Beyond Meat - Q2 2023

Transcript

Operator (participant)

Good day, welcome to the Beyond Meat, Inc. 2023 second quarter conference call. All participants will be in a listen-only mode, should you need any 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. Also, please note that this event is being recorded today. I would now like to turn the conference over to Paul Sheppard, Vice President of FP&A and Investor Relations. Please go ahead, sir.

Paul Sheppard (VP, Financial Planning and Analysis 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 Kou, 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. 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 on today's call is unaudited and that 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 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 report on Form 10-Q for the quarter ended July 1st, 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 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 (CEO)

Thank you, Paul. Good afternoon, everyone. I will be summary of 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 with the cycling of 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 2.2%. These outcomes obscure the very strong progress we are making in positioning the business for sustainable operations and growth.

We reduced COGS per pound by 14% or $0.73 year-over-year, reduced operating expenses by 33% or $27.5 million year-over-year, and slashed cash consumption down nearly 50% or $45.5 million year-over-year, reflecting a business that is making early strides in the implementation 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. Before proceeding, I should note that as we continue to drive costs out of our organization and 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 toward the achievement of this objective. The net result should be sharply reduced cash consumption for the balance of 2023 as we move with pace to complete our cash flow positive milestone. I will now turn briefly to the three central pillars upon which we are driving the business to future sustainable growth. Back to the first pillar, that is, the use of value streams across our beef, pork, and poultry platforms to support operating cost, COGS 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 horizontal flow of value to customers is generating results. Some of the more visible outcomes include progress across COGS, operating expenses, and cash consumption.

With regard to the second pillar, the use of inventory reduction as a key lever towards achieving our cash flow positive objective, we continue to make solid progress, and in Q2, reduced inventory by $15.2 million, or nearly 7% sequentially. Year to date, we have reduced total inventory by nearly $30 million, or roughly 12%, bucking our historical trend, which typically sees a seasonal increase in inventory 1st 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 releasing incremental cash. Turning to our third pillar, which centers on near-term opportunities to restore top-line growth. Even as we nurture long-term partnerships, we are focused on five main levers. One, addressing the broader narrative around the category.

Two, continuing to release new renovations, innovations that bring us closer to our North Star of being indistinguishable from animal protein. Three, investing in resetting the retail fresh plant-based meat section. Four, implementing pricing learnings from the last 12 months. Five, supporting our largest strategic partners. We recognize that there are broader economic headwinds at play, namely inflation and higher interest rates that are squeezing spending power of the consumer, we are also acutely aware that there is ambiguity and confusion around the health benefits of plant-based meats, and that this is weighing on the category's growth. As a brand and category, we have significantly more work to do to reach the consumer on the health benefits of Beyond Meat and plant-based meats, respectively.

There is a considerable gap between the strong health credentials of our products and a broader counter-narrative that is now afoot, and this gap appears to have widened. In the two-year period, 2020 to 2022, the percentage of U.S. consumers who believe plant-based meats are healthy dropped from 50%-38%, according to the Food Marketing Institute. As was the case during the ascent of plant-based milk, this change in perception is not without encouragement from interest groups who have succeeded in seeding doubt and fear around the ingredients and process used to create our and other plant-based meats. Nor is it without contribution from well-meaning, yet misguided comparisons of our products to kale salads versus the animal-based meats they are intended to replace.

It is in this latter framing that we belong and excel, with clear nutritional advantages, including no cholesterol, lower levels of saturated fats, the absence of antibiotics, hormones, and other veterinary drugs, the absence of carcinogenic compounds such as heterocyclic amines, and the absence of precursors to TMAO, a compound that researchers have 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 in LDL or bad cholesterol and the aforementioned TMAO after only eight weeks of replacing animal meats with Beyond Meat. Through collaborations such as that with the American Cancer Society, where we are supporting broader studies on plant-based meats and related health outcomes.

Our efforts also include third-party engagement, such as the American Heart Association's first-ever certification of a plant-based meat, Beyond Steak, as a heart-healthy food, as well as work with registered dietitians and nutritionists for purposes of educating consumers about the strong health benefits of plant-based meats. Last week, we launched a campaign long in the making called There's Goodness Here, that shares and celebrates the farming origins of our ingredients and describes our process for turning plants into plant-based meat. The first installment of the campaign features one of our fava bean farmers and connects the consumers to the fields where our protein is grown, while explaining the clean and simple steps we use to build our plant-based meats.

