Beyond Meat - Q1 2023

Transcript

Operator (participant)

Hello and welcome to Beyond Meat's 2023 first quarter conference call. All participants will be in listen-only mode. Should you need assistance, please signal 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 queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Paul Sheppard, Vice President, FP&A, and Investor Relations. Please go ahead.

Paul Sheppard (VP of FP&A and Investor Relations)

Thank you. Good afternoon and welcome. Joining me on today's call are Ethan Brown, Founder, President, and Chief Executive Officer, and Lubi Kutua, Chief Financial Officer and Treasurer. 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. Before we begin, please note that all the information presented today is unaudited. During the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements.

Forward-looking statements in 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 the earnings release, the company's quarterly report on Form 10-Q for the quarter ended April 1, 2023 that was filed today, and the company's annual report on Form 10-K for the fiscal year ended December 31, 2022, 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 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 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. With that, I would now like to turn the call over to Ethan Brown.

Ethan Brown (Founder, President, and CEO)

Thank you, Paul. Good afternoon, everyone. I'm pleased that our first quarter results demonstrate solid progress against our strategy and plan. As you will recall, we outlined three central tenets upon which we'd execute a full force pivot from a growth above all to sustainable growth operating model. One that delivers on our goal of being cash flow positive within the second half of this year, 2023. These pillars are: One, we would apply a laser focus to margin expansion and OpEx reduction through the use of lean value streams across our beef, pork, and poultry platforms. Two, we would place an emphasis on cash flow accretive inventory management with a near-term focus on profit dollars versus maximizing percent margin. Three, we would prioritize opportunities that support near-term growth and consumer trial and adoption, appropriately balancing and streamline activities in support of our most valuable long-term opportunities.

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 out of our operations. We continue to rationalize our production network, collapsing processes and eliminating steps that generate unnecessary costs while consolidating and optimizing our co-packing resources. Though we have much heavy lifting left to do, we are seeing tangible progress. For example, even as inflation continues to plague supply chains more generally, we reduced COGS per pound by approximately 15% on a year-over-year basis, primarily on the back of solid improvement in manufacturing logistics costs, excluding any impact from depreciation.

This swift reduction allowed us to cross over into positive gross margin in Q1 2023 from a trough of negative 18% margin as recently as Q3 2022. We will continue to apply intense focus on margin restoration through cost reduction versus raising prices as we pursue our long-standing price parity target with animal protein. 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, reflecting both changes in mix as well as deliberate pricing programs consistent with our path to price parity. More broadly, we are bringing the overall cost of business operations down, taking out approximately $34 million for a total OpEx reduction of 35% year-over-year.

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, down from $66.8 million in Q4 of 2022, and a steep 74% reduction on a year-over-year basis. Two. Drawdown of high inventory levels to free up cash. As with our network, the business had raw material and with inventory levels in excess of current demand levels. We're working down these inventory levels and generating cash in the process, with inventories down $13.2 million or nearly 6% on a sequential basis. The team continues to implement our plan to draw down inventory across the balance of the year to efficient levels, though, as previously noted, the downward curve will not necessarily be linear across the calendar.

Three, prioritization of near-term growth opportunities and select long-term strategic partners. We are taking civic action to encourage the near-term restoration of growth even as we continue to nurture our most valuable long-term opportunities and partnerships. Here, I've chosen to focus my comments on U.S. retail grocery with regard to near-term actions, given the segment's impact on our growth, though we are using similar approaches in U.S. food service. In U.S. retail grocery, we are focused on restoring growth to our refrigerated offerings, where we face our most challenging year-over-year comparisons through four main actions. One, as we approach summer, we are rolling out Better with Beyond, 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.

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. Setting the record straight is a key part of bringing consumers back to the category. Two, we are working with our largest retail partners to implement a ground game strategy that features digital marketing, in-store activation, and promotional campaigns to reengage the consumer around the important themes of taste and health. Three, we continue to evaluate strategic pricing actions to further test elasticities as we seek to narrow the gap between our products and animal protein. Four, we plan to introduce certain renovations within our refrigerated portfolio.

