Beyond Meat, Inc. (1BYND) Q2 2020 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Beyond Meat Second Quarter 2020 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference may be recorded. I would now like to introduce over to your speaker today, Lubi Kutua, VP of Investor Relations. You may begin.

Thank you. Good afternoon, and welcome to Beyond Meat’s second quarter 2020 earnings conference call and webcast. On today’s call are Ethan Brown, Founder, President and Chief Executive Officer; and Mark Nelson, Chief Financial Officer and Treasurer. By now, everyone should have access to the company’s second quarter earnings press release and investor presentation filed today after market close. These documents are available on the Investor Relations section of Beyond Meat’s website. Before we begin, please note that all information presented on today’s call 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. Please refer to today’s press release, the company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission, the company’s Quarterly Report on Form 10-Q for the quarter ended June 27, 2020, 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 note that on today’s call, management will refer to adjusted EBITDA, adjusted gross profit, and adjusted net income or loss, which are non-GAAP financial measures. While the company believes this non-GAAP financial measure provides useful information for investors, the presentation of 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, adjusted gross profit, and adjusted net income or loss to their most comparable measure, prepared in accordance with GAAP. And now I'd like to turn the call over to Ethan Brown, Chief Executive Officer of Beyond Meat.

Thank you, Lubi, and good afternoon, everyone. I'm pleased to discuss our second quarter financial results with you today as we achieved record net revenues of $113 million, our first ever quarter in excess of $100 million despite a challenging macroeconomic environment brought on by the global coronavirus pandemic. I am proud of our management team's ability to pivot so as to remain on our steep growth trajectory. Much of this activity involved quickly reorienting the business from a COVID-19 impacted food sector to retail grocery. Recall at the beginning of the year, the split between our retail and foodservice business was approximately 50/50. And as we report today, the balance was 88 retail, 12 foodservice in the second quarter of 2020. Adapting to such a dramatic change in mix over a short period of time was no small feat. Led by the shift in consumer behavior toward retail, the team repurposed assets and repacked and rerouted inventory to this sector. As a result, we were able to demonstrate extraordinary year-over-year gains even as foodservice demand rapidly deteriorated. Across our U.S. and international markets, retail net revenues increased 192% year-over-year, driven by expansion in total distribution points, higher sales velocity at existing outlets, and new product introductions. In the U.S., our expansion in the club stores, including most recently Sam's Club and BJ's Wholesale, added to existing retail tailwinds. Further, we continued our expansion in the convenience store channel, where our breakfast sausage product recently became available in 650 Wawa locations and will expand into Wawa's remaining 220 stores as of next week. And as velocities grow across our grocery channel, we continue to gain important new distribution. For example, in September, Walmart will be expanding its distribution of Beyond Burger to more than 2,400 stores, while bringing our breakfast sausage patties to over 2,200 stores. Each of these wins advance our goal of making Beyond Meat products more easily accessible to consumers across the nation. We are now in approximately 112,000 retail and foodservice outlets globally, up 18,000 just since the end of March, with roughly half of that coming from our international retail outlets. Our product is now available in 84 countries outside the U.S., up from 51 a year ago. Looking at consumer takeaway in U.S. retail. According to SPINS data, for total U.S. multi outlet, natural and specialty channels for the 12-week period ended June 14TH, 2020, sales of Beyond Meat products were up 121% year-over-year with a velocity growth of 88%, contributing to a 550 basis point increase in market share, while the plant-based meat category as a whole was up 57% year-over-year. During this period, like the period before, and in fact, year-to-date, Beyond Meat continued to own the top four best-selling SKUs in all plant-based meat and outpaced its closest competitor in terms of year-over-year sales growth by a factor of nearly four times. We continue to see these strong consumer trend takeaways with only a limited number of SKUs available in retail, fueling continued optimism as we accelerate our pace of new product introduction through the newly formed Center for Commercialization. In what may be the most meaningful combination of metrics for our growth story, we are fortunate to be in a position where three critically important consumer trends are concurrently increasing; one, more households are buying our products; two, even as the number of households grow, the average spend per household on Beyond Meat products is increasing; and three, more consumers who try our products are buying them again. That is, our repeat rates are rising. According to SPINS IRI panel data, the U.S. household penetration for the Beyond Meat brand increased to 4.9% as of June 2020 compared to 3.5% in January of this year, nearly a 40% increase over just five months. On a year-over-year basis, Beyond Meat's U.S. household penetration has more than doubled from 2% as of June 2019, adding approximately 3.7 million buyers as estimated by SPINS IRI. This increase in household penetration has occurred in conjunction with extremely favorable trends; a 36% increase in buyer rates, a 23% increase in purchase frequency, a strong increase in repeat rates from approximately 45% in January to nearly 50% in June. This repeat rate should be compared to what generally constitutes success in the retail CPG sector, which is typically anywhere from 30% to 40%. As we continue to expand our retail presence in the international arena, we will look to share insights with you on the performance of our international retail business where available. Turning to our foodservice business. As expected, we experienced a challenging operating environment in the second quarter due to COVID-19 related restaurant