Beyond Meat, Inc. (NASDAQ:BYND) Q4 2023 Earnings Call Transcript

Beyond Meat, Inc. (NASDAQ:BYND) Q4 2023 Earnings Call Transcript February 27, 2024

Beyond Meat, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to the Beyond Meat 2023 Fourth Quarter Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Paul Shepherd, Vice President, FP&A, and Investor Relations. Please go ahead.

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 fourth quarter and full year 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, company’s quarterly report on Form 10-Q for the quarter ended September 30, 2023, and to the company’s annual report on Form 10-K for the fiscal year ended December 31, 2023, to be filed with the SEC, along with 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 my comments by briefly reviewing the five priorities we anchored our activities around in Q4 2023, and then turn to our five forward priorities for 2024. In both instances, these steps are intended to serve and accelerate our progress towards sustainable operations and return to growth. In Q4 2023, we executed across the following actions: One, we sought to accelerate our transition to a leaner operating structure. As part of these efforts, we established a minimum of $70 million in cuts from our operating budget for 2024. We recorded approximately $95.6 million in non-cash charges, primarily relating to inventory and assets now deemed to be in excess are no longer consistent with our path to profitability and continue to consolidate our production footprint.

Two, in U.S. retail, we put the finishing touches on a multi-year renovation of certain core platforms, including Beyond Burger and Beyond Beef. We believe this renovation further positions the brand to overcome misinformation regarding the nutritional and health profile of our products while providing strong support for certain pricing actions. Three, we conducted extensive pricing analysis and, as discussed momentarily, are now preparing to implement pricing changes to support gross margin expansion. Four, throughout the quarter, we continued to use inventory management to free up working capital. Five, we maintained our investment focus in Europe and served our strategic customers in this important market for plant-based meats, including continued traction at McDonald’s across countries such as Austria, Germany, Ireland, the Netherlands, UK, Malta, Portugal, Slovenia, and Switzerland.

Turning to 2024, a pivotal year for Beyond Meat, we are pursuing the following five priorities, several of which simply represent a transition from 2023 planning to 2024 implementation. One, we are beginning 2024 by executing within a leaner operation, consistent with substantially reduced 2024 planned OpEx and cash use. Part and parcel with this leaner operation is our ongoing tightening of focus relating to portfolio, markets, and consumer. We are, as just one example, discontinuing our Beyond Meat Jerky product line, despite its number one position in the plant-based jerky category. These refinements allow focus and resources to be put against our latest product platform renovation, Beyond IV, and other SKUs which you believe have higher profitable growth potential here in the U.S. and are consistent with my intention to focus more resources against key markets and customers in Europe.

Two, we will be rolling out Beyond IV in U.S. retail and view this renovation as an important and potentially transformative moment for our brand and category. Iron sharpens iron and we certainly experienced this ancient metaphor firsthand. Specifically, the current climate of misinformation and efforts by incumbents, including sadly, pharmaceutical interests, to poison the plant-based meat well push us to accelerate gains in the health profile of our product platforms. To be clear, as I’ve often repeated, likely the point of boredom of listeners, we are proud of the health benefits available through our current products, including, for example, those documented in the SWOT meat study, published in the American Journal of Clinical Nutrition, where participants experienced a meaningful drop in LDL or bad cholesterol, as well as a decline in TMAO, the compound in the gut associated with heart disease, after switching from animal-based meats to Beyond Meats across eight week intervals.

And we are proud of the certifications associated with our existing product lines, such as the American Heart Association’s Heart-Check Program Certification of our Beyond Steak and Beyond Beef Crumbles. However, as we have also oft-repeated, we are chasing a perfect build of meat from plants, and this goal encompasses sensory as well as nutritional characteristics. On the latter, our job is to deliver as much of the nutritional benefits of plant-based eating as we can in the familiar and satiating form and taste of meat. Over the years, we’ve surrounded ourselves with a broad ecosystem of doctors, registered dietitians, and leading health institutions to guide us in this effort. Combination of this extensive input and the talent and expertise of our research and development team is what led to what I believe is a significant breakthrough in the Beyond IV platform.