We are intensifying our implementation of each of these four tactics, broader marketing programs designed to educate consumers and make 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 U.S. retail, despite its recent launch, Beyond Steak has quickly risen to the number two SKU in frozen plant-based meat at a key retail customer, and we continue to expand distribution for the product. More generally, the frozen category continues to be a growth area for our brand, where sequential and year-over-year dollars and units were both up significantly. Specifically, in the frozen category, Beyond Meat grew units 20.3% and dollars 28.8% when comparing Q1 2023-Q4 2022.

Year-over-year, Beyond Meat grew units 31.5% and dollars 36.4% during the same period, according to SPINS data for the 12-weeks ending March 26, 2023. Moving on to EU retail. We are expanding our product portfolio in the EU with localized innovation that draws on the resources and expertise of our global team. In the Netherlands and the U.K., we rolled out a new range of plant-based chicken products. In the Netherlands, the Beyond Chicken Burger, Beyond Schnitzel, Beyond Tenders, and Beyond Nuggets can be found at select Albert Heijn and Jumbo stores nationwide. In the U.K., the Beyond Chicken Burger, Beyond Fillet, and Beyond Nuggets are available at select Waitrose and Sainsbury's stores. These products complement the existing Beyond Meat portfolio in Europe, which includes Beyond Burger, Beyond Sausage, Beyond Mince, and Beyond Meatballs.

Turning to our strategic partners and long-term opportunities, we are encouraged by the success of the plant-based platform in Europe, which is contributing to our year-over-year growth of 100% in international food service. Both the McPlant Burger and McPlant Nuggets are seeing success across McDonald's in Germany, while the latter is also offered as a Happy Meal option in Germany. I've had the pleasure of enjoying the McPlant Nugget at various McDonald's throughout Germany and would certainly agree with the very positive press it is receiving. 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.

The McPlant Burger continues to resonate and succeed with the EU consumer and remains a permanent menu item in the U.K., Ireland, Austria, Germany, and the Netherlands, while also being offered for a limited time in Portugal. Additionally, in Austria, McDonald's continues to offer limited-time 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 U.K., Singapore, El Salvador, Guatemala, and Sweden. In summary, across all segments of the business, net revenues rose 15% Q1 2023 over Q4 2022, which in and of itself is less noteworthy given typical seasonality. However, the increase exceeded the same year-ago metric of 8.7%.

This relative progress was driven by modest sequential 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, which saw 45% growth quarter-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. I would now like to turn from these near-term actions to check in on our enduring longer-term strategy. As I've 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.

Two, articulating the health benefits of our products to the consumer in a way that resonates. Three, driving our cost structure to the point where we can match and then underprice animal protein. I will focus on each of these crossover elements, taste, health, and price, for much of the balance of my comments today. We continue to advance the taste and sensory profile of our products as well as expand distribution of award-winning offerings. This summer, I am pleased to announce that we will be launching a new generation of our burger platform in food service and in the retail frozen section. Both offerings contain strong advances in sensory profile, particularly around the delivery of animalic 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.

Moving to health, the second element of our crossover strategy, we continue to develop products that provide important health benefits to the consumer. Beyond Steak is a great example. As was announced yesterday, Beyond Steak has been certified by the American Heart Association's distinguished Heart-Check program, joining the ranks of a select number of foods that meet the American Heart Association's exacting heart-healthy nutrition requirements, including being low in saturated fats, trans fats, and sodium. More to the same, Beyond Steak has received the Good Housekeeping Nutritionist Approved Emblem and is the first plant-based meat to earn this recognition from Good Housekeeping Institute's Nutrition Lab, which assesses foods based on specific nutritional criteria as well as taste, simplicity, convenience, and transparency.

Here again, I'm very proud of all the hardworking team members at Beyond Meat who have worked for years to bring such powerful, purposeful, and positive innovation to consumers and families. Whether the certification of Beyond Steak by the American Heart Association, our five year research program with Stanford University School of Medicine, the Plant-Based Diet Initiative, or our three year agreement with the American Cancer Society to advance research on plant-based meat and cancer prevention, 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. Third element of our crossover strategy remains price. In an economy where aggressive price taking has been the norm, putting the consumer under economic pressure at various important parts of everyday life, we remain committed to our strategy of marching toward price parity with animal protein.

The last 18-24 months have interjected substantial noise into our production system. Yet today, we have what is perhaps our clearest line of sight in some time to further cost reduction. Accordingly, as progress allows, we will continue to explore certain time-limited pricing programs to provide insights into consumer behavior as we narrow the gap between our products and their animal protein equivalent. 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.