closures, scaled back operations and delays in further Beyond Meat tests and our launches among our foodservice customers. Overall, net revenue across our U.S. international foodservice business decreased 59% year-over-year during the second quarter. Despite the ongoing challenges facing foodservice businesses, there are several positive takeaways we can glean from the quarter. First and foremost, I want to recognize the determination and focus of our foodservice teams continue to demonstrate in the face of formidable headwinds. We focused on what matters so much in business, true partnership, and simply asked them to understand how we could best serve our customers during this period of uncertainty. We remained and continue to remain in close contact with our foodservice partners and have with some orchestrated tests and launches even as COVID-19 cast a continued cloud over the sector. Our intention remains to make it clear that Beyond Meat is determined to be a true long-term partner to each of our foodservice customers, irrespective of any particular economic cycle. To this end, we offered aggressive promotional programs to many of our foodservice partners, helping them to offer our plant-based need options to consumers at reduced price points. I remain encouraged by the long-term strength of the foodservice business for our company and see some very nascent positive trends. First, we saw small but nonetheless steady sequential improvement in our foodservice sales as the quarter progressed and with each successive month. Second, during the quarter, we were able to increase our total foodservice distribution points globally by approximately 8,000 outlets or a 16% sequential increase. And third, our relative performance in U.S. foodservice continues to show favorable overall trends for Beyond Meat versus our peers. We were pleased to secure several new foodservice opportunities, including the addition of the Beyond Sausage Wake-Up Wrap at Dunkin', the introduction of a limited time Beyond Spicy BBQ Cheeseburger at Carl's Jr. and Hardee's locations nationwide, three new Beyond Epic burrito items at Del Taco, the introduction of the Beyond Meat Coastal Med Bowl at Luna Grill locations in Southern California, a limited time offer of the Beyond Sausage Spicy Sunrise Egg Sandwich at Einstein Bros in Denver, Colorado; a pizza offering featuring Beyond Meat at Papa John's nationwide in Costa Rica; and a limited time test of a new pizza offering at select Pizza Hut locations in Puerto Rico. In addition, and particularly noteworthy as it relates to continued advancement of our poultry platform, we recently initiated a limited time promotion of Beyond Fried Chicken with KFC in Southern California. KFC Beyond Fried Chicken was available in more than 50 restaurants throughout Southern California in a six or 12 piece combo meal for a planned one month sneak peak. The product sold out in half that time in Los Angeles, with San Diego not far behind. This test followed successful consumer responses in Atlanta, where Beyond Fried Chicken debuted at a single location in August of 2019 and sold out in less than five hours, and an expanded market test in February 2020 in the Nashville and Charlotte markets, which also received a very positive consumer response. We are fortunate to partner with such an iconic brand as KFC and couldn't be more pleased with these initial positive results. These numerous examples of foodservice trials and expanded menu offerings are illustrative of how restaurants and consumers alike are integrating the Beyond Meat brand into their menus and lives, respectively. More generally, according to NPD U.S. foodservice data for the quarter ended June 2020, which tracks broadline distribution and generally excludes major quick-serve restaurants, Beyond Meat fares significantly better than the broader plant-based meat category in the foodservice sector, with brand sales actually up 35% year-over-year versus a 23% decline for the overall category. Although this data reflects only broadline distribution, it is a relative performance of Beyond Meat versus its peers that is both informative and encouraging. The year-over-year increase in NPD was driven by sales of our ground beef and dinner sausage products, both of which were new entrants in the marketplace in the year-ago period. Within NPD, Beyond Meat remained the number one branded offering in terms of dollar sales and also led all other top 10 brands in the category in terms of year-over-year sales growth in the second quarter. To sum up on foodservice, as expected, we felt the negative impact of COVID-19 in our sales and customers as so many dealt with closures and/or significant complexity and deterioration of business. However, as noted, we are also seeing some positive signs that bode well for post-COVID resumption of our growth in this critically important channel. We see no fundamental issues related to our foodservice business itself or our strategy that would preclude us from returning to a strong growth trajectory when some level of normalcy returns. For the remainder of the year, however, we do anticipate that U.S. foodservice demand will remain soft relative to a year ago, given the return of high rates of COVID-19 infections across many parts of our country, including here in Los Angeles. Similar to our strong pivot from foodservice to retail, we asked ourselves how to best utilize our international plans and presence to continue growth in the midst of the pandemic. In this context, we had not cut international spending and, in fact, accelerated international activities. We've shared with you previously that China and more broadly, Asia represents a critical part of our long-term strategy. To this end, though it is still early days, we are pleased to see the Beyond Meat brand beginning to gain traction in this important region. During Q2, in collaboration with Yum China, we launched a limited time offer across KFC, Pizza Hut, and Taco Bell restaurants. In addition, recent wins at retail include our availability at 50 Fresh Hippo stores, which are part of the Alibaba Group in Shanghai with a plan to expand into 48 more in September and our availability in Metro China with Beyond Meat products sold at select Shanghai locations. As we announced previously, we entered into a distribution agreement with Sinodis in China and we look forward to their help in increasing our availability throughout the retail and foodservice sectors. In South America, we entered Brazil with our Beyond Burger, dinner sausage, and ground