Beyond Meat, Inc. (NASDAQ:BYND) Q1 2023 Earnings Call Transcript May 10, 2023

Beyond Meat, Inc. beats earnings expectations. Reported EPS is $-0.92, expectations were $-1.01.

Operator: Hello and welcome to Beyond Meat’s 2023 First Quarter Conference Call. [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.

Unidentified Company Representative: Thank you. Good afternoon and welcome. Joining me on today’s call are Ethan Brown, Founder, President and Chief Executive Officer; and Lubi Kutua, Chief Financial Officer and Treasurer. By now, everyone should have access to the company’s first quarter 2023 earnings press release filed after the market closed today. This document is available in the Investor Relations section of Beyond Meat’s website at www.beyondmeat.com. Before we begin, please note that all the information presented today is unaudited. And during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management’s current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements.

Forward-looking statements in today’s earnings release, along with the comments on this call, are made only as of today and will not be updated as actual events unfold. We refer you to the earnings release, the company’s quarterly report on Form 10-Q for the quarter ended April 1, 2023, that was filed today and the company’s annual report on Form 10-K for the fiscal year ended December 31, 2022 and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please also note that on today’s call, management may reference adjusted EBITDA which is a non-GAAP financial measure. While we believe this non-GAAP financial measure provides useful information for investors, any reference to this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

Please refer to today’s press release for a reconciliation of adjusted EBITDA to its most comparable GAAP measure. 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’m pleased that our first quarter results demonstrate solid progress against our strategy and plan. As you would recall, we outlined 3 central tenets upon which we would execute a full force pivot from the growth of overall sustainable growth operating model, one that delivers on our goal of being cash flow positive within the second half of this year 2023. These pillars are: one, we would apply a laser focus to margin expansion and OpEx reduction through the use of lean value streams across our beef, pork and poultry platforms. Two, we will place an emphasis on cash flow accretive inventory management with a near-term focus on profit dollars versus maximizing the percent margin.

And three, we would prioritize opportunities that support near-term growth and consumer trial and adoption, appropriately balancing and streamline activities in support of our most valuable long-term opportunities. I will begin the body of my comments by summarizing our Q1 performance in reference to each of these 3 pillars. One, margin expansion and cost reduction. The company is focused on the deployment of lean management structure and process to drive cost out of our operations. We continue to rationalize our production network, collapsing processes and eliminating steps that generate unnecessary cost while consolidating and optimizing our co-packing resources. Though we have much heavy lifting left to do, we are seeing tangible progress.

For example, even as inflation continues to plague supply chains more generally, we reduced COGS per pound by approximately 15% on a year-over-year basis, primarily on the back of solid improvement in manufacturing and logistics costs, excluding any impact from depreciation. The swift production allowed us to cross over into positive gross margin in Q1 of 2023 from a trough of negative 18% margin as recently as Q3 2022. We will continue to imply intense focus on margin restoration and cost reduction versus raising prices as we pursue our long-standing price parity target with animal protein. At this point, we are achieving these margin gains even as our average price per pound is down 6% on a sequential basis and 9% on a year-over-year basis, reflecting both changes in mix as well as deliberate pricing programs consistent with our path to price parity.

More broadly, we are bringing the overall cost of business operations down, taking out approximately $34 million for a total OpEx reduction of 35% year-over-year. Alongside this reduction in operating expenses, our team continues to focus on sweating existing assets, reducing our need for new investments. The combined impact is total cash use of $48.6 million for the quarter, down from $66.8 million in Q4 of 2022 and a steep 74% reduction on a year-over-year basis. Two, drawdown of high inventory levels to free up cash. As with our network, the business has raw material and with inventory levels in excess of current demand levels. We’re working down these inventory levels and generating cash in the process with inventories down $131 million or nearly 6% on a sequential basis.

The team continues to implement our plan to draw down inventory across the balance of the year, efficient levels, though as previously noted, the downward curve will not necessarily be linear across the calendar. Three, prioritization of near-term growth opportunities at select long-term strategic partners. We are taking specific action to encourage the near-term restoration of growth even as we continue to nurture our most valuable long-term opportunities and partnerships. Here, I’ve chosen to focus my comments on U.S. Retail grocery with regard to near-term actions, given the segment’s impact on our growth, though we are using similar approaches in U.S. foodservice. In U.S. retail grocery, we are focused on restoring growth to our refrigerated offerings where we face our most challenging year-over-year comparisons through 4 main actions.

One, that we approach summer, we were rolling out better with the odd a broad marketing program or Airgain that highlights the great taste and health benefits of our products while celebrating our clean and sustainable process. This messaging continues to be a critical point of engagement with the consumer as there remains confusion around what can make our plant-based products from and how we make them. setting the record straight is a key part of the consumers back to the category. Two, we are working with our largest retail partners to implement a ground game strategy that features digital marketing, in-store activation and promotional campaigns to reengage the consumer around the important themes of taste and health. Three, we continue to evaluate strategic pricing actions to further test elasticities as we seek to narrow the gap between our products and animal protein.