As you can likely tell, we are proud of our process and ingredients and are confident that the more consumers know, the more they will see the goodness in what we do. Goodness for the soil due to the nitrogen-fixing nature of legumes that helps keep fields healthy and productive. Goodness 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. 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, the key parts of the Beyond Meat Rapid and Relentless Innovation program is to improve each of our pillars of beef, pork, and poultry over time, so that one day they are indistinguishable from their animal protein counterparts.

This is a goal that we share with consumers, with 53% of all consumers agreeing that plant-based protein products should taste indistinguishable from meat, according to recent data from Mintel. The good news is we continue to make strong strides in this direction, all against a static target. In Q2 alone, we released a series of important iterations within our core platforms of pork and beef. One, we launched what we internally call Sausage Three, the refrigerated plant-based meat section, where Beyond Meat remains the number one selling brand, according to SPINS, the latest 12 weeks, ending 7/16/2023.

We are pleased with and point to early feedback on our renovated dinner sausage product as evidence that despite current headwinds, we steadfastly march forward against our promise of enabling consumers to eat what you love while simultaneously having a positive impact on your health, on the climate, environment, and animal welfare. Earlier this summer, the Tasting Table posted a review that captures the results of our latest sausage renovation efforts, which apparently went beyond the indistinguishable goalpost, the title of which reads: The Revamped Beyond Bratwurst and Hot Italian Sausage are shockingly better than pork links. We are pleased it is the number 1 selling plant-based dinner sausage in retail, according to SPINS data, for the latest 12-week period ending 07/16/2023, and have rolled this renovation out to food service as well.

Two, we are providing consumers with a sneak peek of our latest beef formula in the form of a soft launch of Beyond Stack Burger at Kroger and select Albertsons, as well as New Seasons in Northern California. Like our renovated dinner sausage, this newest iteration of our burger represents the latest in our flavor and texture advances and is winning early praise. We further took this taste and texture innovation to foodservice as the Beyond Smashable Burger. Lastly, even as the Beyond Burger is the number one selling plant-based burger across retail, according to SPINS for the latest 12-week period ending 7/16/2023, we are actively working on our next iteration, the Beyond Burger Four, where we are incorporating certain elements of the Beyond Stack and Beyond Smashable Burger. Accordingly, we are 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 newer innovations, Beyond Steak, which is the number one selling new plant-based meat item at retail, according to SPINS data for the 12-week period ended 07/16/2023. Interestingly, recent data from a regional chain showed that more than 50% of households that bought Beyond Steak were new to the plant-based meat category, and that two out of three households repurchased Beyond Steak, 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 are increasing our investment in in-store execution, particularly in the US.

In 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, a reset and regrounding, particularly in the refrigerated meat case, is overdue. We recognize that the once clearly demarcated plant-based sections of the fresh meat case can be, in 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 we bring new renovations to market. As you may recall, a little over four years ago, we set a goal that within five years, we would be able to produce and sell at a cost and price, respectively, that is at parity with animal protein for at least one product in 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 food service, and expect to be able to report more of the same over the next year. Yet in the last 12 months of pricing exercises, we've learned more about different elasticities across our product lines. These elasticities 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 McPlant nugget alongside the McPlant burger in the German market, as well as the McPlant burger across the UK, Ireland, Austria, Netherlands, Portugal, and our most recent introduction, Malta. As the McPlant platform takes hold, it is fun to see countries such as Austria build and promote unique McPlant burger offerings such as Steakhouse Burger and McPlant Fresh.

We believe the success of the McPlant platform in the EU speaks to consumer and government recognition that plant-based meats are 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. Before closing out, I want to emphasize how at Beyond Meat we view the current category trough and how this perspective informs the strategy and tenor behind our response. Like many innovative disruptions throughout history, what we initially thought was going to be a quicker pace of mainstream adoption has proven to be slower.

In my comments today, I emphasized familiar points of focus for us as we navigate the chasm between early adopters and mainstream consumers, continuing to improve products toward our true north, amplifying our health message to counter incumbent industry positioning and noise while educating the consumer, and lastly, collapsing the cost structure of our product lines to improve margins and, where it matters most, offer products at parity to animal protein. We continue to pursue each of these levers while focusing on increasing operational efficiency, driving COGS reductions, and sharply limiting cash consumption along our path to cash flow-positive operations. Though we believe equally in the four 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 120,000 years, and the many well-covered heatwaves, storms, fires, and 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 in our 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 on 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 gaining urgency, and that despite 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 Lubi Kou, our chief financial officer and treasurer, to walk us through second quarter financial results in greater detail, as well as update our outlook for 2023.