beef products to be sold at 19 St. Marche locations across São Paulo. In Canada, we introduced our latest iteration of the Beyond Burger with availability at major grocery stores nationwide. This product is made in Canada through our partnership with our local manufacturer in Québec, enabling us to better serve the Canadian market, reduce the environmental footprint of our shipping and logistics activities, and support jobs within this important market. We would not allow the pandemic to slow or deter our infrastructure expansion activities. This includes facilities acquisition and development in the EU and Asia, respectively. In June, we acquired a facility in the Netherlands to support EU extrusion operations. This facility works in tandem with our Zandbergen co-manufacturing facility to allow for end-to-end production of Beyond Meat products in the EU, resulting in greater efficiencies and again, lowering our company's environmental footprint, while creating jobs in the communities that we serve. Our new facility will not only bring production closer to the European consumer, but will also allow us to leverage local supply chains, improving our cost structure. We expect this new production facility to be operational by the end of 2020. In Asia, our goal of establishing a production footprint before the end of 2020 remains on track, and we are building out a strong local team in the region. As I've said before, we believe the magnitude of the opportunity in Asia merits significant investments, and we will continue to proceed with a sense of urgency appropriate for the challenge and opportunity alike. Our continued focus on investment and expansion throughout the quarter clearly demonstrates our unwavering commitment to long-term growth. This orientation also runs throughout the offensive measures we instituted in response to COVID-19. As a reminder, our offensive measures fell into two activity sets; one, repurposing, where we thought to pivot resources away from COVID-19 impacted business segments; and two, rerouting, where we aim to meet consumers where they are in this unstable COVID-19 economy. Under these two broad themes, we developed a value pack for retailers, offered promotional and reduced pricing at retail to encourage greater consumer trial during a period of higher beef prices, switched foodservice production lines over to retail products, repacked foodservice inventory for retail sale, supported our QSR and foodservice partners with incremental programs, and continued to invest in what our brand stands for by providing free product to first responders and those in need. Many of these efforts, like the COVID-19 crisis itself, continue. And I'm proud to report that early indications suggest each have been highly effective. Taking our retail value pack, for example, despite being introduced at the tail-end of the second quarter, the Cookout Classic value pack contributed 16 points of year-to-year volume growth to our U.S. retail business and has been very positively received by retailers across the board. As you will recall, our intention with the value pack was increased accessibility and reduced the pricing delta between hamburgers and conventional beef equivalents. With an MSRP of $15.99 per pack and a per pound price of $6.40, this value offering puts us at roughly a 20% premium against the recent USDA retail average for beef patties, bringing us substantially closer than the 2x premium associated with our Beyond Burger 2 Pack. As Mark will discuss in greater detail, we incurred considerable cost of goods sold and, thereby, gross margin impact associated with repacking foodservice inventory into value packs, the growth trial, advanced pricing and accessibility goals, and brought new consumers into the brand, providing a wider base from which to continue to grow. This limited-time offering points to the potential to unlock much broader adoption of Beyond Meat products over time as we travel a downward cost curve toward pricing parity with animal protein over the next several years. Throughout the balance of the year, we will continue to invest in existing and new markets with a focus on the U.S., Canada, the EU, and Asia, domestic and global production infrastructure, additional innovation capabilities and talent, new product offerings, increased consumer engagement and being the best partner we can possibly be to our customers. The magnitude of this opportunity, where we stand at its base, and the value we know we can build deserves nothing less. Before closing, I want to turn back to our Feed A Million+ pledge, which aims to provide more than one million Beyond Burgers and nourishing meals at no cost to frontline health care workers and communities in need. We launched this initiative in early April with our Beyond Meat employees and community ambassadors and advocates. And I'm pleased to report the program provided over five million Beyond Burgers and nourishing meals through donations to organizations such as Feeding America, Food Bank for New York City, the Food Bank for Central and Northeast Missouri, DC Central Kitchen, Houston Food Bank, Second Harvest Canada, and more. Given the enormous need, particularly during COVID-19, we feel strongly as part of our brand ethos to be of service when we can. We are also honored to join in partnership with Chris Paul, Dwyane Wade, and Carmelo Anthony in support of the social change fund to address racial inequalities, nutrition access, and health outcomes in America. We remain dedicated to serving broader social goals using what's at the center of the plate as a critical starting point. At Beyond Meat, we have made commitments to fight disparities in the black and brown communities through initiatives tied to health and education equity. Within this context, the social change fund of Beyond Meat shares the goal of creating lasting systemic change for black and brown communities across America. Lastly, on previous calls, we promised you'd see us tell our story on health, ingredients, and process with content across television, digital, and print media. Today, I'm proud to announce that our brand anthem and What If We All Go Beyond campaign officially launched yesterday. I encourage you all to watch it. This brand anthem speaks to who we are, the simplicity of our process of converting plant protein to meat, and our commitment to clean non-GMO ingredients. With that, I'd like to now turn the call over to Mark Nelson, our Chief Financial Officer, who will walk us through the second quarter financial results in detail.