Four, we plan to introduce certain renovations within our refrigerated portfolio. We are intensifying our implementation of each of these 4 tactics, broader marketing programs designed to educate consumers amid substantial noise, tacked a collaboration with our key retailers, strategic pricing toward our parity goal and select renovation as we head into peak grilling season. In the frozen set in U.S. retail, despite its recent launch, the Beyond Steak has quickly risen to the number 2 SKU in frozen plant-based meat at a key retail customer and we continue to expand distribution for the product. More generally, the frozen category continues to be a growth area for our brand or sequential and year-over-year dollars and units were both up significantly.

Specifically, in the frozen category, beyond meat grew units 20.3% and dollars 28.8% when comparing Q1 2023 to Q4 2022. Year-over-year, the Omnipreunits, 31.5% and dollars, 36.4% during the same period, according to Spindata for the 12 weeks ending March 26, 2023. Moving on to EU retail; we are expanding our product portfolio in the EU with localized innovation that draws on the resources and expertise of our global team. In the Netherlands and the U.K., we rolled out a new range of plant-based chicken products. In the Netherlands, the Beyond Chicken Burger, Beyond Schnitzel, Beyond Tenders and Beyond Nuggets can be found at select Albert Heijn and Jumbo stores nationwide. In the U.K., the Beyond Chicken Burger, on file and Beyond Nuggets are available at select Waitrose and Sainsbury’s stores.

These products complement the existing Beyond Meat portfolio in Europe which includes Beyond Burger, Beyond Sausage, Beyond Mince and Beyond Meatballs. Turning to our strategic partners and long-term opportunities. We are encouraged by the success of the plant platform in Europe which are contributing to our year-over-year growth of 100% international foodservice. Both the McPlant Burger and McPlant Nuggets are seeing success across McDonald’s and Germany, while the latter is also offered as a happy meal option in Germany. I’ve had the pleasure of enjoying McPlant Nugget at various McDonald’s throughout Germany and we certainly agree with the very positive press it is receiving. I’m immensely proud of all the members of our global team who worked so tirelessly to bring this product forward and I’m grateful for the collaboration and partnership from McDonald’s that is making it possible.

Moreover, McPlant burger continues to resonate and succeed with the EU consumer and remains a permanent menu item in the U.K., Ireland, Austria, Germany and the Netherlands but also being offered for a limited time in Portugal. Additionally, in Austria, McDonald’s continues to offer limited tide items at McPlant, Steakhouse Burger and the McPlant Fresh burger on a rotating basis. Turning to Yum! Our products remain permanent menu items at HEP restaurants in Canada, the U.K., Singapore, El Salvador, Guatemala and Sweden. In summary, across all segments of the business, net revenues rose 15% Q1 2023 over Q4 2022 which in and of itself is less noteworthy given typical seasonality. However, the increase exceeded the same year-ago metric of 8.7%.

This relative progress was driven by modest sequential increases in U.S. Retail and U.S. Foodservice net revenues, with total sequential growth bolstered by a 31% increase in International Retail net revenues and a jump in International Foodservice net revenues which saw a 45% growth quarter-over-quarter. Though encouraging on a sequential basis, our focus and expectation is the return of Beyond Meat to year-over-year growth on a quarterly basis that we moved past Q2’s 2023, more challenging year-ago comparison and into the back half of the year. I would now like to turn from the near-term actions to check in on our enduring longer-term strategy. As I maintained, it is our belief that we will cross over the chasm from early adopters to mainstream consumers by relentlessly focusing on: one, advancing the taste and broader sensory profile of our platforms; two, articulating the health benefits of our products to the consumer in a way that resonates; and three, driving our cost structure to the point where we can match and then underprice animal protein.

We will focus on each of these crossover elements, face health and price for much of the balance of my comments today. We continue to advance the taste and sensory profile of our products as well as expand distribution of award-winning offerings. This summer, I am pleased to announce that we will be launching a new generation of our burger platform in foodservice and in the retail frozen section. Both offerings contain strong advances in sensory profile, particularly around delivery of animalic and serum like notes at a convincing get neutral bet flavor. A long time in the making, we are receiving very positive reviews from early customer tests. Moving to health. The second element of our crossover strategy, continue to develop products that provide important health benefits to the consumer.