Lubomir Kutua (CFO and Treasurer)

Thanks, Ethan. On the surface, Q2 was a disappointing quarter for us as net revenues and gross profits fell short of our expectations. As I will discuss 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 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. 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 8.6% year-over-year, resulting in an overall net revenue decline of 30.5% 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. food service. In U.S. retail, the decline in volume primarily reflected weaker than expected demand in the category, cycling of significant jerky sell-in in the year ago period, and to a lesser extent, the impact from competition.

US food service was similarly impacted by weak overall demand and a difficult year-over-year comparison, as Q2 2022 was a particularly strong quarter for US food service, driven by restocking of that channel following its reopening post-COVID. With respect to pricing, the 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 suppressed price realization on certain items in the year ago period. As it relates to product sales mix, relative underperformance 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 on to gross margin. Our Q2 gross profit was $2.3 million, or gross margin of 2.2% 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, it fell short of our previously stated expectation to drive sequential margin improvements throughout the year.

Gross profit and gross margin were positively impacted by lower materials costs, lower inventory reserves, and lower logistics costs per pound, partially offset by higher manufacturing costs, excluding depreciation, and, as I just discussed, lower net revenue per pound. Total COGS improved by $0.73 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 attest 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 underutilization fees, which we view as transitory, of approximately $800,000, driven by softer demand and some startup delays as we ramped up production lines within a new co-manufacturing site.

COGS in 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 volume 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 2022 to $56 million this quarter. The main drivers of this were reduced non-production headcount expenses, primarily as a result of the reduction in force implemented in October 2022, lower legal and consulting fees, decreased production trial expenses, and lower outbound freight costs. This 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 continue 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 $0.83, 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 40% of net revenues in the second quarter of 2023, compared to an Adjusted EBITDA loss of $68.8 million, or negative 46.8% of net revenues in the year-ago period. 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 1st, 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 initiatives. As I mentioned, this represents our 5th consecutive quarter of inventory reduction, and we remain highly focused on driving further reductions in the balance of the year. Turning to cash flows. Net cash used in operating activities in the 2Q 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. Our total cash consumed in Q2 amounted to $47.7 million, or 49% less than the year ago figure of $93.2 million.

Taken together, these improvements in COGS, operating expenses, inventory drawdown, and 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 net revenue growth and its attendant implications for gross margin. We attribute this, at least in part, to persistent weakness in the category that transcends Beyond Meat. 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.

As 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 US, distribution growth in international markets, and continued progress with key strategic accounts internationally. However, greater than expected category headwinds, particularly in the US, 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-$380 million, representing a decrease of approximately 14%-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. OpEx are expected to be approximately $245 million or less, and CapEx are now expected to be in the range of $20 million-$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 this objective 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 of cash flow positive operations. 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)

We will now begin the question and answer session. To ask a question, you may press Star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw a question, please press Star, then two. 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 just momentarily to assemble our roster. Our first question here will come from Adam Samuelson with Goldman Sachs. Please go ahead.

Adam Samuelson (Equity Research Analyst)

Yes, thank you. Good afternoon, everyone.

Ethan Brown (CEO)

Hey, Adam. Hey there.

Adam Samuelson (Equity Research Analyst)

Hi. Hi. Maybe just talking about the updated sales outlook and maybe specifically in US retail, you alluded to some challenges in scaling some of the trial and promotion activity in the US. How should we think about that moving forward? As we think about the need to accelerate kind of volume consumption, kind of as a pathway to future growth, where is the pivot from a marketing and product and distribution perspective that's gonna enable that?

Ethan Brown (CEO)

Sure. No, thank you for the question, and I'll maybe start and then hand it over to Lubi for some additional detail. First and foremost, I wanna stress some of the things that we covered in our prepared remarks. You know, despite bringing down the forecast somewhat for the balance of the year, we are 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. I don't wanna 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 produced during earlier quarters....

Can take advantage of some of the lean work we've been doing around cost down on COGS. You also see us continue to make really strong progress on reducing operating expense, I think, down 33%, as I mentioned, year-over-year, and then cash down about 50, near 50. On top of that, you can just see an improvement in products, this is a core, I think, part of the answer that I'm gonna give you on sort of how we are thinking about continued growth.

First and foremost, if you look at whether it's a Beyond Steak product and all the reviews it's getting, and the fact it's the number one, you know, new plant-based meat product in the category, look at the recently renovated dinner sausage, where that also is the number one plant-based sausage in the category. Then you look at our Beyond Burgers, continues to be the top selling plant-based burger. And we're shifting into, to both a new formula and texture that we're releasing in food service, as the Smash Burger we have released and just demoed, and are trialing in retail, something called the Stack Burger, which captures some of those improvements. 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, and particularly Beyond Meat. They are extremely strong, and this is something that we've attacked, you know, through research and through partnerships, whether it's the, you know, American Cancer Society work we're doing, or the certification from the American Heart Association around our steak, the work with Stanford School of Medicine, all the things I mentioned in my prepared remarks. We're now taking it a step further and, and going to be much more aggressive in our marketing around the goodness within our products.

