Beyond Meat, Inc. (NASDAQ:BYND) Q2 2023 Earnings Call Transcript

Beyond Meat, Inc. (NASDAQ:BYND) Q2 2023 Earnings Call Transcript August 7, 2023

Operator: Good day. And welcome to the Beyond Meat Inc. 2023 Second Quarter Conference Call. All participants will be in a listen-only mode. [Operator Instructions] 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 Shepherd, Vice President of FP&A and Investor Relations. Please go ahead, sir.

Paul Shepherd : 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 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 31, 2022, the company’s quarterly report on Form 10-Q for the quarter ended July 1, 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. And with that, I would now like to turn the call over to Ethan Brown.

Ethan Brown : Thank you, Paul. And good afternoon, everyone. I will begin with a 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 revenue is reflected deeper headwinds than we previously anticipated, combined with the cycling of one of our largest quarters ever, among other factors. The level of 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’re 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 casts consumption down nearly 50% or $45.5 million year-over-year, reflecting a business that is making early strides in implementation journey.

Simply put, as we navigate what is proven to be a more prolonged crossover from early adoption to the mainstream than we anticipated, we are operating with increasing levels of efficiency. We’re proceeding I should note 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.

With respect 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 or 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, first half of the year.

As we look to the balance of the year, we will continue to aggressively manage inventory levels with a 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, continue to release new revenue innovations that bring us closer to our north star of being indistinguishable from animal protein; three, investing and resetting the retail fresh plant-based meat section; four implementing pricing learnings for the last 12 months; and five, supporting our largest strategic partners. Though 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’re also acutely aware that there’s ambiguity and confusion around the health benefits of plant-based meats and that this is weighing on the categories 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 potentials of our products 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 that base meats are healthy, up from 50% to 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 head of a sick again means the absence of precursors to TMAO a compound that researchers have associated with heart disease and certain cancers. We are attacking this misinformation, continuing to build a body of research, or 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.

And 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, at a heart-healthy food, as well as work with registered dieticians 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 origin of our ingredients and describes our process for turning plants into plant-based meat. The first installment of the campaign features one of our following farmers and connects to consumers the fields where protein has 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 lagoons it helps keep fields healthy and productive. Goodness for the Farmer who can use less fertilizer as a result, witness for the Earth given the much lower greenhouse gas, water, land and energy footprint. And 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, a key part 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 the 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 Intel. The good news is that we continue to make strong strides in this direction, all against the 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 called sausage free, the refrigerated plant-based meat section, where Beyond Meat remains the number one selling brand according to Spends [ph], latest 12 weeks ending 7/16/23. We are pleased with and point to early feedback on a renovated dinner sausage product is evidence that despite current headwinds steadfastly march forward against our promise of enabling consumers to eat what you love, simultaneously having a positive impact on your health, on the climate, environment and animal welfare.

Earlier this summer, the tasting table posted 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 that is the number one selling plant-based inner sausage in retail according to SPINS data for the latest 12 week period ending 7/16/23 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 is winning early praise.

We further cook 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 SPINS for the latest 12 week period ending 7/16/23, we are actively working on our next iteration the Beyond Burger 4, where we are incorporating certain elements of the Beyond Steak and Beyond Smashable Burger. Accordingly, we were watching consumer and customer reactions closely and are excited by early results. In the frozen section, we continue to expand distribution and one of our new innovations Beyond steak, which is the number one selling new plant-based meats item at retail according to SPINS data for the 12-week period ended 7/16/23. Interestingly, recent data from a regional chain show that more than 50% of households bought Beyond Steak, were new to the plant-based meat category, and that two out of three households repurchase Beyond Steak, reinforcing that this is a product that is resonating with consumers.

With our newest renovations and distribution expansions and the balance of our product portfolio across retail, we are increasing our investment in store execution particularly in the U.S. In the turbulence of the last four years with a pandemic changing consumer behaviors high inflation, and the entrance and exit of competitive players in the plant-based meat section, they reset and re grounding, particularly in the refrigerated meat case, is overdue. We recognize that the ones 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 innovations to market.

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As you may recall, a little over four years ago, we set a goal that within five years, we will be able to produce and sell at a cost and price respectively that is at parity with animal protein for at least one product 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. Getting 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 new plant nugget alongside the McPlant Burger in the German market, as well as the McPlant burger across the UK, Ireland, Austria, Netherlands, Portugal in the 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. For 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 the mainstream adoption has proven to be slower.

In my comments today, I emphasize 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, amplify our health message to counter incumbent industry positioning and noise by educating the consumer and lastly collapsing the cost structure of our product lines to improve margins to where it matters most offer products at parity to animal protein. Continue to pursue each of these levers are 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 force 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 heatwave, 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 and the atmosphere. We believe the transition to a more plant-based food system is not only inevitable, but gaining urgency 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, 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.