Thank you, Ethan and good afternoon, everyone. We are extremely pleased with our second quarter financial results as we achieved record net revenues and solid underlying performance despite a difficult operating environment due to the COVID-19 pandemic. Even as we made meaningful tactical adjustments in response to the sudden shift in consumer behavior, we continue to push forward with our aggressive agenda to drive long-term growth and international expansion. I'd like to echo Ethan's acknowledgment of the hard work and relentless focus exhibited by each of our team members throughout the organization. We are grateful for their extraordinary efforts during this period of high uncertainty, without which our exceptional second quarter results would not have been possible. Now, turning to our financial performance. As Ethan indicated, net revenues in the quarter were $113.3 million, up 69% compared to the second quarter of last year. Growth in net revenues for the second quarter of 2020 was primarily driven by an increase in volumes sold, partially offset by lower net price per pound as we implemented our strategy to offer more aggressive pricing and promotional programs amid temporary dislocations in the animal protein market. In aggregate, although our Q2 net price per pound of $5.69 was down only 3% year-over-year and 2% sequentially, this number was heavily influenced by the significant mix shift from foodservice towards retail sales channels that we experienced. As a reminder, our retail products generally have a higher net selling price per pound versus our foodservice products. Growth in volumes sold was driven by continued expansion in the number of distribution points, both domestically and abroad, as we grew our total global outlets from 94,000 at the end of Q1 to 112,000 in Q2 or a 19% increase, as well as higher sales velocities at existing retail outlets and, to a lesser extent, contributions from new products. Taking a closer look at our distribution channels, retail net revenues increased 192%, while foodservice net revenues decreased 59% versus the second quarter of 2019. In retail, our recent expansion into club stores continues to drive exceptional growth along with strong distribution gains in international markets and increased sales velocities across the remainder of our retail footprint. In foodservice, while we were still able to grow our total distribution points, we saw a significant deterioration in demand due to COVID-19. As Ethan mentioned, within foodservice, independent or smaller chain regional restaurants generally fared worse than larger chain QSR customers. Although we saw improvement in our foodservice business as the quarter progressed, demand remains weak relative to year-ago levels. Sales to international customers across retail and foodservice channels represented 15% of our net revenues during the quarter compared to 30% in the year-ago period. Gross profit during the quarter was $33.7 million or 29.7% of net revenues compared to $22.7 million or 33.8% of net revenues in the second quarter of 2019. Included in cost of goods sold during the quarter was $5.9 million of expenses related to product repacking activities due to COVID-19. As mentioned earlier, we experienced a sudden and significant shift in demand from our foodservice to our retail business, prompting our decision to convert a meaningful portion of our foodservice inventory into retail product items. To provide some context on what this undertaking entailed, these activities primarily involved costs associated with retrieving finished goods products from third-party storage facilities, transporting them to our own and our co-manufacturing partner's facilities for repacking, direct labor and holding fee costs associated with the physical repacking itself, installing new retail packaging, as well as disposal of the original foodservice packaging and transportation back to our warehousing facilities. In addition, we incurred costs associated with the write-off of unrecoverable portions of the original inventory items. Following the rebalancing of our finished goods inventory through these efforts, we do not anticipate a need for further repacking activity going forward. Given the cumulative total of these repacking activities attributed to COVID-19, we determined that it was sufficiently material and appropriate to disclose our underlying operating results excluding the impact of these activities to facilitate a clear understanding and year-over-year comparability of our performance during the quarter. On that basis, our adjusted gross profit, which excludes $5.9 million of the repacking expenses, was $39.6 million or 34.9% of net revenues during the second quarter of 2020. As compared to our prior year gross margin of 33.8%, the 110 basis point increase on an adjusted basis was primarily driven by direct materials and packaging input cost savings, direct labor efficiencies, and an increase in the volume of products sold versus the prior year period, partially offset by incremental investments in trade promotional activities. Operating expenses totaled $41.8 million or 36.9% of net revenues in the second quarter of 2020 as compared to $20.6 million or 30.6% of net revenues in the year-ago period. In Q2 2020, operating expenses included $1.6 million in product donation costs associated with our COVID-19 frontline relief campaign. In addition, the year-over-year increase in operating expenses also reflects increased headcount to support the company's long-term growth, higher share-based compensation expenses, increases in the company's marketing initiatives, continued investments in innovation, and investments in our international expansion activities. Net loss during the second quarter of 2020 was $10.2 million or $0.16 per common share as compared to a net loss of $9.4 million or $0.24 per common share in the second quarter of last year. Adjusted net loss, which excludes $7.5 million in costs directly attributed to COVID-19, specifically, $5.9 million in product repackaging activities and $1.6 million in product donation costs as well as $1.5 million in early debt extinguishment costs associated with the company's refinanced credit facilities, was $1.2 million or a loss of $0.02 per common share during the second quarter of 2020 compared to adjusted net income of $2.3 million or $0.05 per diluted common share in the prior year period, which excludes re-measurement of warrant liability costs. As I mentioned previously and reflecting the long-term mindset Ethan emphasized, we continued to invest in strategic initiatives to support our long-term growth even as we made short-term tactical adjustments in response to COVID-19. These long-term initiatives included investments in our international expansion efforts as well as new hires to enhance our capabilities in key areas, and this spending represented roughly a $0.03 per share sequential reduction in EPS in the second quarter of 2020. Adjusted EBITDA was $11.7 million or 10.3% of net revenues in the second quarter of 2020 compared to adjusted EBITDA of $6.9 million or 10.2% of net revenues in the year-ago period. We note that in Q2 2020, adjusted EBITDA also excludes the expenses defined earlier attributed to COVID-19 totaling $7.5 million, in addition to the customary add-backs we have historically included in adjusted EBITDA. Now, looking at our balance sheet and cash flow highlights. The company's cash and cash equivalent balance was $222.3 million and total debt outstanding was $50 million as of June 27th, 2020. We saw a significant increase in our inventory balance to $143 million versus $120.7 million at the end of Q1, driven by an increase in raw materials, specifically, our core pea protein inputs, partially offset by a reduction of our finished goods and work-in-progress inventory levels during the quarter. With respect to pea protein, given the nature of our contractual commitments, our volume deliveries are front-loaded during the year in anticipation of higher demand levels during the summer growing season. Given that we dialed back our production in response to COVID-19 and to reduce our existing finished good inventory levels, we have seen an increase in our pea protein stocks. However, as our pea protein raw materials have a shelf-life of approximately two years, we see minimal risk of obsolescence at this time. For the six months ended June 27, 2020, net cash used in operating activities was $44.3 million, compared to $22.4 million for the prior year period. The increase in cash used in operating activities was primarily due to working capital usage, and more specifically, to our inventory investments as previously discussed. Capital expenditures totaled $26 million for the six months ended June 27, 2020, compared to $7.5 million for the prior year period. The increase in capital expenditures was primarily driven by continued investments in production equipment and facilities related to our capacity expansion initiatives. Finally, with respect to our 2020 outlook, as noted in today's press release, given the ongoing uncertainty regarding the ultimate duration, magnitude, and effects of the COVID-19 pandemic on our business and those of our customers, our 2020 guidance remains suspended. We will periodically reevaluate our ability to provide clearer visibility into our near-term outlook. However, at this time, we do expect COVID-19 to continue to impact our business operating environment at least through the balance of the year.