I think if you, you were looking at some of our marketing recently, last week, we released There's Goodness Here, which is a campaign focused on celebrating the ingredients we use, the farmers who grow them, and the process that we use to turn the plant material into, into meat. All these things are part of our health message and our health story. As we look at this second half of the year, you know, that efficiency that keeps 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, to the resumption of, of growth.

We're also looking at some more tangible things as we go off of this forecast, like, you know, increased distribution both in the US and in Europe, and things of that nature. Lubi?

Lubomir Kutua (CFO and Treasurer)

Yeah, Adam, I would just add that, you know, I think, just given the 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 promotional spending. It's, you know, an impact that transcends the plant-based meat category. I think, you know, others more broadly in the industry have reported sort of similar phenomenons going on in the areas that they play in. You know, in relation to your question and sort of how we're thinking about this is we're definitely taking learnings from...

You know, we, we had some targeted promotional programs earlier in this year, which were really intended to bring more consumers into the category. I think what we're seeing is, for various reasons, some of which Ethan mentioned in his prepared remarks, you know, there, 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, you know, I, I think, be a little bit more vocal about. You know, if you look at our recent campaign that just came out. Certainly, you know, our goal is to be sharper in terms of, you know, how we deploy our promotional spending.

We expect to see some benefits from that in the latter part of this year and, as we move forward.

Ethan Brown (CEO)

Lubi, I'll just add a little bit to that. I mean, I think one of the key issues is if the category itself is facing some headwinds. If you look at, you know, if I kind of start on more broadly, and you look at the overall consumer, and 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. You get to our category, where we are high priced, and so not gonna do particularly well in that environment, but also now have this kind of ambiguity around health.

You can see how potentially pricing is going to be less impactful given that you're not bringing new people into the category because of those macro conditions and then some of the category headwinds. For us, it's really around restoring the category message and making sure the consumer understands that and has a reason to come into the category. At that point, we think some of the promotional activities will probably be more effective.

Adam Samuelson (Equity Research Analyst)

Yeah, there was a, there was a lot there, a lot of color. I appreciate it. I'll, I'll, I'll pass it on.

Ethan Brown (CEO)

Sure.

Operator (participant)

Our next question will come from Peter Galbo with Bank of America. Please go ahead.

Peter Galbo (Managing Director and Senior Equity Research Analyst)

Hey, hey, guys. Good afternoon. just maybe a 1A and a 1B on, on super quick modeling questions. Just, Lubi, is there any differential we should think about in terms of the revenues between 3Q and 4Q cadence would be helpful? Secondly, on, on the cash burn, you know, it, it seems like you're saying it should improve in, in the 3rd and 4th quarters. It's been running about $50 million a quarter over the past, you know, 12 months. Just, just anything you could help us dimension about how much improvement you'd expect there. Thanks very much, guys.

Ethan Brown (CEO)

... Just quickly on the, on the cash flow. I mean, it, it's not that we're, you know, walking away from that in any way, shape, or form. It's just with the top line coming down somewhat, we wanted to caution that it was gonna be unlikely within the timeframe we'd specified. That said, you should see a sharp reduction in cash consumption across the balance of the year, and certainly internally, we continue to drive the business toward achieving that goal. We would rather keep that as an internal goal and give a little more room externally on when we cross over into cash flow positive. Lubie?

Lubomir Kutua (CFO and Treasurer)

Yeah. Yeah, Peter, to your first question around the sort of cadence of revenues in the back half of the year. We're not providing specific guidance by quarter at this time. However, you know, 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, you know, I don't think there would be anything that would deviate significantly from that this year. And then just to your question around cash consumption and how that evolves in the second half relative to the first half. You know, I think there's several things, right, that we're looking at.

you know, first and foremost is, you know, we have to deliver on our revenue projections for the, for the balance of the year. Then, you know, in conjunction with that, we also have to deliver on our gross margin targets, right? To ultimately generate gross profit dollars, right? Then, once we do that, you know, it's about continuing to contain costs from an OpEx perspective. There's some opportunities that we're looking at from a CapEx perspective, you know, where we can potentially defer some CapEx projects that we were anticipating would happen in the back half of this year. There's things related to our inventory reduction efforts, which we're 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, should be significantly lower than what we saw in the first half. So, you know, that those are the primary things I think that bridge that gap.