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 within the second half of this year, we are encouraged by early results even as we have many miles left to travel. We continue to advance by working the plan, driving margin expansion and OpEx 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, 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.

With that, I'll turn it over to Lubi to walk us through our first quarter financial results in greater detail, as well as our outlook for the balance of the year.

Lubi Kutua (CFO and Treasurer)

Thanks, Ethan. Our first quarter results reflect continued sequential progress and demonstrate the early success our team is having in executing against our operating plan. Though net revenues declined 16% year-over-year to $92.2 million as we continued to navigate the challenging environment, we drove a 15% sequential increase 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 as our absolute top-line results and category trends continue to reflect demand weakness amid broader macroeconomic headwinds. 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, as we lap a more difficult comparison from last year 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-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. 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 sales mix, increased trade discounts, and to a lesser extent, unfavorable foreign exchange rate impact, partially offset by higher pricing for certain products.

Gross 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. Of note, gross profit and gross margin included the impact from a change in accounting estimate associated with the estimated useful lives of our large manufacturing equipment. For further context, during the first quarter of 2023, we completed a reassessment of the useful lives of our manufacturing and R&D equipment and determined that an increase in the useful lives of certain large equipment from a range of five to 10-years to a uniform 10-years was appropriate to reflect more current operating practices and equipment service periods.

The resulting change in estimate reduced cost 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. When considering the roughly $0.30 year-over-year improvement in gross profit per pound, inclusive of the aforementioned change in accounting estimate, depreciation expense accounted for only $0.02 of the increase. The primary drivers of the year-over-year improvement in gross profit per pound were reduced manufacturing and logistics costs per pound, which contributed a combined benefit of approximately $0.84. These factors were partially offset by lower net revenue and increased inventory reserves per pound. Turning to OpEx. Operating expenses in the first quarter of 2023 were $63.9 million, down approximately 35% year-over-year and reflecting our ongoing focus on right-sizing our expense base.

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. Of note, SG&A expenses in the first quarter of 2023 included $3.9 million in non-cash expenses related to losses on sales of certain fixed assets. 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-ago period, partially offset by a $2.6 million increase in loss from our unconsolidated joint venture, primarily reflecting limited economic activity 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 $0.92, compared to $100.5 million, or net loss per common share of $1.58 in the year-ago period. adjusted EBITDA was a loss of $45.8 million or -49.6% of net revenues in the first quarter of 2023, compared to an adjusted EBITDA loss of $78.9 million or -72.1% of net revenues in the year-ago period. Turning to our balance sheet and cash flow highlights. Our cash and cash equivalents balance, including restricted cash, was $273.6 million, and total debt outstanding was approximately $1.1 billion as of April first, 2023.

Inventory fell to $222.4 million, a reduction of $13.3 million compared to the previous quarter. You may have seen, we filed a universal shelf registration statement earlier today, which will be used to bolster our balance sheet. Under such registration statement, we are establishing a $200 million at-the-market facility for our common stock. Turning to cash 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 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. 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-$415 million, representing a decrease of approximately 10%,1% compared to the full year 2022. 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, and incrementally higher category headwinds relative to our previous expectations. 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. 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 Fillet, distribution expansion and contribution from new products in international markets, and the cycling of weaker year-ago comparisons.

With respect to gross margin, as a result of the change in accounting estimate for depreciation, gross margin is now expected to be one to two percentage points above our prior guidance of low double digits for the full year. Gross margin is still expected to increase sequentially through the remainder of the year. 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. Our previous CapEx estimate of $30 million-$35 million for the full year remains unchanged. 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 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. 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.

Operator (participant)

Thank you very much. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. 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. To withdraw from the question queue, please press star then two. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Alexia Howard with Bernstein. Please go ahead.

Alexia Howard (Research Analyst and US Foods)

Good evening, everyone.

Ethan Brown (Founder, President, and CEO)

Hi, Alexia. How are you doing?

Alexia Howard (Research Analyst and US Foods)

Hi. Good. 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? Where are the biggest levers that get you back to that 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.