Thank you, Mark. In closing, we are very proud of our results for the second quarter of 2020. And while we acknowledge the road ahead may present additional challenges and uncertainty due to the COVID-19 pandemic, we hope that we have conveyed the deep sense of optimism that pervades Beyond Meat. We are just scratching the surface of what we continue to view as an immense global opportunity. And I have every confidence in our team's ability to adapt to challenges and continue to push forward with our aggressive growth agenda. At this point, I'd like to turn the call over to the operator for your questions.

Thank you. And our first question comes from Ken Goldman from JPMorgan. Your line is open. Please check that your line is not on mute sir. And we will move to a secondary line, Mr. Goldman again your line is open.

Here we go. Can you hear me now?

Yes, we can. Hi, Ken. How are you doing?

Good. How are you? I'm not sure what happened there. Usually, it's my fault, but not this time. Your growth in the U.S., Ethan, it was a lot better than what scanner data might have suggested. Are there any maybe shipment timing issues we should be aware of that either boosted or affected your shipments during the quarter? Just thinking about how we should model the third quarter a little bit?

We experienced significant growth in U.S. retail activity. What surprised me the most was the team's ability to shift from a nearly equal split between foodservice and retail distribution at the beginning of the year to an 88% retail and 12% foodservice mix, successfully transitioning all product lines. One of the factors contributing to this remarkable performance in the second quarter, which may not be fully captured in data, is our success with Costco. While I can't disclose their internal figures, we are proud of our ranking in total frozen goods at Costco. There are elements like this that aren't always reflected in the data, but overall, we are witnessing a very strong set of trends. In retail, we are the top-selling refrigerated plant-based meat for the 12-week period ending June 14, with a 195% increase in domestic retail sales. This surge is driven by a remarkable 88% increase in retail velocity. We are in a highly favorable position for a brand. Household penetration grew 40% from January to June, reaching about 5% of U.S. households, and each household is also purchasing more. This results in an increase in purchase frequency, which rose by about 23%. All these factors contributed to the tremendous growth we observed, along with an increase in market share of approximately 550 basis points. Overall, I am very pleased with our retail performance and our ability to adapt, and I believe the numbers reflect that.

So, that's all helpful. But let me circle back to the question, which is, is inventory at retail as far as you know, at the levels that you want it to be or is there a potential for shipments to maybe trail consumption a little bit in the third quarter?

No, I don't see that. I don't see that at all. I mean I think we're very comfortable where they. And again, I look to the uptake that we're seeing in Costco and in some of these Sam's and BJ's, et cetera, that are driving a lot of growth. So, no, we feel pretty comfortable where we are.

Okay. I’ll let it go there. Thanks so much.

Sure.

Thank you. Our next question comes from Robert Moskow from Credit Suisse. Your line is open.