Beyond Steak is a great example. As was announced yesterday, Beyond Steak has been certified by the American Heart Association’s distinguished HeartCheck program, joining the ranks of a select number of foods that meet the American Heart Association’s exacting heart-healthy nutrition requirements, including being low in saturated fats, trans fats and sodium. More to the same, Beyond Steak has received a good housekeeping nutritionist-approved Emblem. And is the first plant-based meat to earn this recognition in good housekeeping institutes. Nutrition Lab which accesses foods based on specific nutritional criteria as well as taste, simplicity, convenience and transparency. Here again, I’m very proud of all the hard-working team members at Beyond Meat who worked for years to bring such a powerful, purposeful and positive innovation to consumers and families.

Whether the certification of Beyond Steak of the American Heart Association, our 5-year research program with Stanford University School of Medicine, the plant-based diet initiative, or our 3-year agreement with the American Cancer Society to advance research on plant-based meeting cancer prevention. It should be clear that we are highly focused on helping consumers understand the facts and empirical data underlying the benefits of our plant-based meat. The third element of our crossover strategy remains price. In an economy where aggressive price taking has been the norm, quite consumer under economic pressure and various important parts of everyday life, we remain committed to our strategy of marching toward price parity with animal protein.

The last 18 to 24 months of interjected substantial noise into our production system. But today, we have what is perhaps our clearest line of sight in some time to further cost reduction. Accordingly, as progress allows, we will continue to explore certain time-limited pricing programs to provide insights into consumer behavior as we narrow the gap between our products and their animal protein equivalent. It remains our strong conviction that by providing consumers with delicious plant-based meats with clearly understood health benefits at a price point that is passed or below that of animal meats. We can access a meaningful percentage of the $1.4 trillion global meat industry. In closing, as we look back on the second full quarter of our transition towards a sustainable growth operating model with an emphasis on achieving cash flow positive operations in the second half of this year, we are encouraged by early results, even as we have many miles left to travel.

We continue to advance by working the plant, driving margin expansion and OpEx efficiency and the implementation of lean value streams across our beef, pork and poultry portfolio, managing inventory for cash as we push toward much higher efficiency, steady-state inventory levels and pursuing a more narrow set of near-term growth initiatives even as we support our most valuable long-term partners and opportunities. I look forward to returning to you next quarter to share progress. With that, I’ll turn it over to Lubi to walk us through our first quarter financial results in greater detail as well as our outlook for the balance of the year.

Lubi Kutua: Thanks, Ethan. Our first quarter results reflect continued sequential progress and demonstrate the early success our team is having in executing against our operating plan. Though net revenues declined 16% year-over-year to $92.2 million as we continue to navigate the challenging environment. We drove a 15% sequential increase relative to Q4, representing our strongest Q4 to Q1 percentage increase since the first quarter of 2019. We recognize, however, that there is still much work to do as our absolute top line results and category trends continue to reflect demand weakness amid broader macroeconomic headwinds. Within U.S. plant-based meat, our core subcategory of refrigerated continues to experience significant challenges that inflationary pressures have driven a shift towards lower-priced animal protein among consumers.

With this backdrop and as we lap a more difficult comparison from last year that included strong sell-in of Beyond Meat Jerky and particularly strong Q2 results in our foodservice business, we expect to see a more muted sequential increase in revenues from Q1 to Q2 this year than in recent years past. I’ll return to this topic momentarily when I discuss our outlook for the balance of the year. Turning to the drivers of our first quarter net revenue performance. Net revenue per pound decreased approximately 9.1% year-over-year and volume of products sold declined 7.3%. The decrease in net revenue per pound was primarily attributable to changes in product sales mix, increased trade discounts and, to a lesser extent, unfavorable foreign exchange rate impact, partially offset by higher pricing for certain products.

Gross profit in the first quarter of 2023 was $6.2 million or 6.7% of net revenues compared to $0.2 million or 0.2% of net revenues in the year ago period. Of note, gross profit and gross margin included the impact from a change in accounting estimate associated with the estimated useful lives of our large manufacturing equipment. For further context, during the first quarter of 2023, we completed a reassessment of the useful lives of our manufacturing and R&D equipment and determined that an increase in the useful lives of certain large equipment from a range of 5 to 10 years to a uniform 10 years was appropriate to reflect more current operating practices and equipment service periods. The resulting change in estimate reduced cost depreciation expense in the quarter by approximately $5.1 million or 5.5 percentage points of gross margin relative to depreciation expense utilizing our previous estimated useful lives.

However, when considering the roughly $0.30 year-over-year improvement in gross profit per pound, inclusive of the aforementioned change in accounting estimate, depreciation expense accounted for only $0.02 of the increase. The primary drivers of the year-over-year improvement in gross profit per pound were reduced manufacturing and logistics cost per pound which contributed a combined benefit of approximately $0.84. However, these factors were partially offset by lower net revenue and increased inventory reserves per pound. Turning to OpEx. Operating expenses in the first quarter of 2023 were $63.9 million, down approximately 35% year-over-year and reflecting our ongoing focus on rightsizing our expense base. The year-over-year decrease in OpEx was primarily driven by lower marketing expenses, including advertising, reduced nonproduction headcount expenses, lower production trial expenses and decreased outbound freight costs included in our selling expenses.