Ethan Brown (Founder, President, and CEO)

Sure. Thank you. So, you know, we really have four levers, as you know, to guide ourselves into a cash flow positive position, you know, net revenue, margin, OpEx and of course, freeing up cash from inventory. It's just a question of optimizing a combination of those factors. We are obviously gonna lean very heavily into freeing up cash from inventory. We have a significant amount of inventory relative to current demand environment. We're gonna use that as a source of cash. We're also very much focused on gross margin improvement.

If you look at what we were able to accomplish swinging into positive this quarter relative to where we were, let's say in the third quarter at -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, you know, quarter-over-quarter, get back into a much stronger position with a business that is more appropriate for the current market. We feel confident that we'll continue to get cash out of inventory and in fact accelerate that to get to that cash flow positive goal in the second half of this year. Continuing on a cash flow positive trajectory.

We're also confident in that regard, wanna caution that, you know, there'll be some quarters where we're adding cash and some quarters where we're not, as we overall continue to orient the business in that direction. I think the main piece of information that I want people to take away is that we've organized the business, around that principle, right? That our decision-making is governed by achieving and then sustaining over time, cash flow, positive operations. If we get in a situation where some of the levers aren't working as well as we thought, we'll also attack the problem through operating expense.

Operator (participant)

The next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.

Adam Samuelson (VP and Equity Research)

Yes, thank you. Good evening, everyone.

Ethan Brown (Founder, President, and CEO)

Hey, Adam.

Lubi Kutua (CFO and Treasurer)

Hey there.

Adam Samuelson (VP and Equity Research)

Hi. I guess, two questions. I mean, well, Lubi, I think in the prepared remarks you alluded to a $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 that or the aim of actually raising that much capital and kind of over what timeframe do you think you could plausibly do that? 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, is that specifically saying in one specific quarter or cumulatively in second half in total, you actually expect cash flow positive operations?

I just wanna be clear on kinda how we're measuring that goal.

Ethan Brown (Founder, President, and CEO)

Yeah, thank you. I'll tackle the first one, and then we can elaborate on the timing of the cash flow positive. On the ATM, it's something that, you know, we wanted to put out there. We are again very confident in the progression the business is making. You know, I think this story is one where week-over-week, we're making considerable progress toward storing growth and creating a sustainable business model. It's in no way, you know, a signal that we're, you know, needing the cash immediately. As a result, we're just gonna use it opportunistically. We'll use it as we think, you know, the conditions are appropriate.

It's really to bolster our cash reserves and, put it out there 'cause I think there's a lingering question about what we're gonna do. This provides an answer, but we are gonna be very judicious and, thoughtful about, when and how we use it.

Lubi Kutua (CFO and Treasurer)

Yep. Thanks, Ethan. 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. You know, that can either mean both quarters, Q2 and Q3 or one quarter. Now, you know, we're doing everything that we can around, you know, some of the levers that Ethan mentioned already to drive, you know, stronger gross margin performance and, you know, making sure that we manage operating expenses within a very tight sort of range, right? We would of course, love to be able to hit that mark in both the third quarter and the fourth quarter. You know, what we've said was, you know, within.

We think we should be able to do it within the second half. Again, just to remind you, the way we've defined that the cash flow positive objective is it is free cash flow, so operating cash flow from operations less CapEx.

Operator (participant)

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

Rob Dickerson (Managing Director and Consumer Staples Equity Research)

Great. Thanks so much. Ethan, kind of a fairly broad question just around household penetration. You know, clearly household penetration's, you know, dropped, been as elevated through COVID and then some headwinds obviously, you know, now and it's pulled back some. It just kinda 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.

You know, if you look at that, you think through that, and then we think through kind of the forthcoming innovation pipeline that you're speaking to in the back half, you know, would you say that there have been kind of like decent material, product development changes that are inherent within that innovation that gives you now kind of a better kind of higher conviction feel on consumer, you know, reaction to the innovation relative to clearly the drop in household penetration we've seen over the past 12-months? That's it. Thanks.

Ethan Brown (Founder, President, and CEO)

No, I appreciate it. Great question. You're right. There has been, I think from like 27.8%-25.5% or something like that, re-reduction. You know, we continue to really look at this in three ways. One, there's the macro issue of, you know, the inflationary environment and obviously seeing some moderation there. That gives us a little bit hope on that front. If you look at recent earnings of animal meat providers, they're also seeing that trading down is occurring. You know, we believe some of that is still at play for sure. Second is there is an increased level of ambiguity, I think, around the health benefits of our products.

