will have this kind of ambiguity around health you can see how potentially pricing is going to be less impactful given.
Given that you're not bringing new people into the category because of those macro conditions and some of the category headwinds so for us, it's really around the store and the category message.
Making sure the consumer understands and has a reason to come into the category at that point, we think some of the promotional activities will probably be more effective.
If there was a there was a lot there are a lot of color I appreciate it I'll pass it on.
Sure.
And our next question will come from Peter Galbo with Bank of America. Please go ahead.
Hey, Hey, guys good afternoon.
Maybe one day and I wouldnt be Super quick modeling questions. Just movie is there any differential we should think about in terms of the revenues between <unk> and <unk> cadence would be helpful. And then secondly on the cash burn.
It seems like you're saying it should improve in the third and fourth quarters. Its been running about 50 million a quarter over the past 12 months is just anything you can help us dimension about how much improvement you would expect there thanks very much guys.
Yes, just quickly on the on the cash flow.
Not that were.
Walking away from that in any way shape or form it's just with the top line coming down somewhat wanted to caution that it was gonna be unlikely within the timeframe specified that said you should see a sharp reduction in cash consumption across the balance of the year and certainly internally continue to drive the business towards achieving that goal.
But.
We'd rather keep that as an internal goal.
Give a little more room in Sterling.
When we crossover and eventual Basel IV.
Yes, so to your first question around the.
What sort of cadence of revenues in the back half of the year.
We're not providing specific guidance by quarter at this time. However, if you look at historically, the third quarter being typically a little bit stronger than.
The fourth quarter, just from a seasonal demand perspective.
I don't think there would be anything that would be.
Significantly from some that this year.
And then just to your question around.
Cash consumption and how that falls in the second half relative to the first half I think.
There are several things that we're looking at.
First and foremost is we have to deliver on the hour.
Our revenue projections for that.
Bounce of the year and then.
In conjunction with that we also have to deliver on our gross margin targets right to ultimately generate gross profit dollars right and then once we do that.
We it's about continuing to contain costs from an opex perspective, theres some opportunities that we're looking at from a capex perspective.
Where we can potentially defer some capex projects that we were anticipating.
What happened in the back half of this year.
Things related to our.
Our inventory reduction efforts, which were still very focused on you put all of those things together and we do expect that the overall level of cash consumption in the back half of this year will still be well should be significantly lower than what.
What we saw in the first half.
And so those are those are the primary things I think that that bridge that gap.
Great. Thank you.
Okay.
Our next question will come from Ken Goldman with Jpmorgan. Please go ahead.
Hi, Thank you.
I wanted to ask about your strategy for R&D spending it's down but.
But it's still 9% of your sales this quarter, which is you know me.
Meaningfully more than what we see from a typical packaged food company and I agree or.
We're not a typical packaged food company, but you talk about you know the biggest issue facing the category being maybe a misperception of the health benefits.
You've had some recent launches I hope, it's not unfair to say the results are some good some maybe slightly disappointing why not divert some of this R&D spend toward brand building toward category building, if youre if thats the biggest issue that you're facing why not it really maybe lean into that a little more.
Thanks, Dan I appreciate the question and so I think the main response I'd have is that we are certainly emphasizing spend on.
The category narrative.
Also reaching out across companies to help us do this.
Uh huh.
A bunch of companies, obviously, you're in a category all rising.
Rising or falling.
With this narrative.
So, bringing together industry coalitions to address this as an important way to add.
But we are looking at how do we reallocate funding toward marketing to clean up this messaging because it is just an education issue I mean, the facts are there.
The health benefits of our products are very strong we.
We see that in the work, we do not only with universities, but.
In general just seeing consumers and help their logical change.
So it's a very good question I won't comment specifically on how much we're going to allocate toward R&D versus this but.
I think the emphasis in your question is right.
And then just quickly.
How are you doing with.
Meat eaters, where flexitarian versus pure vacancies lately what are what are your data telling you about how the vegan and start looking at your product or at your category compared to how they used to or are they being affected by the marketing as well.
I think to a lesser extent I mean, there are the folks that I mentioned that would be susceptible to some of the kind of more let's say.
I don't know the Foodies.
Paris, two a salad or something of that nature, and we always resist that regimen R. R.
Really our point of relevance as the.
The health benefits relative to animal protein, where those are extremely strong.
We continue to see.
The consuming family be a mix of.
Flexitarian essentially.
That's what we want to be I think the main issue with the categories is not bringing in enough new consumers. That's the number one issue start to show the characteristics of the consumer is that overall pie is not growing and thats, what we need to fix together and work on those other companies.