If you come to our facilities in Los Angeles, you will see that one of the analytical areas that we emphasize is the structure, interplay, and distribution of plant-based proteins and fats. In Beyond IV, the team was able to blend high-quality proteins from fava beans, red lentils, peas, and brown rice together with fats from avocado oil in a way to deliver superior nutrition and sensory outcomes. The nutritionals are clear and compelling, including high levels of plant-based protein, 21 grams specifically, with just 2 grams of saturated fat, which is 75% less saturated fat than a typical 80-20 animal beef patty. Avocado oil has been identified as potentially beneficial across a range of health outcomes, including reducing the risk of various chronic diseases, among them heart disease, as well as potentially helpful with eye and skin health, reflecting its composition of monounsaturated fats, antioxidants, and other plant compounds.

The critics will undoubtedly continue to agitate. A favorite target is sodium levels, and the sleight of hand employed is to compare the Beyond Burger, which is seasoned to an unseasoned ground beef burger. Keeping in mind that the current Beyond Burger contains 17% of the daily recommended value of sodium, which when appropriately compared to seasoned beef burgers, often means less, not more sodium. Nevertheless, Beyond IV achieves a 20% reduction in the amount of sodium, with the sodium content now registering at 14% of daily values. Quick math reveals that even if you were to have seven of the Beyond IV burgers in a single day, this consumption alone would not exceed the daily recommended value of sodium. And here’s the thing, we’re not done.

As the critics position, talk, post, and lobby, we will keep chasing our own true north, that perfect build of meat from plants, and you can expect even lower sodium levels in subsequent generations. These and other advances in Beyond IV have earned recognition from important members of the health and nutrition community. This includes the American Association’s Heart-Check Program Certification of a series of heart-healthy recipes featuring the Beyond IV Beef and Burger, the placement of the American Diabetes Association seal on our Beyond IV Beef and Burger packaging, as both products meet the nutritional guidelines of the American Diabetes Association’s Better Choices for Life program, and the clean label project certification of the Beyond IV Beef and Burger.

Moreover, in a survey of registered dietitians at a recent conference, 94% of these dietitians answered that they enjoyed the taste of the new Beyond Burger, viewed it as healthful and would recommend it, while broader consumer testing scored favorably across the taste, juiciness, and texture relative to our existing burger. Three, we are implementing changes to our U.S. trade and pricing programs, effective in early Q2. Though varied across channels and product lines, we expect the overall impact of these pricing changes to meaningfully impact margin across the balance of the year. This change in strategy does not reflect an abandonment of our long-sought price parity goal, which we in fact achieved in certain very specific offerings. Rather, the change reflects three main factors.

One, we clearly need to restore our margins, and this, coupled with the network consolidation I discussed momentarily, are expected to aid greatly toward this end. Two, the broad pricing programs we put in place over the last 18 months simply didn’t accomplish the goal of crossing from early adopters into the mainstream. In retrospect, the noise and swirl surrounding the category reached decibels that were perhaps sufficient to ground out pricing and other messages. Three, given the aforementioned margin objectives, as well as the inclusion of certain premium ingredients in the Beyond IV platform, our pricing architecture is putting far more deliberate emphasis on tiered pricing across our product lines. Four, as referenced above, we are nearing the completion of what has been a very difficult, but highly worthwhile consolidation of our production network.

Though we undertook these changes for myriad reasons, depending on the site and partner, we expect this right-sizing to substantially contribute to margin. To give a sense of the magnitude of this restructuring effort, it helps to consider that in the last two years, we’ve contracted our production network from as many as 13 co-packers in North America to just one today. This consolidation, coupled with an emphasis on internal production, has obvious benefits relating to overhead absorption, as well as logistics and quality control. Five, we are continuing to invest in our European business and related strategic customers. In a recent trip to the UK, I was struck by what I’m personally certain is the future of plant-based meat, that is, a growing ubiquity.

I was able to, within a radius of no more than three blocks, enjoy delicious Beyond Meat offerings at McDonald’s UK, Pizza Hut UK, and Starbucks UK. More generally, I routinely enjoy watching with much interest the reaction of visitors at our headquarters in Los Angeles when they taste the McPlant Nugget, which is now available in Germany. Almost universally, it is viewed as indistinguishable from its animal protein equivalent. Similar to the delicious aforementioned products at Pizza Hut UK and Starbucks UK, this outcome reflects years of development and investment that helps separate Beyond Meat. Before moving on from Europe, I should note that across 2024, we look forward to more fulsome entry into the German retail market, given our recent satisfaction of local shelf life requirements.