Some of that is purposefully seeded, through, you know, interest group campaigns, and some of that is just genuine. You know, it's a new category, new products, people are trying to figure out, you know, what's what. Third, you know, brand specific issues, where tremendous number of entrants came into the category. 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 taking care of itself, as the category shakes out, and I think the consumer is left with a much more rational and approachable decision set when in a grocery.

Those are the kind of three main factors that we felt would contribute to the household penetration numbers that you just shared. On the positive side, I'll get into some of the things that we're doing also on the innovation renovation side. First, you know, I do wanna 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. That's obviously from a smaller base, it shows the power of Beyond innovation. You know, when we launch a new product, for example, like Beyond Steak, 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.

I think we'll continue to see real progress from that. 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, right? We've created a piece of steak that is, by all reviews, delicious, right? It's earning the endorsement and the certification from AHA, which, you know, is very selective, right? Now a product that, you know, I think it's Cheerios has the endorsement. Now, something as a center of the plate protein, typically associated with, you know, kind of very indulgent eating, is now something that people can feel really good about consuming. It is 62% less saturated fat than an animal protein than the animal protein equivalent.

you know, it's a terrific source of protein with fava beans, et cetera. 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, of our products. As inflation starts to moderate, as the health message becomes clearer, we're then set up with both the renovation and innovation that we're bringing to market to really reengage the consumer. Talk a little bit about the renovation. Some of that renovation is targeted directly at the refrigerated case where we've had the most significant issues, right? You'll see something later this year coming out, which in all the kind of CLT, the consumer tests we do, scores well above the current product in the market.

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, have people in all the time looking at it, and it's a true, I think, advance in taste and sensory experience. So that'll actually be going 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. I'm excited to get that out. Then this price parity program. We're not going all the way down to the price of animal protein, but we're starting to tease out that elasticity.

As you do that, in the stores where we can really control for noise, we are seeing some very good results. That's not, in any way a broad statement, right? These are more limited efforts, and the data is still pretty rough and early. I caution against, you know, using it for anything other than which it is, which is nascent information. We are seeing some elasticity that's encouraging around those pricing tests. Finally, you know, as the shakeout continues to occur, we think we'll have a straighter shot to the consumer. We are building momentum. The second quarter is obviously lapping a very, very significant quarter for us last year, I think at $147 million in revenue.

I think it's really more about quarter three and four with the lower comps. I think we're finally gonna get this business back to being, you know, a pretty decent margin, and seeing growth again in the second half of the year, which I'm really excited to do.

Operator (participant)

The next question comes from Peter Galbo with Bank of America. Please go ahead.

Peter Galbo (Managing Director and Head of US Consumer Staples Equity Research)

Hey, guys. Good afternoon. just one quick clarification and then my actual question. Just, Lubi, I wanted to understand the change around the depreciation impact to the gross margin. you know, is that something that continues then throughout the rest of the year, or was it kind of pulled into just 1Q? you know, that's really the only flow through kind of to the higher gross margin, would be my first question.

Lubi Kutua (CFO and Treasurer)

Yeah, sure. It does continue throughout the year, because, you know, essentially, as we mentioned, we've done a reassessment of the useful lives of our large equipment. 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 industry standards. There will be a benefit, and that actually is the reason, the primary reason for us taking up the gross margin guidance for the full year.

Now, it won't be 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. We would expect depreciation as a percentage of total net revenues to be lower in those. 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.

Peter Galbo (Managing Director and Head of US Consumer Staples Equity Research)

Okay. That's helpful. Then maybe Ethan, just if we could go back on the quarter, just some of the sales trends. I've gotten a few questions. Just one on.

Ethan Brown (Founder, President, and CEO)

Sure.

Peter Galbo (Managing Director and Head of US Consumer Staples Equity Research)

on U.S. retail. You know, obviously underperformed a lot of the scan data. Just trying to understand the gap there. 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.

Ethan Brown (Founder, President, and CEO)

Yeah. No, no problem. I think what you're referencing, year-over-year, I think of 100% growth in international food service. You know, there's obviously some performance in mom and pops, but also the strategics are really driving that. 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 the sense of we wanna make this transition to plant-based meat. You know, all factors are pointing to it. There's been some disruption to that. As you look at the progress we're making with strategics 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.