Great. Thank you.
And our next question will come from Robert Moskow with TD Cowen. Please go ahead.
Hi, Ethan high Luby.
And I was wondering if as you start to look ahead to 2024 and beyond are in your like long term scenario planning do.
Do you ever consider the possibility of.
This business may be a $300 million business, instead of $3 50, plus or a $250 million business.
You know shrinking to win is always a tough strategy, but you know given what you're up against here in terms of consumer perception.
And what I'm sure are some very good core consumers, who care about the environmental impact of what Youre doing.
Is that a possible strategy and would you consider you know right sizing the company in that direction ever.
Yes.
But I think disagree it pretty rigorously with that future.
If you look at.
Where we're operating if you look at some of the positive trends that we're seeing.
Including stacked that resuming.
Quarter over quarter had been through I think what is the most difficult period for the business.
Let's take Europe for example.
And look at our strategics over there.
The progress, we're making now in Germany were selling both burgers and Nuggets.
In doing so.
With high acceptance among consumers.
Just I think we've got another launch with Mcdonald's in Malta.
We look at and I think that's.
I don't think I mentioned in my prepared remarks, but it'll end up and I'll, let Mcdonald's comment on their own.
But a competitor shared that.
Large global Birch and one in five of their signature burgers in Germany is now plant base.
And so if you look at whether it's those trends or universities or just overall consumption of animal protein in certain European countries. You can see a very very strong trend in the right direction that had come to the U S and while older people arent necessarily wrapping their minds around this younger people or so.
We look at how institutions are responding to that for example, take some of the biggest food providers in the country. Our remarks at <unk>. So I think it was aramark committed to increasing their plant based on the use of 50% by.
By 2025.
So something like 44%.
Across more than 250 universities.
So the trend is really is here there are some distortion in it like many.
Early disruptions.
But.
As I've mentioned, many times that kind of.
The arc of history is very much on the side of what we're trying to accomplish.
Even if all of these other things don't get cleared up which they will ramp health et cetera, do you have a climate crisis, which is now becoming more and more real for the consumer and there is really no way to get at that without fixing food.
And so our job as a company is to continue to get much more efficient continue to drive cost out of our products and beer. So when when folks are ready to make this transition on their terms, we can certainly doing that but I do not see it going backwards in any shape or form the direction you just noted.
Yeah I appreciate the clarity thank you.
Okay.
And our next question will come from Peter <unk> with <unk>. Please go ahead.
Great. Thanks.
I wanted to ask about the overall category and really what youre seeing it seems like you're finding some success in some of these international markets yet your sales in the U S continue to be under <unk>.
The amount of pressure, so maybe or maybe you can help us understand or are there any learnings that you can take from what you're seeing in international markets and apply them to the U S. What what's happening internationally, that's not occurring in the U S to drive maybe.
Maybe the trend better it is.
The price is lower.
In international markets, like Germany, or what exactly is the difference that you're seeing better adoption there. Thanks.
Great question. So the answer is this and it's somewhat nuanced, but it's the message.
The reason to why it's clear right. So in Europe . The why is different than it is here in United States with clear right. So consumers are very concerned about climate and the environment in Europe governments concerned about institutions concerned about it and they see for the reasons I mentioned in prepared remarks, changing food as a key way to two of them.
Opt and adapt in the timeframe that we need to actually have to do with specific.
The nature of the emissions coming from.
On different sources of greenhouse gas and so in the case of.
Animal protein etcetera to oxide and methane and those are very potent.
Emissions, but also have a shorter residency in the atmosphere, so clear them out.
Cyclically by time.
The climate issue and one of the most effective way so Europe understand our consumers getting that young people are getting IV in Europe , and the U S. It's more driven by health and Theres been a decline in the reception of our category. So I think we noted.
<unk> Research Institute or something of that food marketing Institute.
Noted I think it was 50% of consumers in 2020 thought that capex needs for healthy and now that number is down to 38% that's a clear outcome.
It's a competitive market into that I guess, it's they've done a really good job of it.
Very impressive job in changing the consumer perception, we now have to.
Heavy work as an industry.
But that's the main difference right at a clear and compelling why in Europe . There wasn't clear in the building why here that has got eroded become eroded and we need to basically reestablish that that's what we got.
Can I just follow up on that that number.
50% gone to 38% perception has has that continued to decline in 'twenty, three and I'm not sure if you know.
What do you think was going to take to kind of.
Bend the curve there on that figure.
