Beyond Meat, Inc. Q1 FY2021 Earnings Call

Welcome to the Beyond Meat, Inc. 2021 First Quarter Conference Call. During the presentation all participants will be in listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded. I would now like to turn the conference over to Fitzhugh Taylor of ICR. Please go ahead.

Thank you. Good afternoon, and welcome. On today's call are Ethan Brown, Founder, President and Chief Executive Officer of Beyond Meat; and Lubi Kutua, the company's Vice President of FP&A and Investor Relations. By now, everyone should have access to the company's first 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 at www.beyondmeat.com. Before we begin, please note that all of the 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. Forward-looking statements in the earnings release that we issued today, along with the comments on this call, are made only as of today and will not be updated as actual events unfold. Please refer to today's press release, the company's annual report on Form 10-K for the fiscal year ended December 31, 2020, the company's quarterly report on Form 10-Q for the quarter ended April 3, 2021, to be filed with the SEC and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please also note that on today's call, management will refer to adjusted EBITDA and adjusted net income or loss, which are non-GAAP financial measures. While we believe these non-GAAP financial measures provide 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 or the investor presentation for a reconciliation of adjusted EBITDA and adjusted net income or loss to their most comparable GAAP measures. And with that, I would like to turn the call over to Ethan Brown. Ethan?