Peter Galbo (Managing Director and Senior Equity Research Analyst)

Great. Thank you.

Lubomir Kutua (CFO and Treasurer)

Sure.

Operator (participant)

Our next question will come from Ken Goldman with JP Morgan. Please go ahead.

Ken Goldman (Managing Director and Senior Equity Research Analyst)

Hi, thank you. I wanted to ask about your strategy for R&D spending. It's, it's down, but it's still 9% of your sales this quarter, which is, you know, meaningfully more than what we see from a typical packaged food company. And I agree, you're, you know, you'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 know, you've had some recent launches. I hope it's not unfair to say the results are, you know, some good, some maybe slightly disappointing. Why not divert some of this R&D spend toward brand building, toward category building? If that's the biggest issue that you're facing, why not, you know, really maybe lean into that a little more?

Ethan Brown (CEO)

Thanks, Ken. Appreciate the question. So I think the, the main response I'd have is that we, we are certainly emphasizing spend on, on, on the category narrative, and also reaching out across companies to help us do this. You know, there's a, you know, a bunch of companies obviously in our category, all, all, you know, rising and falling, with this narrative. Bringing together industry coalitions to, to address this is, is an important way to handle it. We are looking at, you know, how do we reallocate funding toward marketing to, to clean up this messaging? Because it is just an education issue. I mean, the facts are there. You know, the, the health benefits of our products are very strong.

We see that in the work we do, you know, not only with universities, but, in general, just, seeing consumers and how their lives can change. It's a very good question. I won't comment specifically on, you know, how much we're gonna allocate toward R&D versus this, but, I think the, the emphasis in your question is the right one.

Ken Goldman (Managing Director and Senior Equity Research Analyst)

Just quickly, how are you doing with meat eaters or flexitarians versus pure vegans lately? What is, what are your data telling you about how the vegans are looking at your product, or at your category compared to how they used to? Are they being affected by the marketing as well?

Ethan Brown (CEO)

I think to a lesser extent, I mean, there are the folks that I mentioned that, you know, would be susceptible to, to some of the, you know, kind of more, let's say, I don't know, the, the foodies that would, you know, compare us to a salad or something of that nature, and we always resist that, right? I mean, our, our... really, our point of relevance is, is our, the health benefits relative to animal protein, where, where those are extremely strong. You know, we continue to see, the consuming family be a mix of, you know, basic flexitarians, essentially. And that's, that's where we wanna be. I think the main issue with the category is just not bringing in enough new consumers. That's the number one issue. It's not necessarily the characteristics of the consumer.

It's that overall pie is not growing, and that's what we need to fix together, and we're working on that with other companies.

Ken Goldman (Managing Director and Senior Equity Research Analyst)

Great. Thank you.

Operator (participant)

Our next question will come from Robert Moskow with TD Cowen. Please go ahead.

Robert Moskow (Managing Director, Consumer – Food & Beverages Research Analyst)

Hi, Ethan. Hi, Lubie. You know, I was wondering, as you start to look ahead to 2024 and beyond, in your, like, long-term scenario planning, do you ever consider the possibility that this business may be a $300 million business instead of, you know, $350+ 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 you're doing, is that a possible strategy, and would you consider, you know, rightsizing the company in that direction ever?

Ethan Brown (CEO)

Yeah, I mean, I think disagree pretty rigorously with, with, with that future. You know, if you look at, you know, where we're operating, if you look at some of the, the, the positive trends that we're seeing, including the fact that we're resuming, you know, growth quarter-over-quarter and been through, I think, what is the most difficult period for the business. Take Europe, for example, and look at our strategics over there, and the, the progress we're making. You know, now in Germany, we're selling both burgers and, and nuggets, and doing so, you know, with, with high acceptance among consumers. Just I think we got another launch with McDonald's in Malta.

You look at, and I don't think I mentioned this in my prepared remarks, but interestingly enough, and I'll let McDonald's comment on their own outcomes, but a competitor, shared that, a very large global burger chain, that one in five of their signature burgers in Germany is now plant-based. So if you look at whether it's those trends or universities or just the overall consumption of animal protein in certain European countries, you can see a very, very strong trend in the right direction. You come to the U.S., and while older people aren't necessarily wrapping their minds around this, younger people are. So if you look at how institutions are responding to that, for example, take some of the biggest food providers in the country, Aramark, Sodexo.