Yes, I don't I don't know, but my guess is it's going to start reversing and a reason that it's going to start reversing as we wanted to get sort of play its course.
Point there is.
That people.
If a community the other start to push back the wait a minute guys has gone too far.
Very helpful tool to combat diabetes heart disease cancer twice you Arthur.
Standouts.
First day together right at the.
As he said because this stuff works.
This catheter work, we're doing and where their work we're doing about cancer side at some point right you got to get you strip out the noise and you start to see some of the key proof points.
I think.
Yes.
There are some additional work is being done outside of our company and in the broader category. It also help that so it.
It could continue to worsen, but I doubt it I think I think you'll start to see a rebound.
Thank you.
Our next question will come from Ben Theurer with Barclays. Please go ahead.
Yeah. Good afternoon, Ethan newbie, thanks for call and it sounds like clarification I wanted to dig a little deeper into the foodservice in the U S and it kind of feels like it was like that area, where we expect a lot of growth with some of these announcements back in the past.
Mcdonald's and so on but it kind of feels like it has not taken off and sound like level.
These mid teens somewhere.
On a revenue basis.
So it doesn't really feel like it's delivering well on every side.
National piece is done significantly better on foodservice soup.
Maybe following on some of these questions around consumer trends.
How do these foodservice channels why why is it so different that the performance of foodservice international versus foodservice U S that would be much appreciated.
Sure.
It gets to the consumer again in each market.
If we look at the EU I think the consumer receptivity and readiness is there.
Thank you.
<unk> partners recognize that so thats why theyre, emphasizing but I don't think it's a binary issue I think that it's a timing issue.
By strong Europe here in the U S. You'll see a resumption of activity among <unk>.
In fact, I think that's something that.
We feel comfortable about.
So.
It's very much part of the larger trends, we just discussed.
It was prolific growth and excitement around the category.
You go through that and you go through the kind of trough, what they say trough of disillusionment then you come back up on the slipped within like a minute I think we're kind of in that area, where we're coming back out of it I wanted to get through this quarter I'm very glad its over I'm very glad to be in this quarter and look forward to the balance of the year, because I do think youll see.
Some of that assumption of growth.
And anyway, we had years ago for the balance of the year, but modest growth that shows we're climbing out of this and that's what I'm really looking forward to.
Okay. Thank you.
And our next question will come from Michael <unk> with Piper Sandler. Please go ahead.
Thank you and good afternoon.
Hi.
I sort of want to ask almost the opposite of Ken Goldmans question.
I think that the help discussion is interesting in the study numbers are certainly interesting, but at least in the U S. Consumers overwhelmingly say that their primary consideration is taste and.
Even price and health benefits or health considerations are far behind and so.
How can you continue to develop.
Better product I think that's in so many consumers' minds kind of a centerpiece.
The 9% obviously.
Parents to his point is a lot but.
Can you give a sense of what might be ahead, and how much more quickly product development could advance that might be.
The difference maker for at least a large percentage of U S consumers.
It's a great great question and then turn this question is fair and this is also.
Alright balance you guys were trying to strike here.
And then why do we think about all the time so.
I would refer to that tasting table review of the dinner sausage.
We've always said, our north star as it should be indistinguishable.
But I have heard this from others.
Then new sources for what we call soft story.
People enjoy it actually more than animal protein equivalent.
And our efforts to get it to the parent.
We are making strong progress there I think if you look at the state product.
Sure that up it's absolutely delicious.
Such high levels of protein.
Less than a graph our graph so saturated fat so many benefits to it but.
Anyway, so all of those things matter, what the consumer is willing to comment.
But if there is a time to cloud over the sector.
Those things that are less so price matters less equipment fragmentation. So our number one goal.
And this area is to lift that club.
The consumer about the health benefits of the product.
Things like taste will really start to matter again, you need to give the consumer taste is the most important thing.
But you need to give the consumer and motivation beyond that because alco to taste good too so.
So we have to deliver on tape.
Slightly more within Novartis other attributes.
U S consumer education.
Okay, great. Thanks for the thanks for the question.
Okay.
By the way and our next question.
That'd be airtime I'll, just do a shameless plug for our neighbor.
You should go out and you should try.
In foodservice, whether it's called it beyond the Bachelor or in retail type on the <unk> that has a new flavor formula texture at which I think has gone down a review something like.
Early reminiscent or something of that nature.
Or so.
We keep we keep making better.
But again, let's let the.
There are clear on these other issues, but you that'll be something that is really pleasing.
Go ahead.