In closing my comments, I want to properly frame the state of our business. Over the last 12 to 18 months, we spent considerable time, energy, and resources reorienting Beyond Meat’s trajectory amidst changing and challenging conditions with an eye towards sustainable operations and return to growth. To reiterate, these major steps include a potential leap forward in the value proposition of our core product lines, a steep reduction in our operating costs and cash use as we continue to implement lean management principles, the contraction of our production network to achieve quality and margin gains, and the implementation of pricing changes also in support of margin expansion. As we look forward, we expect the early results from this extensive spade work, together with specific actions we plan to pursue to bolster our balance sheet to make 2024 an important, promising year for the Beyond Meat story.

With that, I’ll turn it over to Lubi, our Chief Financial Officer and Treasurer, to walk us through our fourth quarter and full year 2023 financial results in greater detail, as well as provide our outlook for 2024.

Lubi Kutua: Thank you, Ethan, and good afternoon, everyone. Before diving into the components of our fourth quarter P&L, let me provide some color more broadly on the significant non-cash charges you will have seen in our press release today. You’ll recall we announced in November 2023 that we were initiating a review of our global operations spanning five areas: first, the potential exit of select product lines; second, changes to our pricing architecture within certain channels; third, accelerated cash accretive inventory reduction initiatives; fourth, further optimization of our manufacturing capacity and real estate footprint; and lastly, fifth, a review and potential restructuring of our operations in China. We recorded $67.5 million in non-cash charges in cost of goods sold this quarter in connection with our global operations review.

These charges consisted of a few different items, including the provision for certain inventory now deemed to be excess or obsolete, given changes to our strategic priorities as well as more limited internal resources following our November 2023 reduction in force. We also recorded a significant charge representing accelerated depreciation expense on certain fixed assets determined to be non-core to our strategic priorities within the foreseeable horizon, but for which no recovery or sale value could be reasonably expected. Also, in connection with the global operations review, we recorded a non-cash write-off to cost of goods sold associated with a prepaid option to purchase certain raw material ingredients which we no longer expect to exercise.

Within operating expenses, we recorded a non-cash charge of $17.6 million, reflecting the write-down to estimated fair value of certain production and R&D fixed assets, which we now intend to sell. Of note, $16.3 million of the non-cash items recorded in cost of goods sold and $3.6 million of the non-cash items recorded in operating expenses related to Beyond Meat Jerky, which we have made the decision as part of our global operations review to discontinue. Let me now briefly review our fourth quarter financial results before turning to our 2024 outlook. Net revenues decreased 7.8% to $73.7 million in the fourth quarter of 2023 compared to $79.9 million in the year-ago period. The decrease in net revenues was driven by a 14.6% decrease in net revenue per pound, partially offset by an 8% increase in volume of products sold.

The decrease in net revenue per pound was mainly driven by changes in product sales mix and increased trade discounts, partially offset by favorable impact from foreign exchange rates. The increase in volume sold was primarily driven by sales in our international business, where we continue to see solid growth across our retail and food service channels. However, this was partially offset by softness in our U.S. business, where volumes declined in both our retail and food service channels, due mainly to continued category weakness and the lapping of certain business in our food service channel that did not repeat in Q4 ’23. Turning to gross profit and gross margin, gross profit in the fourth quarter of 2023 was a loss of $83.9 million compared to a loss of $2.9 million in the year-ago period, which included the negative impact of non-cash charges totaling $78 million taken in the fourth quarter of 2023.

Of the aforementioned amount, $67.5 million was associated with strategic decisions arising from our global operations review, and $10.5 million was due to other special items driven mainly by additional reserves for inventory associated with a large QSR customer and the write-off of a prepaid fee resulting from the termination of a co-manufacturing agreement in Q4 2023. Excluding the aforementioned charges, gross profit and gross margin were also impacted by lower net revenue per pound, partially offset by reduced logistics cost per pound compared to the year-ago period. Operating expenses were $76.9 million in the fourth quarter of 2023 compared to $62.8 million in the year-ago period. The increase in operating expenses included non-cash charges totaling $17.6 million associated with our global operations review, which I described a moment ago.