I think it was Aramark committed to increasing their plant-based menus to 50% by 2025. I think Sodexo was something like 44% across more than 250 universities in the country. The trend is really, it is here. There's some distortion in it, like many early disruptions. The sort of, as I've mentioned many times, the 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, around health, et cetera, 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.

Our job as a company is to continue to get much more efficient, continue to drive cost out of our products and be here, so when, when folks are, are ready to make this transition on their terms, we can serve them in doing that. I, I do not see it going backwards in any shape or form, in the direction you just noted.

Robert Moskow (Managing Director, Consumer – Food & Beverages Research Analyst)

Yeah, I appreciate the clarity. Thank you.

Operator (participant)

Our next question will come from Peter Saleh with BTIG. Please go ahead.

Peter Saleh (Managing Director, Restaurants and Food Distributors Analyst)

Great, thanks. I wanted to ask about, you know, the, the overall category and really what you're seeing. It seems like you're finding some success in some of these international markets, yet your sales in the US continue to be under a significant amount of pressure. Maybe you can help us understand, are there any learnings that you can take from what you're seeing in international markets and apply them to the US? What's happening internationally that's not occurring in the US to drive maybe the trend better? Are the prices lower in international markets like Germany? What exactly is the difference that you're seeing better adoption there? Thanks.

Ethan Brown (CEO)

That's a great question. The answer is this, and it's, it's somewhat nuanced, but it, it's the message and the reason, the why is clear, right? In Europe, the why is different than it is here in the United States, but it's clear, right? Consumers are very concerned about climate and the environment in Europe. Governments are concerned about it, institutions are concerned about it, and they see, for the reasons I mentioned in my prepared remarks, changing food as a key way to, to adopt and adapt in the timeframe that we need to. Again, this actually has to do with specific the nature of the specific emissions coming from, from different sources of, of greenhouse gas.

In the case of animal protein, it's nitrous oxide and methane, and those are very potent emissions, but also have a shorter residency in the atmosphere. If you clear them out, right, you can basically buy time and deal with the climate issue in one of the most effective ways. Europe understands that, the consumer is getting that, and young people are getting that in Europe. Here in the US, it's more driven by health, and there's been a decline in the health perception of our category.

I think we noted there's the Food Research Institute or something like that, Food Marketing Institute, noted that I think it was 50% of consumers in, in 2020 thought that, that plant-based meats were healthy, and now that number is down to 38%. That's a clear outcome of some competitive marketing has been done against us, and they've done a really good job at it. They've done a very impressive job in changing the consumer perception. We now have to do the heavy work as an industry to fix that. That's the main difference, right? There's a clear and, and compelling why in Europe, and there was a clear and compelling why here that has got eroded, become eroded, and we need to basically reestablish that, and that's what we're doing.

Peter Saleh (Managing Director, Restaurants and Food Distributors Analyst)

... Can I just follow up on, on that, that number, the, the 50% going to 38% perception? Has that continued to decline in 2023? I'm, I'm not sure if you know. What do you think it was gonna take to kind of bend the curve there on, on, on that figure?

Ethan Brown (CEO)

Yeah, I don't, I don't, I don't know, Khan, but my guess is that it's going to start reversing. The reason that it's gonna start reversing is, is one, I think it sort of played its course. You know, at some point, there's, the people, you know, the medical community and others start to push back and say, "Wait a minute, guys, this is going too far." This is, this is a, this is a, this is a very helpful tool to combat, you know, diabetes, heart disease, cancer. That's why you see the American Heart Association stand up and say, "Wait a minute, we're certified first state ever, right, as a heart-healthy state, because this stuff works." Or the Stanford work we're doing, or the work we're doing with the American Cancer Society.

I mean, at some point, right, you get, you strip out the noise, and you start to see some of the key proof points. I think, you know, there's some, there's some additional work that's being done outside of our company and in the broader category that'll also help that. It could continue to worsen, but I doubt it. I think you'll start to see a rebound.

Peter Saleh (Managing Director, Restaurants and Food Distributors Analyst)

Thank you.

Operator (participant)

Our next question will come from Ben Theurer with Barclays. Please go ahead.

Ben Theurer (Managing Director, Head of Latin America Equity Research)

Yeah, good afternoon, Ethan, Lubi. Thanks for calling and some of the clarification. I wanted to dig a little deeper into the food service in the US, and it kind of feels like it was like that area where we expected a lot of growth with some of these announcements back in the past, Yum, McDonald's, and so on. It kind of feels like it's not taking off and sounds like a level of these mid-teens somewhere than on a revenue basis. It doesn't really feel like it's delivering. Well, on the other side, the international piece has done significantly better on food service.