To have a major customer like a McDonald's or a Yum! show that kind of progress in a very limited market and do it so profoundly, I think is really encouraging. No, there wasn't really load in. It's just, you know, progress, quarter after quarter progress. It hasn't been a straight line, but, you know, I think the arc of this thing is gonna continue to be impressive. On the retail side, it kind of gets back to the issues I talked about. You know, it's a tough retail quarter for, you know, animal meat as well, right? There's just a lot of noise in the system right now. We're making the steps that you should make to do this.

You know, we're putting in marketing programs at a high level around taste and health. We're, you know, 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. Then we're doing an overdue, you know, 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 confusion. You know, whether it's the Stanford Health study, that was done, the SWAP-MEAT study.

I've talked about a lot in the past, but again, it probably bears repeating where, you know, consumers had animal protein twice a day for eight weeks and then switched over to Beyond Meat twice a day, eight-week period, and then back to animal protein. Just in that eight-week period, if I do nothing else than help the people on this on this phone call understand this, they saw a drop in bad cholesterol, statistically significant drop. They also saw, and I think this is even more meaningful. It's not just LDL cholesterol dropping, but TMAO drops, which is the compound in the gut that they're increasingly associating with heart disease. You see that benefit, right? You see organizations like the American Heart Association endorsing the product.

Then you see the partnership with American Cancer Society. There's more to come. We are, you know, not doing what others do. You know, we're not putting propaganda out there. We're not criticizing other companies. What we are doing is doing the research, right? We're bringing together the medical community to continue to study these issues. The inevitability of this, the truth that stands behind our products, the proof points that we have, that is what's going to bring us back in retail, and we have to continue to communicate that. Pricing, new products coming in, clear marketing around health and taste, those are the things that are gonna drive us back to a growth position in the second half of the year. Again, week after week, we're making progress here.

It's gotten to be exciting and fun.

Peter Galbo (Managing Director and Head of US Consumer Staples Equity Research)

The next question comes from Ben Theurer with Barclays. Please go ahead.

Benjamin Theurer (Managing Director)

Yeah, good afternoon, Ethan, Lubi. Thanks for taking my question. Just wanted to follow up on the international food service piece, which clearly was one of the better growth stories in the quarter. If we kind of look into what you've printed just in 1Q 2023, it's kind of the level that we just had before the pandemic hit back in the first quarter of 2020. Wanna understand if you can help us maybe put that into context where we are Q1 2023 versus the Q1 2020, as it relates to outlets 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.

Ethan Brown (Founder, President, and CEO)

Thank you for the question. One of the rules that I've always tried to follow is to let our partners, you know, kind of speak for their progress. I will say we're just, as I mentioned in my remarks, really proud to be working with McDonald's in Europe, and really proud to be working with Yum! in select European markets as well as globally. To see some of the traction we're making where, you know, you see the McPlant burger come out, you see the good results there. Then you see the McNugget, the McPlant Nugget come out and see good results there in the press. I can't share the results to share, not mine.

If you look at the press reaction and the consumer reaction in Germany, we're seeing some things we really like. To see, you know, after the years and years of investment, to see that start to pay off, is something that's very gratifying for us. What we need to do is continue to work with our supply chain, continue to work with our partners. To provide these products at a price point that the everyday consumer can afford. Again, I've always maintained this is around, you know, get the taste right, get the health message super clear, and then get to the price to the point where it's at parity or below that of animal protein. 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. We're getting clearer on the health benefit for the consumer, we're driving price reduction. I said in the prepared remarks, year-over-year, we're down 9% on average price. That's mix and some of the pricing programs. I really wanna 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. It shows, I think, that they're just scratching the surface. As we continue to optimize our network and continue to gain scale globally, that will be easier and easier.

The success of the strategics in Europe, I think is again, sort of the tip of the iceberg. It's been a successful test and we expect those to roll out. Can't speak for any one of them, but we do expect those to roll out into other markets over time.

Operator (participant)

The next question comes from Peter Saleh with BTIG. Please go ahead.