Excluding these charges, operating expenses also reflected reduced non-production headcount expenses, lower restructuring expenses, reduced scale-up expense and lower selling expenses, partially offset by higher consulting fees compared to the year-ago period. Moving down the P&L, total other income net of $5.7 million was lower by approximately $1.2 million compared to the year-ago period, reflecting decreased realized and unrealized foreign currency gains. Losses related to the company’s joint venture with PepsiCo, the Planet Partnership, decreased by approximately $8 million year-over-year, reflecting the reduced scale of our jerky business versus the year-ago period. Overall, net loss in the fourth quarter of 2023 was $155.1 million, or $2.40 per common share, compared to net loss of $66.9 million or $1.05 per common share in the year-ago period.

Net loss in the fourth quarter of 2023 included non-cash charges totaling $95.6 million as previously described. Adjusted EBITDA was a loss of $125.1 million in the fourth quarter of 2023 compared to an adjusted EBITDA loss of $56.5 million in the year-ago period. Turning now to our balance sheet, the company’s cash and cash equivalence balance, including restricted cash, was $205.9 million, and total outstanding debt was $1.1 billion as of December 31, 2023. Net cash used in operating activities was $107.8 million in the year ended December 31, 2023 compared to $320.2 million in the year-ago period. Capital expenditures totaled $10.6 million in the year ended December 31, 2023 compared to $70.5 million in the year-ago period. Let me now turn to our full year 2024 outlook.

We expect net revenues to be in the range of $345 million, and net revenues for the first quarter of 2024 are expected to be in the range of approximately $70 million to $75 million. Gross margin is expected to be in the mid- to high-teens and is expected to be higher in the second half of the year relative to the first half, reflecting the timing of anticipated pricing actions and further production insourcing activities. Operating expenses are expected to be in the range of $170 million to $190 million, weighted slightly more towards the first half of the year. And capital expenditures are expected to be in the range of $15 million to $25 million. Finally, in 2024, we plan to bolster our liquidity and potentially restructure our balance sheet.

And with that, I’ll conclude my remarks and turn the call 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] Our first question comes from Andrew Strelzik with BMO. Please go ahead.

Daniel Gold: Hi, thanks for taking my question. This is Daniel Gold on for Andrew.

Ethan Brown: Hi.

Daniel Gold: When will the Beyond IV be rolled out? And will that be a phased rollout? And is pricing going to be rolled out alongside it? And what’s the magnitude of pricing you plan on taking? And kind of what channels and geographies does that plan for?

Ethan Brown: Thank you for the question. So, we’re very excited to have the Beyond IV come out. It will be shipping next month and probably start to gain broader distribution April timeframe and into May, and that’ll be in U.S. retail. On pricing, there are two kind of separate issues. The Beyond IV, as I mentioned in my remarks, was many years in the making, and we were able to get it out as we roll into the summer season this year. But it does coincide well with some pricing changes that we have to take. And so, they will be largely coincident, and certainly it helps that there’s some premium ingredients in Beyond IV, and I think an enhanced value proposition in Beyond IV to help support that pricing. In terms of the magnitude, we should probably talk with retailers first before getting into the specific details on that.

But the entire effort is really around making sure that we get back to very healthy margins. And we did a tremendous amount of work on this question around elasticity, worked with an external firm and looked across our portfolio at where we thought pricing had some headroom, or room, rather, for growth. And so, I think we’ve made the right decisions here and just look forward to rolling it out. But it is really part — if I could just reiterate some of the things that I was saying on our introductory remarks. It’s part of an entire effort to really reset the business after about 12 to 18 months of effort to reorient what we’re doing from a much more growth at all costs focused operating model to one now that is highly focused on sustainability and profitability.

And so, the pricing increase is just one of those things. But if you look at all of the changes we’re making, whether it’s a substantial reduction in operating budget, we’ll be down significantly from 2023 if we execute according to our ’24 plan, as well as a very substantial reduction in cash use. If you look at the global staff cuts we’ve made over the last several years, the one that we did in November was not insignificant at about 19%. And so, I think we really right-sized the business for the size of the current opportunity and the growth that we want to create ahead. Pricing is a very significant tool in restoring margin, but it’s not the only one. We’re also well underway in terms of production efficiencies that we’ve been chasing. And if you think about the magnitude of the effort over the last several years to put the business into a footprint that’s consistent with the current opportunities, we’ve gone from 13 manufacturing locations that are external to our company down to one, and bringing a lot of that production in-house to benefit from much higher overhead absorption and some material flow efficiency and things of that nature, reduce logistics costs, so on and so forth.