Hi thank you. The retail sales growth was phenomenal. It was better than I thought it would be. But the foodservice decline was also bigger than I expected, down 60%. Most of the restaurant chains that are reporting numbers are reporting better results than that. And in particular, the QSRs are reporting better results and maybe even better exit rates. So, I guess, I'm a little surprised to see it kind of lagging the restaurant sector. And I wanted to know, are you seeing anything within those chains that those chains that indicates that maybe consumers are just buying their old favorites during this timeframe? They're going to trusted products. Is trial a little bit lower than normal just because of the pandemic? And then when do we think we can get it back to normal again?

Sure. We have received some very good questions. Our focus in foodservice lies in the distinction between quick-service restaurants (QSRs) and smaller independent businesses. As anticipated, larger QSRs, especially those with drive-thru options, are performing quite well. However, smaller regional chains without drive-thrus, along with mom-and-pop shops, are facing significant challenges. In the fourth quarter of 2019, our overall distribution consisted of about 30% strategic accounts and 70% smaller accounts. Since then, the landscape has changed considerably, and now we're looking at a mix of approximately 42% strategic and 58% smaller accounts. The revenue shift is primarily due to the decline in the smaller account segment, which has historically been a strong performer for us. Independent accounts have decreased by about 60%, whereas strategic accounts have seen a decline of roughly 40%. This situation is particularly challenging for small business owners, and we are acutely aware of their struggles to keep their operations running under current conditions. However, we are seeing some positive signs that give us hope for a gradual month-over-month improvement in foodservice. That said, it remains too early to predict when we will see a complete recovery in sales for the sector.

I guess the follow-up there, Ethan is, are your sales at these customers weaker than their overall sales, like are you keeping track?

We have some data regarding the plant-based sector. In the NPD data, which includes large quick-service restaurants and smaller accounts, our sales in the smaller category have increased by 35% year-over-year, while the overall category has experienced a decline of about 20% to 23%. Therefore, we are not seeing a disproportionate level of deterioration compared to other products in those restaurants. The situation relates more to the open or closed status of restaurants based on their circumstances.

Okay. Thank you.

Thank you. Our next question comes from Ben Theurer from Barclays. Your line is open.

Hey, good afternoon Ethan and Mark. Thank you very much for taking my question. I wanted to shift a little gears into the international market actually. If you could talk a little bit about the dynamic there, similar along the lines within your exposure on foodservice, and if you could share maybe a little bit of the breakdown large box versus the smaller independent QSRs, if that's similar as it is in the U.S.? And then on the international retail piece, which clearly gained contraction during the quarter, but if you could elaborate a little bit on the more recent strategic initiatives and maybe new outlets you've been winning within retail on the international side?

Sure. Let me address your question about international foodservice. The breakdown is approximately 30% to 35% strategics, with the remainder being smaller accounts. This distribution mirrors what I previously mentioned. We are very optimistic about growth in both retail and foodservice internationally, supported by significant proof points. Our partnership with Starbucks in China has been successful, with over 3,000 stores promoting our products as permanent items through their "good, good" campaign, rather than as limited time offers. We are also focusing on pricing in international markets, aiming to have production operational in China by the end of the year, which will allow us to offer more competitive pricing. We're pleased with our tests with KFC, Pizza Hut, and Taco Bell in China, and we anticipate further developments, though I can't disclose specifics. Additionally, we are starting to collaborate with local Chinese quick-service restaurants, which opens up a new business avenue for us and should drive growth. Many are aware of our partnership with Sinodis, a distributor in China that helps make our products available to casual dining and hotels, as well as retail outlets like Metro, Citi Super, and Costco in China. We are experiencing very significant growth and activity in China. We have a small team in Shanghai, led by a capable leader from Yum! China, which brings a lot of expectations. In Europe, we are also seeing good growth in the market. While your question focused on the foodservice side, we have also secured numerous wins in retail in Europe. Although we don't have detailed data, I can share that stores that introduced our products a year ago, six months ago, or even three months ago are now expanding their offerings, whether by increasing the number of stores or adding more products. Our international retail sales are significantly rising, with growth at 167%. For instance, Metro Germany initiated our products and then expanded into other EU countries, including China. Costco Spain has performed very well and has extended into the U.K., France, and Ireland. Sobeys in Canada continues to add new items, along with Loblaws, and we see great success in other markets like Sweden and Denmark. This quarter, we have put substantial emphasis on two key areas. Firstly, we are pivoting from foodservice to retail, which is a significant undertaking when dealing with physical goods. It’s important to recognize the efforts of our team, as we had 50% of our infrastructure set up for a sector that largely faded away. We managed to transition those lines to retail and repack products within a very short time frame. Secondly, the pandemic's impact varies globally, with some economies recovering more quickly. We anticipated that China would recover faster, and that has proven to be accurate, leading to our success there. Parts of Europe are showing a similar trend, and we will keep seeking growth where it is available while adjusting our strategies, even if that means incurring some short-term costs. At this stage in our growth, gaining market share is crucial, and that has been our main focus. I hope this addresses some of your questions, and I’m happy to take any follow-up inquiries.

No, you actually captured all of it, including my follow-on, so I'll leave it here, and thanks very much and congrats on the results.

Okay, great. Thank you very much. Appreciate it.