Peter Saleh (Managing Director and Restaurants)

Great. Thanks. Ethan, I want to come back to that conversation around international food service real quick. You guys seem to be finding some success over in Europe with your product. I was hoping you'd give us. I know you don't wanna 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. Any sort of details you can provide around the characteristics of the customer who's buying it there. Are they older, younger? Are they lower income, higher income? Anything that can just help us kinda identify what might work here in the U.S. that's already resonating over in Europe.

Ethan Brown (Founder, President, and CEO)

I can't really dive too much into the repeat data and things of that nature. I will say that I think the fact that we're contemplating expansion with various partners is a good thing. The thing that is so strong in Europe, which I think needs to be developed here in the U.S., is, you know, while we're hammering on healthier and the true and amazing benefits that we think we can deliver with a piece of steak, for example, that, you know, again, has such strong health credentials, in Europe, it's really about the environment, right? You know, consumers that, you know, are maybe less focused on the category for health are gonna come into it because of climate.

There's so much proactive and progressive behavior there around climate that you have situations where major fast food organizations are battling it out on plant-based offerings. It's really encouraging. I don't know that that kind of environmental context is going to develop overnight here in the U.S. It seems to be more health driven. Certainly here in the U.S., we try to lean into those categories, or rather those consumer segments where we see very strong interest in the environment and climate. Younger people here in the U.S., college-age students here in the U.S., those folks actually care about climate, and we're working very closely with them. The way they embrace the product is very different from someone who's in their 50s, right?

There are far fewer, kind of traditional roadblocks or ways of thinking that might get in the way of it. We do take the lessons from the European consumer and try to find pockets here in the U.S. that maybe are more dialed into some of the urgency of the environmental crisis that we face.

Operator (participant)

The next question comes from Andrew Strelzik with BMO Capital Markets. Please go ahead.

Matt Linden (Equity Research Associate)

Good afternoon, everyone. This is Matt Linden on for Andrew. Wanted to touch on pricing quickly. You know, when we think about some of the challenges to consumer adoption in plant-based, it often comes up as the, you know, the premium price point relative to, you know, animal-based protein. You know, understanding price parity is a long-term goal, wanted to ask how you think about balancing that move to price parity, while also protecting near-term margin growth as we execute the turnaround strategy. Thank you.

Ethan Brown (Founder, President, and CEO)

Sure. That's a great question. I think first and foremost, it's really around we are emphasizing total profit dollars versus percent margin. Getting some of these bigger programs going, whether in Europe or here in the U.S. with some of the grocers and things of that nature, and just putting more volume through our system really helps us, right? You know, not being myopically focused on percent, but rather on profit dollars is a way to think about it, and how we're tackling that question. I think the second piece that gets back to this disruption that's occurred to the business over the last couple of years, you know, we went from, I think, eight now to three co-packers.

Doing that, while also lowering costs is really hard. You know, there's just so many variables that are moving. I'm really excited to see what our team's gonna do now that they kinda have some pathways that are more stable. We start getting around some of the leaning out that we've been doing in a more stable environment. 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, and we don't have much more room to go. We have a tremendous amount of low-hanging fruit to grab from here.

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. You know, if you, 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 entrepreneurial environment within your company between product families, beef, pork, and poultry. You can get there, and that's what we're doing. I think the team's having fun doing it.

Operator (participant)

The next question is from Michael Lavery with Piper Sandler. Please go ahead.

Michael Lavery (Managing Director and Senior Research Analyst)

Thank you. Good afternoon.

Ethan Brown (Founder, President, and CEO)

Hey, Michael.

Michael Lavery (Managing Director and Senior Research Analyst)

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? You know, is there any spoilage risk or write-offs that you might have to wrestle with? Maybe related, maybe not, but can you also just talk about the decision to bring jerky from the partnership in-house and just some of the thinking there and how that unfolds?

Ethan Brown (Founder, President, and CEO)

Yeah, sure. Let me take the second one first. Yeah, bringing jerky in-house, you know, we love the work with PepsiCo. You know, we think we're gonna be able to utilize that vehicle down the road. In this particular case, again, like, once you start to really focus on this goal of cash flow positive, change the operating model toward 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 jerky market in one year, I think sixfold. It's a good product. We like it. Let's get the margin right, and so that's why we're bringing it in-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 a specific program to make sure that we're putting all that to use. You know, we can't control for everything, so we obviously continue to have reserves. The goal there is to monetize any excess ingredients we have, as well as keep a very tight control on any aging inventory to avoid the write-off. 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. You know, you never know. Feel really good about that and have some good people in the company focused on that.