Maybe following on, on some of these questions around consumer trends, how do these food service channels, why, why is it so different that the performance of food service international versus food service, US? That would be much appreciated.

Ethan Brown (CEO)

Sure. I, I think it gets to the, the consumer again in, in each market. I think if we look at the EU, I think the consumer receptivity and readiness is, is there. I think that the-- our CD partners recognize that, so that's where they're emphasizing. I, I don't think it's a, a binary issue, right? I think that, that it's a timing issue, and my strong view is if you're in the US, you'll see a resumption of activity among QSRs. In fact, I think that's something that, that, that, we, we feel comfortable about. I-- you know, it's very much a part of the larger trends we've just discussed. You know, there, there's been a-- there was prolific growth and excitement around the category.

You know, you go through that, and you go through the kind of trough of, what they say, Trough of Disillusionment, then you come back up on the Slope of Enlightenment, and I think we're kind of in that area where we're coming back out of it. You know, I wanted to get through this quarter. I'm very glad it's over. I'm very glad to be in this quarter and, and looking forward to the balance of the year, because I do think you'll see, some of that resumption of, of growth, you know, not in, in any way, what we had, you know, a few 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.

Ben Theurer (Managing Director, Head of Latin America Equity Research)

Okay. Thank you.

Operator (participant)

Our next question will come from Michael Lavery with Piper Sandler. Please go ahead.

Michael Lavery (Managing Director and Senior Research Analyst)

Thank you. Good afternoon. I, I sort of want to ask almost the opposite of, of Ken Goldman's question. You know, I think that the health discussion is, is interesting, and, and the study numbers are certainly interesting. At least in the US, consumers overwhelmingly say that their primary consideration is, is taste, and, even price and, and health benefits or health considerations are, are, are far behind. So how can you continue to develop, you know, the, a better product? I think that's, in so many consumers' minds, kind of the centerpiece.

The 9%, obviously, in fairness to his point, is, is a lot, but is, can you give a sense of what may be ahead and how much more quickly product development could advance that might be, the difference maker for, for at least a large percentage of, of US consumers?

Ethan Brown (CEO)

It's a great, great question. Then, you know, Ken's question is fair, and this is also, I think it's the right balance you guys are trying to strike here, and the one that we think about all the time. You know, I would refer to that Tasting Table review of the, of the dinner sausage, where, you know, we've always said our North Star is, is, should be indistinguishable. I have heard this from others, that the new sausage, what we call Sausage Three, people enjoy that actually more, than the animal protein equivalent. You know, our efforts were just to get it to be at parity. I think we are making strong progress there. I think if you look at the steak product, and you sear that up, it's absolutely delicious.

You know, you have such high levels of protein and, you know, like less than a gram or a gram or so of saturated fat, so, so many benefits to it. At any rate, so all of those things matter when the consumer is willing to come in, right? If there's a kind of cloud over the sector, right, those things matter less. Price matters less, the improvements we make in taste matter less. Our number 1 goal in this area is to lift that cloud and to educate the consumer about the health benefits of the products. I think things like taste will really start to matter again. You need to give the consumer... Taste is the most important thing in food, right?... You need to give the consumer a motivation beyond that, right? Because animal protein tastes good, too, right?

We have to deliver on taste, rubber, and slightly more, but deliver on taste and other attributes, right? For the U.S. consumer, it's taste and health.

Okay, great. Thanks for the, thanks for the question.

Operator (participant)

By the way.

Ethan Brown (CEO)

Our next question.

Since I have the airtime, I'll just do a shameless plug for our new burger. You should go out, and you should try in, in food service, what is called the Beyond Smashable Burger, or in retail, try to find the Beyond Stack Burger that has a new flavor formula and a new texture in it, which I think, again, got a review that said, you know, something like, I don't know, eerily reminiscent or something of that nature, of, of, of animal burger. We keep, we keep making better, not there yet, but, again, let's let the air clear on these other issues, and I'll bet you that'll be something that's, that's really pleasing for consumers. Okay, go ahead.

Operator (participant)

Our next question will come from Rob Dickerson with Jefferies. Please go ahead.

Rob Dickerson (Managing Director - Consumer Staples Equity Research)

Great. Thanks so much. Just kind of a simple question. I mean, it sounds like, kind of back half US retail revenues are expected to grow a little bit. I'm assuming that's, clearly volume-based, and they have a kind of easier compares, off of last year's back half. Is there, is there something unique that just kind of drives that volume? Like, because a lot of the conversation these days is, you know, what happens when, you know, you have student loan payments, you're gonna kind of circle back a little bit, and maybe the consumer is not so strong, and there are not a lot of companies have a lot of conviction in the strength of the consumer, and you're saying, you know, the consumer is still a little tight, and we have a premium product at the same time.