Our next question will come from Rob Dickerson with Jefferies. Please go ahead.
Great. Thanks, so much.
It's kind of a simple question I mean, it sounds like.
Kind of back half U S retail revenues are expected to grow a little bit.
I'm assuming that.
Clearly volume base.
Your compares awful last year's back half.
Is there is there something unique that just kind of drive that volume.
Out of the conversation these days.
So what happens when you have student loan payments are going to kind of circle back a little bit and maybe the consumers not so strong and there's not a lot of companies have a lot of conviction in the strength of the consumer and you're saying.
The consumer is still a little tight and we have a premium product at the same time, yeah revenues are going to get better I don't know if that's just kind of points of distribution or why you have that conviction.
Yes, so it's a good question. So it's a couple of things wanted to against the lower comps, we have got year over year.
Two it's increased distribution both in.
Retail and in foodservice.
And globally.
The continued strength of our strategic partnership partnerships, particularly in Europe .
So that's really what's driving it versus any sense that the consumer's going to automatically have a better outcome outlook or something of that nature. It's more of those tactical things that we know to be present.
Okay, Okay fair enough and then.
I guess kind of late in the queue here, but I'll circle back to Ken's question is another question on R&D.
Lavery kind of R&D versus advertising.
New Smash Burger taste profile.
Just feel like you know maybe not as much.
As an analyst, but just your consumer debt when you kind of think that tourists.
The taste profile.
Should we also be expecting in the investment community.
To like see new adds about that or like you walk into the store and it's going to show why it tastes better just something for a hawk because I do feel like you are.
I'm kind of on a rolling basis renovating the product.
Maybe consumers don't know.
That's all thanks.
Yes, it's also a very good question.
You should expect that I think we've been focused right now during a period when a lot of these flowed through.
On cleaning up the shelf narrowed it so so I think a lot of our marketing for the balance of the year is going to hit that theme.
But overall.
The vision for this is that it would be very much like the release of any new products you know 34567.
Excitement around each of those.
So, but I think right now we have a broader category issue that we have to hammer home.
And once we can fix that then we can.
You spend those dollars more tax.
More tactical one.
Yes.
Fair enough thanks season.
Yes.
And our next question will come from Andrew <unk> with BMO. Please go ahead.
Hey, good afternoon, thanks for taking the questions I had.
I had two quick ones. The first what are you seeing in terms of competitive dynamics across the category you mentioned.
So trade discounts in the quarter and as Youre seeing the pressures on the category are you seeing more competitive activity competitive intensity pick up alongside that or how are you expecting that to evolve going forward that would be the first question and the second question is just on the margin side.
A bunch of headwinds that you listed impacting the quarter, which of those do you see sticking around versus moderating through the rest of the year of the year or.
Within the high level buckets that you mentioned, where do you see the biggest opportunities for margin expansion.
So I'll start with the second one.
Our margin I mean, I think one of the.
The transitory issues.
Don't expect to see again with the flow through of some highly capitalized inventory from last year.
That was I think it would be the right thing there, where we were slow in production to help us run through inventory for the balance.
But it caught us a little bit this quarter.
Some underutilization things and some other stuff.
We don't expect to reoccur.
At the same level, so we feel pretty good about the balance of the year, but some of it is really good Taj workshop showing up.
All in all.
The broader category competitive dynamics I think that's only.
I mean, there's two ways one is again.
Get the category message right first.
So we welcome new people into the category again.
And I think.
Doing a lot of continued discounting whether it's us or our major competitor, we're just trading amongst children. So it's less productive.
So I think it's really a dollar store and the overall category message, but the thing that has happened is there has been a tremendous.
Kind of shake out.
<unk> category, which is to our benefit.
We're still stand and we feel very strong CLO products getting better cost cutting lower operators are getting more efficient.
<unk> partnerships are moving forward.
So we have a lot of confidence about our future even as we're seeing less competitors that was better than many of the hospitals very good competitor.
And a lot of good things so that's good for the category.
Very good for the category.
Great. Thank you very much.
This concludes our question and answer session I'd like to turn the conference back over to Ethan Brown for any closing remarks.
No. We appreciate it everyone sticking with us through the quarter, we knew there's going be a tough comp.
But didn't didn't materialized exactly what we wanted to but I think the good news is we're through to a second half, which we hope will show a return.
Turning to growth.
The first would be I think.
Good climb out of this.
We look forward to reporting to export.
Okay.
The conference has now concluded.
Thank you very much for attending today's presentation. You may now disconnect your lines.