So, it’s really part and parcel with an entire effort to reorient the business towards sustainable and then profitable organizations. I think I mentioned in the opening remarks that we’re going to be discontinuing jerky, it’s the same idea there. And then, this last global business review to take out some of the excess inventory and assets that we have from a write-down perspective and then be able to monetize those with less pressure on us. So, all of these things, again, we were at one size and needed to get a little bit leaner. I think we’ve done that now. And so, in 2024, I very much look forward to a lot of this coming to fruition and this reset beginning to really show.

Daniel Gold: That’s very helpful. Thank you. Just one more for me. Can you speak to your confidence in the gross margin guide?

Ethan Brown: I’ll give that to Lubi, but I think the two main features that I just referenced, one is the pricing change as well as this consolidation of our production network and the increased — or continuing rather, COGS reductions that you see throughout the last 12 months. Those will, I think, help significantly and then also clearing out of some of the higher reserve levels we had. Lubi?

Lubi Kutua: Yeah. Not a whole lot to add to that, but I think just generally in speaking to sort of our confidence level, we feel pretty good about it, right? So, we did say in the guidance that we provided that we expect gross margins to be higher in the back half relative to the first half, and that’s related to some of the timing around some of these actions. Ethan already discussed the pricing. One thing that we have communicated on prior calls as well as that we are rolling back to some degree, right, the level of promotions that we’ve done. We really did some aggressive promotions in 2023 as a means of trying to draw more consumers into the category. We’re taking a little bit of a different approach this year. The in-sourcing of finished goods production is something that I think should not be underestimated.

As Ethan said, it really gives us an opportunity to sweat our assets more and benefit from the fixed cost absorption. As well as the fact that it helps us from a logistics cost perspective as well, right? You can imagine if you have eight or 10 different co-manufacturers in your network, you’re transporting ingredients and work in process items to multiple locations, that starts to have a detrimental effect on your logistics costs. So, all of these things combined, I think, give us pretty good confidence that we should be able to achieve the margin targets that we’re seeking.

Operator: The next question is from Adam Samuelson with Goldman Sachs. Please go ahead.

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

Lubi Kutua: Good afternoon.

Ethan Brown: Hey, there.

Adam Samuelson: Hi. So, I just want to, Lubi, Ethan, I want to just make sure I’m thinking about 2024 outlook pieces correctly. Given the revenue outlook you’ve given, given the gross margin outlook for mid- to high-teens, the operating expenses, and there’s some D&A and stock comps, so it’s not all cash, but there’s also the CapEx. It would still look like the cash burn based on the gross margin less the OpEx, less the CapEx, add back some D&A and stock comp, you would still have a cash burn from operations in 2024 of $100 million-plus. And am I missing something in terms of the non-cash expenses in there? Because I’m just trying to think about that level of cash burn in 2024 relative to an ending cash balance in ’23 of, I think, $205 million, arguably kind of expecting to burn half or more of your cash balance in ’24 before further liquidity actions.

Ethan Brown: Yeah, I can — I’ll answer that at a high level, then hand it over to Lubi. I do think we should probably after the call work through this with you on some of the puts and takes. We’re pretty comfortable that it’s going to come in at a reasonable number and lower than $100 million, certainly at the midpoint, but Lubi can give guidance on that.

Lubi Kutua: Yeah. So, Adam, I’m not sure what assumptions you’re baking in there in terms of some of the non-cash add-backs. But I think the number that you sort of referenced there, roughly $100 million, I think if you just looked at some of the big non-cash items, the depreciation and stock comp from last year and factor that in and then just take our guidance, that would put us sort of right at the range that you’re talking about. Obviously, we expect to do better in certain areas. The other thing that’s not baked into those numbers, right, we did — part of the reason why we have these significant non-cash charges is we’re writing down certain fixed assets, right, to estimated fair value so that we can sell them and start to monetize some of those assets, doing the same thing on the inventory side.

And so that should provide some benefit to cash as well. We did talk about that we’re looking to bolster our liquidity. So, look, we’re doing everything that we need to do to fix sort of the fundamentals of the business so that we are fundamentally a lower cash consumption business, right, with a longer term goal, obviously, of getting to sustained free cash flow positive, but we’re being responsible as well. And this is why one of our objectives for 2024 is to bolster the balance sheet. But like I said, there’s other puts and takes that just our guidance alone on its face would not necessarily consider, but we think we’ll provide a little bit of upside relative to the number that you are estimating.