Lubi Kutua : Thanks, Ethan. On the surface, Q2 was a disappointing quarter for us as net revenues and gross profits fell short of our expectations. However, 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. Although the operating environment within our sector is proving more challenging than previously anticipated, we believe the foundational work against which we are making good progress will better position our company to capitalize on the opportunity ahead of us.

Let me now dive into our Q2 financial results in a bit more detail. Beginning with net revenues, volume of products sold declined by 23.9% year-over-year, while net revenue per pound decreased 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 selling in the year ago period, and to a lesser extent the impact from competition. U.S. 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 U.S. 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 6 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 revenues 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 at tests 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 ramp up production lines within a new co-manufacturing site. And 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 volumes in response to weak demand, resulting in the capitalization of inventory bearing 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 nonproduction 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 to 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. Now turning to our balance sheet, our cash and cash equivalents balance, including current and non-current restricted cash was $225.9 million, and total debt outstanding was approximately $1.1 billion as of July 1, 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 fifth 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 second quarter of 2023 was $46.2 million or a $24.3 million decrease compared to the year ago period. Capital expenditures totaled $1.8 million in Q2 2023, compared to $20.4 million in the year ago period. And our total cash consumed in Q2 amounted to $47.7 million or 49% less than a 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 a 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. But as Ethan discussed earlier, we continue to pursue several growth strategies to drive better outcomes on our top-line. Let me now provide some commentary about our 2023 outlook. 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 week comparisons from a year ago, and as we expect to see continued expansion of newer products in the U.S. distribution, growth and international markets, and continued progress with key strategic accounts internationally.

However, greater than expected category headwinds, particularly in the U.S., is resulting in a more cautious outlook for the balance of the year. And as such, we now expect net revenues for the full year to be in the range of $360 million to $380 million, representing a decrease of approximately 14% to 9% compared to 2022. Gross Margin is now expected to be in the mid to high-single digit range, reflecting both the Q2 outcome as well as the expected impact from reduced revenues. Operating expenses are expected to be approximately $245 million or less, and capital expenditures are now expected to be in the range of $20 million to $25 million. Finally, with respect to the company’s previously stated target of achieving cash flow positive operations within the second half of 2023, we now believe 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.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] And our first question here will come from Adam Samuelson with Goldman Sachs. Please go ahead.

Adam Samuelson : Yes, thank you. Good afternoon, everyone.

Lubi Kutua : Hey, there.

Adam Samuelson : Hi, so maybe it just talking about the updated sales outlook, and maybe specifically in U.S. retail, you alluded to some challenges in scaling, some of the trial and promotion activity in the U.S. How should we think about that moving forward, and we think about the need to accelerate kind of volume kind of as a pathway to future growth? Where’s the pivot from a marketing and product and distribution perspective that that’s going to enable that?

Ethan Brown : Sure, no, thank you for the question. And I’ll maybe start and then hand it over to Lubi for some additional detail. But first and foremost, I want to stress some of the things that we covered in prepared remarks that 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. So I don’t want to lose sight of that. You’ll also see an improvement in gross margin, we believe in the third and fourth quarter, particularly as we move further away from higher cost products that we produced during earlier quarters, and 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 expenses down 32%, as I mentioned year-over-year, and then cash down about 50, near 50. On top of that, you can indeed see an improvement in products, this is a core I think part of the answer that that I’m going to give you on to the how we are thinking about continued growth. First and foremost, if you look at whether it’s a state product and all the reviews, it’s getting in the fact it’s the number one 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. And then you look at our burgers continues to be the top selling plant-based burger. And we’re shifting into both a new formula and texture that we’re releasing in food service as the Smashburger we have released and just demoed and trialing and retail something called the Stack Burger, which capture some of those improvements.

So continuing to improve the products continue to operate the business much more efficiently. I think the last piece is attacking ahead 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 through research and through partnerships, whether it’s the American Cancer Society we’re doing, or the certification from the American Heart Association, or on our stake, the work with Stanford School of Medicine, all the things I mentioned in my prepared remarks. But we’re now taking it a step further and going to be much more aggressive in our marketing around the goodness within our products. And I think if 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 meat.

All these things are part of our health message and our health story. So as we look at this second half of the year, that efficiency that keeps continuing throughout the organization, the reduction in cost of our goods, and then the restoration of a message around the entire category. We view those as key to the resumption of growth. We’re also looking at some more tangible things as we offer this forecast but [indiscernible] both in the U.S. and in Europe, and things of that nature.