Thank you. Our next question comes from Alexia Howard from Bernstein. Your line is open.

Good evening, everyone. Hi, there. So, can you hear me up there?

Hi there. How are you?

Good.

How are you doing?

I would like to inquire about the share trends, especially in the fresh category. It seems there is a significant competitor that has entered the market. I'm noticing a decline in the share trend and a slowdown in sales growth. While I understand you can't provide guidance for the third quarter, could you offer any insights on how we should consider this going into that period as these dynamics unfold? There is still notable growth in other areas, as indicated by the measured channel data you reported, but I'm curious if there are any warnings or important information we should be aware of as the share trends stabilize. Thank you.

Sure. No, thank you. So just on the main point, I mean we continue to grow faster than the category by a large measure, continue to lead the category in terms of the top four selling items in grocery. So I think we feel really good about that. In this economy in general and free enterprise economy, it would be incredibly unusual to not have competitors come in at a $1.5 trillion opportunity. So, like I think I've said over the last several quarters and before, we have no surprise at this. And we continue to compete extremely well as the numbers that I've shared indicate. So I think if someone were to try to build the case that Beyond is somehow suffering as well as competition, the numbers just don't support it in any shape or form. We see no overall decline in Beyond Meat sales across the chains, or maybe an exception for one or two small chains. But overall, extremely strong, continued growth, continued increases across both new and natural channels and all retailers. And I think this really speaks to the strength of our brand. It's a very competitive environment. We have large incumbents coming in. We have upstarts as well that are making noise in the media and coming into the market, but we continue to outperform and lead the sector in growth and grow, as I mentioned, more quickly than the sector. So competition is a natural part of being in business, and we feel really good about how we're doing against competitors surrounding the market. I think the numbers bear that out.

Great. Thank you very much. In the interest of time, I’ll hop on. Thank you.

Thank you so much.

Thank you. Our next question comes from Rupesh Parikh from Oppenheimer. Your line is open.

Good afternoon, and thank you for taking my questions. I have two related inquiries regarding the U.S. retail segment. In the club channel, regarding Costco, BJ's, and Sam's Club, do those stores intend to carry your product throughout the year? Additionally, concerning the Cookout Classic, which I believe you introduced at some of the discount stores, does that seem more temporary? Is that primarily a benefit for Q2, or do you anticipate that benefit in upcoming quarters as well?

Yes. As you know, Costco frequently adjusts their product offerings, but we have no indication that they will reduce our presence. I recently had a productive conversation with their CEO, and they expressed their satisfaction with our performance. If I had to speculate, I anticipate that we will see an increase in our products at Costco rather than a decrease, especially considering our strong performance in those retail formats. Regarding the value packs, I am particularly proud of this initiative as it aligns with our five-year goal set about 18 to 19 months ago to price animal protein competitively in at least one category. I believe we are on track to achieve that, and possibly expand to more categories like beef, pork, and poultry. Interestingly, this quarter, we noticed an opportunity due to elevated beef prices. We have a two-pack product priced significantly above traditional beef prices, but within a single quarter, we expect to reduce that price difference to a 20% premium. It's worth noting that our company is small, yet we just recorded our first quarter with over $100 million in sales. We're gaining traction thanks to the beef industry’s higher prices, which helps us remain competitive against conventional beef patties. This clearly indicates that we are likely to meet our goal of pricing animal protein more accessibly within the three-and-a-half-year timeframe we established. The value pack reflects that initiative. We've sold around 70,000 cases of the product with strong distribution across retailers like Walmart, Target, Kroger, Harris Teeter, Publix, Wegmans, and Stop & Shop. However, we were only able to launch it in the last two to three weeks of the quarter. Nonetheless, it contributed about 16 points to our year-over-year growth in domestic retail. While this product is a limited-time offer, the concept behind it will have a lasting impact on Beyond Meat. We are committed to making this product accessible at affordable price points, and the Cookout Classic pack is a step in that direction. I am very satisfied with its initial launch and sales, and I expect continued growth.

Great. Thank you.

Thank you. Our next question comes from Michael Lavery from Piper Sandler. Your line is open.

Good afternoon. Thank you. When you examine the international sales, there seems to be a sharper decline in foodservice compared to the U.S. It's somewhat difficult to determine the number of outlets since Canada is now included in the international segment, differing from previous totals. It appears that the number of outlets has sharply increased, potentially by around 300%, but sales are clearly declining. There are evident pressures from closures and COVID, but should we anticipate a different trend in terms of sales per store? Also, are there any products that have been authorized but have not yet been shipped?

So, this is on the international front or in general?

On the international front, it seems that outlet growth is significantly outpacing sales. I would like to understand how we can reconcile this discrepancy.

Yes, we did experience a higher proportion of our international distribution in foodservice compared to retail. The COVID-19 pandemic has significantly affected the foodservice sector, which I believe is a key factor in this trend. However, we have made advancements on the retail side internationally, which became our priority as foodservice began to decline. Initially, a large portion of our sales was concentrated in international foodservice as we expanded globally. We anticipate this will balance out as we continue to grow retail and as the international foodservice sector recovers. Currently, the mix is approximately 43% foodservice and 57% retail, which indicates a notable drop from 2019 when we were around 84% foodservice. These figures clearly illustrate the change.