Adam Samuelson: Okay. All right. That’s helpful. Let me take that offline. If I could ask a follow-up just on the outlook for revenues, which you have down 8% to roughly flat year-over-year for 2024. What are volumes assumed in that at this juncture? I’m just trying to get a sense of how much price elasticity you really think would come from the higher price increases — the higher prices particularly in U.S. retail?

Lubi Kutua: Yeah. So, we don’t necessarily guide to volume, right? So, we gave you the revenue dollar projection. But what I can say is we looked at price elasticities very deeply as part of this exercise and we’re looking at our pricing and it is going to vary by channel and region, et cetera. But we believe and we feel pretty confident, right, that in some of the areas where we are looking to take pricing, that the elasticity — the changes in price will offset or more than offset the anticipated loss of volume as a result of the price increase. And so, I don’t want to get too specific on volume numbers, but generally speaking, right, we would expect the elasticity to be less than 1.

Adam Samuelson: Okay. So, just to be clear there, if you’re still having revenue dollars down but the price increases offsetting the volume declines, is the revenue declines — the dollar declines a function of exiting product lines or regions or what then would be driving — what would be underpinning the revenue dollar decline expectation?

Lubi Kutua: Yeah. So, some of it like — so there is some exit of product lines. We talked about jerky as an example. The other thing is the reality is our U.S. retail business, right, continues to be challenged. And so, there is some assumption in there, which we hope will turn out to be conservative, but nonetheless, we’ve seen baseline velocity erosion in U.S. retail channel, and so we’re trying to factor that in, particularly on the downside. So, those are sort of the key drivers, I guess, when you look at the lower end of the range.

Ethan Brown: I think that’s right. The continued kind of vulnerability in U.S. retail is something that just as you do your models, as we do our models, right, we didn’t want too rosy a picture around. I think the general notion here is that we’re doing a massive product launch that’s a, I think, transformative in terms of what we’ve done over the last eight years is probably the most important renovation we’ve done since the Beyond Burger. And then, we’re also taking price. So, the two of those make it very hard to predict with a ton of certainty any type of growth. We just don’t know. So, we wanted to come in with something that was reflected, kind of current information, and hope to change it and have a better outcome.

Adam Samuelson: Okay. I appreciate all that color. I’ll pass it on. Thank you.

Operator: The next question is from John Baumgartner with Mizuho. Please go ahead.

John Baumgartner: Good afternoon. Thanks for the question.

Ethan Brown: Sure. Hi, John.

John Baumgartner: Why don’t we stick with the guidance for next year and specifically the OpEx. I mean the midpoint you’re guiding to, it’s about like a 25% drop from your recent sort of run rates. The global force reduction announced last quarter, I guess, explains a small part of it. But I’m trying to understand the rest of that decline, especially in the context of what, I guess, seems to be more reinvestment in marketing and brand building at this point.

Ethan Brown: So, I think I’ve said this before, but one of the things I like to say about marketing is that marketing is a lot easier when it’s true. And what it really gets to is you’ve got to have a great product. And I think Edwin Land said it in an even more pointed way, which was “Marketing is what you do when your product is no good.” And what we have to do, right, is reengage the consumer into this entire category with products that are really delivering value to them in a way that they understand. And so, for us, that’s really about continuing to improve the taste, which I think we’ve done with Beyond IV, but also addressing this fundamental issue around health. As I said in my prepared remarks, we really do have a set of products that today can deliver fantastic health outcomes.

I’ve seen it in my own life, in my family’s, I’ve seen it in studies we’ve done with Stanford, which I won’t belabor today, and others. But what we wanted to do was take it another level, and we wanted to continue this march toward that perfect build. And I think we’ve taken a really big step here. It is not just an iteration, it’s something that’s more transformative than that. And so, to be able to have these products where you’re enjoying the satiating experience of having a burger or having a bolognese or whatever you decide to do with it, and yet having an oil that, for example, many in the nutrition community and medical community would characterize as “heart healthy” is something that is new and it’s something that changes the dynamic of the decision.