Yeah, revenues are gonna get better. I don't know if that's just kind of points of distribution or why you have that conviction.

Ethan Brown (CEO)

Yeah. It's a good question. It's a couple of things. One, it's again, the lower costs we have year-over-year. Two, it's some increased distribution, both in retail and in food service, and globally. It's continued strength of our strategic partnership, partnerships, particularly in Europe, things of that nature. That's really what's driving it, versus any sense that the consumer is 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.

Rob Dickerson (Managing Director - Consumer Staples Equity Research)

Okay. Okay, fair enough. You know, I guess, kind of late in the queue here, but I'll circle back to Ken's question. There's another question on R&D. I think it was labor, kind of R&D versus advertising, and then you talk about new smash burger taste profile. I just feel like, you know, maybe not as much of, you know, as an analyst, but just a consumer, that when you kind of change the taste profile, like, should we also be expecting kind of an investment community, to, like, see new ads about that? Like, you walk into the store, and it's gonna show why it tastes better. Just something for a hook, because I do feel like you are, you know, kind of on a rolling basis, renovating the product, but maybe consumers don't know. That's all. Thanks.

Ethan Brown (CEO)

Yeah, that's also a very good question. you know, 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 this health narrative. So I think a lot of our marketing for the balance of the year is going to hit that theme. Overall, you know, my, my vision for this is that it would be very much like the release of, of any new product, you know, three, four, five, six, seven, generate excitement on each of those. I think right now we have a broader category issue that we have to hammer home. Once we can fix that, then we can, can, you know, spend those dollars more tac- in a more tactical way. Yeah.

Rob Dickerson (Managing Director - Consumer Staples Equity Research)

Fair enough. Thanks, Ethan.

Ethan Brown (CEO)

Good.

Operator (participant)

Our next question will come from Andrew Strelzik with BMO. Please go ahead.

Andrew Strelzik (Managing Director and Senior Equity Research Analyst)

Thank you. 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 your use of trade discounts in the quarter, and as you're seeing the pressures on the category, are you seeing more competitive activity, competitive intensity pick up alongside that? Or, or, you know, how are you expecting that to evolve going forward? That, that would be the first question. The second question is just on the margin side. You know, there are a bunch of headwinds that you, you know, listed impacting the quarter. Which of those do you see sticking around versus moderating through the rest of the year?

you know, within the high level buckets that you, that you mentioned, where do you see the biggest opportunity for margin expansion? Thanks.

Ethan Brown (CEO)

I'll start with the second one on, on, on margin. I mean, I think one of the, you know, the transitory issues that we don't expect to see again, was the flow through of some highly capitalized inventory from last year. That was, I think we did the right thing there, where we were slowing production to help us run through inventory for the balance of 23, but it cost us a little bit this quarter. We had some underutilization things and some other stuff that, you know, we don't expect to reoccur at the same level. We feel pretty good about the balance of the year, about finally some of this really good college work showing up.

On the broader category and competitive dynamics, I think that's only... I mean, there's two ways to look at it. One is, again, like, let's get the category message right first, so we can welcome new people into the category again. I think, you know, doing a lot of continued discounting, whether it's us or a major competitor, we're just trading among consumers, and so it's less productive. I think it's really about restoring the overall category message. The thing that has happened is there's been a tremendous kind of shakeout in the category, which is to our benefit.

You know, we're still standing, we feel very strong, feel our product is getting better, our cost structure is getting lower, our operations are getting more efficient, our strategic partnerships are, are moving forward. We, we have a lot of confidence about our future, even as we're seeing less competitors. We have a good competitor. I mean, you know, Impossible is a very good competitor, and, and they're doing a lot of good things, but that's good for the category. You know, it's very good for the category, so.

Andrew Strelzik (Managing Director and Senior Equity Research Analyst)

Great. Thank you very much.

Operator (participant)

This concludes our question and answer session. I'd like to turn the conference back over to Ethan Brown for any closing remarks.

Ethan Brown (CEO)

Yeah, we appreciate it, everyone sticking with us through the quarter. We knew this was gonna be a tough comp, and, it didn't, didn't, materialize exactly what we wanted to. I think the good news is we're through to a second half, which we, we hope will show, a return to growth and, and, you know, the first in, in, what will be, I think, a, a good climb out of this, and look forward to reporting back next quarter.

Operator (participant)

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