I would like to ask a question in a slightly different way. The report indicates there are 47,000 retail and foodservice outlets internationally. In the first quarter, there may have been some impact on foodservice from COVID at the tail end of the quarter. Looking back over the past year, the numbers are quite small, making it a bit challenging. However, if we examine the progression from the second to the third quarter, the total number of international outlets has increased by almost 300%, whereas sales in foodservice have dropped around 40%, compared to a decline of about 14% on the U.S. side. This sequential comparison feels somewhat unusual; it's not directly comparable to the previous quarter. I'm trying to clarify the number of outlets. Are many of these authorized outlets, such as Starbucks in China, where sales have not started yet due to a phased launch? Is that part of the reason for the discrepancy?

Yes, there are two main factors. First, the overall instability in the foodservice sector. Second, many of these wins are very new and still in their early stages. You'll begin to see their impact over time. For instance, Starbucks is a great case; while it may not have a significant effect at this moment, it is present in 3,000 stores, and that will change.

Okay. That's helpful. And just a quick follow-up on the frozen value launch. Have you noticed any changes in consumer perception? Given the initial refrigerated launch, does this create any confusion for consumers? Do you have any insights on how the response has been? It seems like sales are strong. Are these new consumers, or are they the same ones familiar with the refrigerated product? Do you have any information on that?

It's too early for us to provide a definite answer, but we haven't observed any significant decline. In fact, our sales of the 2 Pack continue to rise overall. It doesn't seem to affect those sales negatively. At one point, we considered packaging it in a sleeve to replicate the appearance of frozen beef patties found in the frozen meat section. Our hope is that consumers will perceive both products similarly, as they do with fresh and frozen beef patties. We can follow up in the next quarter if we notice any specific trends in consumer behavior, but we're optimistic about creating a similar perception to that of fresh versus frozen beef.

Okay, perfect. Thank you very much.

Thank you. And we'll take our last caller from Bryan Spillane from Bank of America. Your line is open.

Hey, good afternoon everyone.

Hey, Bryan. Hi there.

Ethan, I have a question regarding the relationship between retail and foodservice in the U.S. In areas where restaurants have reopened, has that influenced retail growth at all? Additionally, this shift to retail was unexpected. My question is how sustainable do you think this retail growth will be over time? You now have a much larger retail business than you anticipated a year ago. As foodservice recovers, do you believe these retail gains will be lasting? Essentially, have you accelerated retail growth while still developing the foodservice side, potentially placing you ahead of your original growth expectations?

It's a great question and allows me to provide a sincere answer. Absolutely, I believe our brand is maturing, not in a way that slows us down, but positively as we gain recognition among mainstream consumers in America. For instance, the ad we released yesterday was extremely well-received, reflected in our household penetration numbers and the growing purchasing rates per household. I don't think these trends are temporary. We know we'll return to foodservice, and I believe it will be a substantial comeback. I don’t expect to lose all of our retail gains. I'm quite optimistic about continuing the retail growth we’ve achieved. The trial program has been significant for us, which is why I wanted to introduce the value pack, giving consumers the chance to find and enjoy our products. When they try them, they typically like them, as shown by our repeat rates. We have eight products in retail now. For perspective, a competitor in the meat section has 23 SKUs, highlighting the vast opportunity we have to expand. The meat industry offers a lot of diversity in cuts and products, so we have much room for growth in the stores we are in. We are launching new products despite the pandemic. Our breakfast sausage patties will be available in over 2,000 Walmart stores and 20 Super Target stores in September, and we are also expanding distribution of these products in Publix. Our breakfast sausage is performing well in Whole Foods, ranking among the top five breakfast SKUs for the eight weeks ending June 20. We're making great strides with our new products, including the Beyond Meatballs that are set to launch with early shipments in September to retailers like Whole Foods and Kroger. I hope we can leverage the momentum from the shift from a 50/50 split to an 88/12 split now, which is impressive, and recapture the foodservice losses with significant gains. We haven't highlighted much about our partnerships, but for example, KFC in Los Angeles had a 50-store launch, and we rushed to get the nuggets because they sold out within two weeks instead of the anticipated month. These launches are yielding excellent results, and we have fantastic partners. Dunkin' recently shared that their new wrap is performing well. Whether it’s with Pizza Hut or other brands, we’re fortunate to have these long-term relationships and aim to support them during these challenging times. I expect we’ll be able to assist them as the economy stabilizes, which it will, as history shows we can overcome these challenges. I expect Beyond Meat to continue growing strongly over the next several quarters.

Thanks, Ethan.

Thank you. And that does conclude our question-and-answer session for today's conference. And I'd like to turn the conference back over to Ethan Brown for any closing remarks.

Just wanted to thank folks for calling in, and I think the main message is to be safe and take care of one another. It's a difficult period. And it's time to just be a little extra careful with everybody. And let's just try to get through this. I'm very hopeful that we're going to emerge from this stronger as an economy and country and looking forward to that, and wishing you all well as we continue to manage the pandemic. Take care. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.