This went from 5 grams to 2 grams of saturated fat. And it’s not just the composition of — sorry, it’s not just the level of the fat in our product, it’s the fact that it now comes from a source that I think is very well identified as delivering benefits, not just because of the low levels, but because of what’s in it. So, this is things like polyphenols, antioxidants, and other plant compounds that depending on what study you want to look up, people have attributed to being helpful in the area of cardiovascular disease or dementia or the health of your eyes or skin, whatever it is, there’s a lot of benefit here. We’ve also been able to reduce the sodium, which as I said before is a red herring, but it’s still there and something we have to address.

So, at 14% of daily value now, that’s a significant improvement. And then, you look at the proteins, whether we’re using not just pea protein, but by going with red lentils and fava beans and brown rice, we’ve increased the protein amount. So, you have a product that fundamentally delivers a stronger value proposition. And you’re certainly going to market around that, but there’s also word of mouth in this community and there’s a strong desire, whether it’s the health community or the environment community or the welfare community, for these products in this category to come back. And so, I think we’re going to leverage that, and you’ll see us work a lot with registered dietitians and nutritionists and the medical community, as well as with these very large health organizations that I mentioned, American Heart Association, American Diabetes Association, in fact the American Diabetes seal that will be on the package itself, Clean Label Project and others.

So, we’re going to have to market, for sure, but we’re also going to do it in a way that, look, this is a fundamental shift in the value proposition. It’s enhanced, it’s increased, and I think people will begin to realize that. So, this use of grassroots marketing, this use of institutions that are standing behind this, I think will allow us to do it much more efficiently. And so, some of the costs we’ve cut out of the business, I think only help us to become profitable more quickly versus hurt us from a marketing perspective. Hope you…

John Baumgartner: Okay. And then…

Lubi Kutua: No, I think you covered it.

John Baumgartner: Okay. Then, as a follow-up on the gross margin guidance for 2024, the improvement there, how much does that rest on the price increases? I mean, I guess it sounds as though you’re not building in much operating leverage from new volume growth. The Coleman consolidation, I think, has been accruing sort of quietly all along. And then, with the China anti-dumping duties in the pea protein, I imagine input costs can’t be all that beneficial this year. So, it feels like the gross margin expansion in the guide, a fair amount of it just boils down to the price increases. Is that right? I guess, can you walk through the relative contribution and magnitude there for the drivers?

Ethan Brown: So, I think you hear me talk a lot about how proud I am of the research development team here. And I often spend more time on it than I do on the operations team. And one of the things that I have felt hasn’t been fair — not fair, but just has been unfortunate is that they’re doing a really good job driving our fundamental cost structure down, right? Whether it’s our facilities in Pennsylvania or Missouri, I mean, these are great operators that are really driving efficiency. And every quarter we have something that comes up, whether it’s we’re dislocating from one co-packer and there’s some fees or some high reserves coming in from legacy products or partnerships that have kind of disrupted that, right, and have not allowed them to shine publicly, although I see what they’re doing.

And so, as we steady and kind of bring in the production network, I think some of those savings that we’re achieving in our facilities will start to come through a little bit better. And an example of that is just the as we’re taking production out of external networks and into internal, the utilization rates in our facilities are significantly improving over absorption, significantly improving. So, these are things that I think even though we’re going to be using, for example, in Beyond IV some more premium ingredients, they kind of are offset and then even driven down somewhat over time by the internalization of the production and the continued production and overall cost. So, for the guys who are listening, the gals who are listening, appreciate it.

And if you guys get to keep it up, we’re finally going to be able to show it.

Lubi Kutua: Yeah. I would just add, I think it’s fair to say that the price increases are a significant factor that play into the gross margin expansion that we’re targeting for next year. But it’s not just that. As Ethan mentioned, right, there’s a lot of stuff that’s been going on just across the production, our operations, organization, et cetera. The other thing in addition to just price increases, we talked about pulling back on trade. So, the combined impact of those two things, right, actually has a pretty potentially meaningful impact on overall net revenue per pound. And then, you mentioned the internalization, right, the increased insourcing of our finished good production, and you mentioned that some of that has pretty much been accruing already.

I think that’s true, but there still was a lot of noise in our cost of goods in 2023. Even as we were internalizing, we’re still dealing with things like underutilization fees and things like that. And I think that type of stuff should be significantly reduced in 2024. And so, now I think we are in a position where we start to benefit in a much more meaningful way from bringing a lot of those production volumes in-house. And then, I mentioned a little bit earlier that there should be benefits as well from just a more streamlined network overall from in terms of logistics costs. When you look at some of these initiatives that we’re targeting now to reduce overall inventory balances, that benefits warehousing costs and things like that. Even the reclassification of some of these fixed assets to held for sale, right, will have a beneficial impact from a depreciation perspective, right?