If you take those, you know, things where you're looking at inventory levels very proactively, both finished goods as well as WIP 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 absorption you get as you do that. This collaboration we have throughout the supply chain to get lower overall costs as we grow the business. You know, we're increasing throughput on our equipment, and then just trying to eliminate waste, again, at every turn within our system, 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 of quarters, and I think you'll see the next few quarters going forward.

Lubi Kutua (CFO and Treasurer)

What was the first question? The, the sort of inventory outlook, which, you know, you sort of addressed, but I'll just add to that, Michael, that, you know, Ethan mentioned that the trajectory of our total inventory balances will not necessarily, you know, look like a straight line down, right? In part due to, you know, some of these preexisting contracts that we have in place. You know, we do expect that, you know, the inventory levels will move around somewhat. However, we've said before that, you know, part of us being able to achieve this cash flow positive objective of ours in the back half of this year is dependent on us significantly reducing our total inventory levels, right?

We've said, you know, we've said quite frankly that our inventory levels are too high, and we're very focused on lowering that. I think our team has done a great job, we absolutely do, still believe that we will end this year with substantially lower, inventory levels than, you know, where we came into the year at. That won't necessarily look like just a straight line down.

Operator (participant)

Today's last question comes from John Baumgartner with Mizuho Securities. Please go ahead.

John Baumgartner (Managing Director of Equity Research, Food, and Healthy Living)

Good afternoon. Thanks for the question.

Ethan Brown (Founder, President, and CEO)

Sure.

John Baumgartner (Managing Director of Equity Research, Food, and Healthy Living)

you know, Ethan, just back to your commentary on temperature state. You know, this category's performance in 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. I think what you do have in refrigerated is this really big entrenched competition from animal meat that culturally, you know, could be a lot harder and more expensive to dislodge over time. you know, I guess how do you think about refrigerated going forward, independent of price point? You know, is there a strategic pivot here to get more involved in the frozen case? Is the runway to dislodge the animal meat eater much longer than you would have thought, you know, three or four years when you sort of started out?

I'd love, like, just your high-level impressions there. Thank you.

Ethan Brown (Founder, President, and CEO)

Yes, that's a great question. A bunch of ways to unpack it, and again, I think some really good stuff in there. First and foremost, you know, our strategy and our goal rather is not to be a high-priced niche item, right? Is to be a major player in the $1.4 trillion global protein market. We're gonna go after that every way we can, right? There's certainly, and of course, people have been taking price right and left, so there's been a lot of suggestions we should do that as well.

Just not interested because we really wanna make sure that we're getting to the mainstream consumer and having the impact that we want and can generate the really outsized return for folks that we think is possible if we're successful at doing that. The frozen case is interesting. You know, it would be not very interesting if it were just the frozen meat alt case of 10-years ago, which we kinda referred to as the penalty box. If you have the data, look, for example, how our Cookout Classic product does relative to, I think it's a BUBBA burger, you know, as a percent of sales, and it's a pretty interesting ratio. You know, what's interesting about that is two things. One, it's in the frozen section.

That's our Cookout Classic is one where the price point is closer to animal protein than in the fresh section. You know, if you were to... You 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 right. In the fresh section, you know, 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 gonna take longer than it looked like two or three years ago. You never know what's gonna turn it, right? Is it as we get to the right pricing?

We're certainly seeing in some cases an uplift there. Is it when we do the next iteration, you know, and bring more consumers in because the taste profile is closer? Is it, you know, these breakthroughs like the American Heart Association endorsement of one of our products? You know, all of those things start to come together, and the next thing you know, it's something that is again coming off the shelves in the fresh section. I don't think we give up on it, but we clearly take advantage of the traction that we're seeing in frozen.

Operator (participant)

This concludes our question and answer session. I would now like to turn the call back to Ethan Brown for closing remarks.

Ethan Brown (Founder, President, and CEO)

Thanks. you know, as I said, I think this is a business that is turning a corner. you know, this next quarter, the quarter we're in, is a high comp, but we're looking forward to really the second half of the year, getting back to growth. Getting back to growth with a reasonable margin and instituting some of these changes we're making. team feels good, and we look forward to reporting in the next quarter. Thanks, everybody.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.