Of note, SG&A expenses in the first quarter of 2023 included $3.9 million in noncash expenses related to losses on sales of certain fixed assets. Moving further down the P&L, we saw a $4.1 million increase in net interest income and foreign currency transaction gains compared to the year ago period, partially offset by a $2.6 million increase in loss from our unconsolidated joint venture, primarily reflecting limited economic activity at TPP in the year ago period. Overall, net loss was, therefore, $59 million in the first quarter of 2023 or a net loss per common share of $0.92 compared to $100.5 million or a net loss per common share of $1.58 in the year ago period. Adjusted EBITDA was a loss of $45.8 million or minus 49.6% of net revenues in the first quarter of 2023 compared to an adjusted EBITDA loss of $78.9 million or minus 72.1% of net revenues in the year ago period.

Now turning to our balance sheet and cash flow highlights. Our cash and cash equivalents balance, including restricted cash, was $273.6 million and total debt outstanding was approximately $1.1 billion as of April 1, 2023. Inventory fell to $222.4 million, a reduction of $13.3 million compared to the previous quarter. As you may have seen, we filed a universal shelf registration statement earlier today which will be used to bolster our balance sheet. Under such a registration statement, we are establishing a $200 million at-the-market facility for our common stock. Turning to cash flows. Net cash used in operating activities in the first quarter of 2023 was $42.2 million or a $123 million decrease compared to the year ago period. Capital expenditures totaled $5.3 million in Q1 of 2023 compared to $21.5 million in the year ago period.

Cash flows from investing activities also included $3.3 million related to investments in our joint venture, partially offset by $2.3 million in proceeds from the sale of fixed assets. Let me now provide some commentary about our 2023 outlook. Our guidance remains largely unchanged from the targets we provided on our last earnings call. For the full year 2023, we continue to expect net revenues to be in the range of $375 million to $415 million, representing a decrease of approximately 10% to 1% compared to the full year 2022. For the second quarter, we expect net revenues to increase roughly 15% sequentially relative to Q1 of this year. This Q2 outlook takes into consideration tough year-ago comparisons as mentioned earlier, some presumed impact from temporary supply chain issues at third-party warehousing facilities and incrementally higher category headwinds relative to our previous expectations.

Overall, for the full year, we expect revenue contributions for the first and second halves to be relatively evenly distributed with a slightly higher weighting towards the first half. This implies an acceleration in revenue growth in the second half of 2023 which we expect to be driven by continued distribution expansion of recently launched products in the U.S., including Beyond Steak, Beyond Chicken Nuggets, Beyond popcorn Chicken and Beyond Chicken Fillet, distribution expansion and contribution from new products in international markets and the cycling of weaker year-ago comparisons. With respect to gross margin, as a result of the change in accounting estimate for depreciation, gross margin is now expected to be 1 to 2 percentage points above our prior guidance of low double digits for the full year.

Gross margin is still expected to increase sequentially through the remainder of the year. We continue to expect total operating expenses to be approximately $250 million for the full year 2023, weighted slightly more heavily towards the front half of the year and our previous CapEx estimate of $30 million to $35 million for the full year remains unchanged. We continue to target the achievement of positive free cash flow within the second half of 2023. Finally, let me provide a quick update on TPP. In the first quarter of 2023, we continued the process of restructuring certain contracts and operating activities related to Beyond Meat Turkey and we intend to assume distribution responsibilities for Beyond Meat Turkey starting in the fourth quarter of 2023, a move which we believe will support our overall objectives for gross margin expansion.

TPP will remain as the vehicle to evaluate a range of plant-based products for potential future business development. With that, I’ll conclude my remarks and turn the call back over to the operator to open it up for your questions. Thank you.

Q&A Session

Operator: [Operator Instructions] Today’s first question comes from Alexia Howard with Bernstein.

Operator: The next question comes from Adam Samuelson with Goldman Sachs.

Operator: The next question comes from Rob Dickerson with Jefferies.

Operator: The next question comes from Peter Galbo with Bank of America.

Operator: The next question comes from Ben Theurer with Barclays.

Operator: The next question comes from Peter Saleh with BTIG.

Operator: The next question comes from Andrew Strelzik with BMO Capital Markets.

Operator: The next question is from Michael Lavery with Piper Sandler.

Operator: Today’s last question comes from John Baumgartner with Mizuho Securities.

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

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

Lubi Kutua: Thanks, everybody.

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