And so, you combine all of these things together and that makes us feel pretty optimistic about where gross margins can go this year.

John Baumgartner: Okay. Thanks, Lubi. Thank you, Ethan.

Lubi Kutua: Sure.

Operator: The next question is from Robert Moskow with TD Cowen. Please go ahead.

Robert Moskow: Hi. Thanks for the question. Ethan and Lubi, it looks like the center of gravity is going to continue to shift to international markets for your business. Can you speak to the profit margin profile of operating internationally? How is it different from domestic? Can you operate at a respectable margin overseas, or are there complicating factors that make it more difficult than here?

Ethan Brown: Thanks, Robert. It’s good to hear from you. So, when we think international, obviously, I’ve said a lot about Europe in the past, and in some sense, that’s becoming kind of its own operation over there. So, it’s not necessarily like we’re shipping things from here or anything of that nature. They’re driving a lot of the same cost reduction. We have a terrific partner there who does some of our production, and is really a true partner to us, as well as a very good general manager there and team. So, I think I don’t foresee that being particularly challenged from the cost perspective now. We’re still pretty nascent there. And so, we do have to continue to adjust downward the cost structure but that’s possible and it’s something that we’ll continue to focus on because some of our retail pricing, for example, is just too high for those markets, and so we need to continue to adjust it.

But that comes with time and further localization of our network, which is doable. We just need to have time to do it. And then, on the kind of food service side, we’re continuing to drive cost out of those products and improve margin. And I think you’ll start to see that come through in ’24. But, Lubi?

Lubi Kutua: Yeah. Not a lot I would add to that, Rob. But I think fundamentally, if you look at our international business relative to U.S., it does skew more towards food service. And we’ve built a pretty meaningful business now with some of the large QSR customers in international. And so, as you can imagine, the margin profile for that business would look somewhat different from then on the retail side. But I guess the short answer to your question about, do we have respectable margins in an international, I would say yes, right? But as Ethan mentioned, there’s still a number of things and initiatives that we’re pursuing to bring about even further improvement in margins in international business.

Ethan Brown: And it is striking to see — and it’s not directly responsive, but just using this opportunity. It is striking to see the difference there in terms of uptake of the category of products. The thing I mentioned in my prepared remarks is significant. Within a several block radius in London, you’re going to McDonald’s, getting Beyond Burger, you’re going to Starbucks, getting a Beyond Sausage, Pizza Hut, and getting Beyond Pepperoni. And it’s — these trends tend to be stronger in Europe and then come over here, and that’s certainly our hope that we’ll get through the politicalization of these protein choices here in the U.S. and just get back to, hey, let’s do something that’s good for our health, good for the environment.

Robert Moskow: Well, Ethan, I’m very impressed that you’re going to McDonald’s and Burger King in London when you visit there. So, keep up the good fight.

Ethan Brown: Thank you.

Robert Moskow: But you also mentioned that pricing is too high for some of your products in the market? I think you’ve said that before. Can you be more specific as to why that is? Is it more commoditized, the category in Europe? Or how do I think about that?

Ethan Brown: Yeah. No, I’ll let Lubi give the details on it. But it’s — I was talking about retail, and it just — we’re still — think about Beyond Meat’s 2009 here in the United States, like we’re still kind of getting going there in terms of the overall production process and things of that nature, but clearly further along than we were at that point. But Lubi can give some detail.

Lubi Kutua: Yeah. Rob, I think one of the differences when you look at the retail landscape in the EU versus the U.S. is they have a much larger private label presence, right? And so, I think the penetration of private label in the EU is about double here in the U.S. And so, there is a much broader, I guess, portfolio of items that compete in our category at a much lower price. And the consumer in the EU does seem to be a little bit more predisposed towards private label than maybe the average U.S. consumer. We, two years ago, took some steps to close the price gap of our products relative to the broader competitive set in the EU, but certainly certain product categories where we still remain at a pretty healthy premium. And I think over time, the goal would still be to try to compress that gap somewhat, not necessarily — I don’t know that there’s a need to come down to the level of private label in the region, for example, but there are areas where we think that the price gap is still wider than where it needs to be, but that’s something that will occur over time.