Thank you, Fitz, and good afternoon, everyone. Before I dive into our business highlights, let me begin with a few comments on Mark Nelson, our Chief Financial Officer and Treasurer for the past 5.5 years. Though Mark will stay on as advisor to me, yesterday, as planned, he officially transitioned from the role of Chief Financial Officer at Beyond Meat. I and Beyond Meat have benefited greatly from Mark's leadership during a critical time in our growth. His impeccable integrity, his expansive knowledge of and great facility with all financial matters, large and small, his tireless work ethic and operational depth were just some of what recommends Mark. Mark worked side-by-side with me throughout so many important moments in our history and no matter the background noise, he delivered. Mark is also a close friend of mine, and as such, I hope you will not mind me sharing an example of his legendary personal frugality. The office Mark chose is across the hall from a small kitchenette here at our headquarters. I love poking my head in when grabbing water or the like. I felt as if I was getting a glimpse of a Chief Financial Officer in his natural habitat. Larger than a closet, but smaller than a freshman single, Mark's office had the elements of survival, but a little more. His own small coffee pot, a fan, a dog bed, a desk with four skinny legs and two chairs. All he needed was a few posters and I would have felt like I was back in the dorm room, which is how I referred to his office. I'm going to miss Mark in the day-to-day excitement of building our business, and I'm glad we'll have his continued support as an advisor. We've run a robust process to identify Mark's successor, and I will make that announcement in the coming weeks. Before I dive into Q1 2021 results, I'd like to share some broader thoughts on context. We spent the last year investing heavily in our business, establishing infrastructure, personnel, innovation capabilities, partnerships and product pipeline against our long-term growth and market share objectives. More specifically, we are making a series of investments here in the U.S., in the EU and in China to be in a position to serve customers and consumers alike, and apply increasing pressure on the three key levers of taste, health and cost that we believe are critical for mass adoption. Making these sizable investments during a period of serious disruption to important segments of our business impacts our operating margin and important metrics such as gross margin through higher fixed overhead. These outcomes are not unexpected and are a direct result of our belief that it makes little sense to limit our ability to capture future growth due to transient pandemic conditions. We will continue to make such investments, and I'm grateful for all of our team members who work so diligently to keep building our foundation through such a tumultuous time. Whether it's our ability to compete and win here in the U.S., as evidenced by our leadership position in retail or NPD foodservice, or in the EU, as indicated by a prestigious win for the Beyond Burger; the strength and breadth of our partnerships with global quick-serve restaurants and so many valued retail and foodservice customers; the latest release of our 3.0 burger with its taste and nutrition gains, along with exciting new product launch around the corner; the sizable investments we're making in production infrastructure here in the U.S., EU and China; our joint venture with Pepsi, the Planet partnership; and finally, the resources we are adding to the Manhattan Beach project as we build out our new corporate campus, I have never been more optimistic about the future of Beyond Meat. It is with this optimism that I'm pleased to share that we are seeing enough stability in recent trends to cautiously resume offering near-term guidance beginning with net revenue for Q2 2021. We, of course, take this step with the understanding that should there be a resurgence of COVID here in the U.S. or in any of our most important economies, we will need to revisit our guidance. Let me now turn to our first quarter highlights. Our first quarter net revenues of $108 million met our internal plan, representing an 11% year-over-year increase. This despite cycling a quarter that largely preceded and as such was unscathed by COVID-19's disruption of the economy and our business. As noted, we are encouraged by the trends we saw in Q1 revenue. Retail net revenues led our growth, increasing 45% year-over-year. And although foodservice net revenues were down 34% versus the prior year period, this sector appears to be showing directional early signs of recovery from COVID-19. In U.S. retail, each of our key brand metrics of household penetration, buyer rates, purchase frequency and repeat rates continued to advance. According to SPINS consumer panel data for the 52 weeks ended March 28, 2021, U.S. household penetration for the Beyond Meat brand increased to 5.4%, representing a 10 basis point increase sequentially and a 100 basis point increase versus a year ago. Our buyer rate, which ranks highest among all plant-based meat brands in U.S. retail, increased 5% sequentially and approximately 54% versus the prior year. Purchase frequency was up 3% sequentially and 37% versus the prior year. And finally, our repeat rate increased to 56.9% versus 55.3% as of Q4 and 44.8% a year ago. This consistent strengthening across each of these metrics continues to drive our position as the number one brand in refrigerated plant-based meat. Consistent with the strength of these metrics, our net revenues in U.S. retail of $63.8 million were up 28% year-over-year. This performance reflects growth in the sales of Beyond Beef and club pack burgers as well as contributions from new products, primarily breakfast sausage patties and meatballs. In terms of consumer takeaway, according to SPINS data for U.S. multi-outlet and natural and specialty channels for the 12-week period ended March 21, 2021, sales of Beyond Meat products were up 16% year-over-year, while the plant-based meat category as a whole was up 6%, contributing to a 160 basis point year-over-year increase in market share for the Beyond Meat brand. Across MULO, for the same 12-week period, our total distribution points, or TDPs, increased 46% year-over-year, driven by growth in total outlets as well as the introduction of new items, including the Cookout Classic, Beyond Meatballs and Beyond Breakfast Sausage Links. As a reminder, while increasing TDPs is a good sign for our long-term sales growth in retail, it typically exerts near-term downward pressure on velocity. And in our case, we saw a roughly 18% year-over-year decline. Turning to international retail, we saw continued momentum in the first quarter of 2021 with net revenues up 189% year-over-year. To put that in context, our first quarter net revenues of $17.2 million in international retail were nearly half of our entire 2020 revenues for that segment. As in the U.S., this growth is driven by the strength of our product quality. For example, in Germany, the Beyond Burger was recently rated the number one plant-based burger by the renowned Stiftung Warentest organization. This organization is the most prominent consumer advocate group in Germany, originally established by the German Federal Parliament to help consumers by providing objective information on certain goods and services. It enjoys over 97% consumer awareness in Germany and was recently determined to have the highest trust among the population from the 20 most important labels in Germany according to Label Monitor 2020 Survey. This award was followed by German consumers ranking Beyond Meat in the top five of all innovative companies according to market research performed for Handelsblatt, a leading German newspaper. More generally, our global progress is driven by increases in both the breadth and depth of our distribution as we enter new doors and add new SKUs to existing outlets. Regarding our distribution footprint in international retail, we recently transitioned away from a sales and distribution partner in Germany, who relied heavily on discounting and limited time placements. This transition, which will better position us for sustained growth in this important market, resulted in what we believe is a largely temporary 10,000-location reduction of our total reported outlets compared to Q4 2020. We've since added our own in-country sales manager and brought on a new distribution partner as part of our overall strategy for certain EU countries. Meanwhile, we have continued to advance distribution gains across the U.K., Austria, Switzerland and Australia, and in Germany as we layer in more strategic stores totaling approximately 2,400 new retail outlets for Beyond Meat products during Q1 2021. Now turning to foodservice, where Q1 2021 reflects COVID-19's continued impact on away-from-home eating generally and specifically the segments therein where we are most active. These COVID-related dynamics aside, Beyond Meat continues to hold the number one brand position in terms of dollar sales for our category in U.S. foodservice according to NPD data. As a reminder, NPD captured broadline distribution foodservice sales, generally excluding large chains and other direct shipment customers. Sales of Beyond Meat products were down 22% year-over-year in the quarter, which was roughly in line with the overall category's 20% decline during the same period. This decline reflects the sizable percent of our business that is tied to independent operators, lodging facilities and recreation venues and a disproportionate impact of COVID-19 on these venues. In aggregate, across foodservice channels, our U.S. foodservice net revenues were down 26% year-over-year as the business continues to contend with weaker away-from-home demand stemming from COVID-19. However, consistent with the slow and steady thaw that we saw throughout Q1, we were up 9% sequentially in U.S. foodservice from Q4 2020 to Q1 2021. In international foodservice, net revenues were down 44% year-over-year in the first quarter as the impact of COVID continues to weigh on foodservice demand, and in many cases, lockdown restrictions in certain international markets remain more severe than the U.S. Let me now provide a brief update on key strategic initiatives that are, as one might expect, centered around our core levers of taste, nutrition and cost. First and foremost, as you are likely aware, last week, we announced the launch of the latest version of our iconic Beyond Burger. This 3.0 version delivers on our promise of constantly improving the taste and sensory experience for our products, while also seeking to further health benefits. The 3.0 improvements in flavor and juiciness have been validated through extensive consumer testing, where likability scores have been on par with 80/20 ground beef burgers. And from a nutritional perspective, the new burger contains 35% less saturated and total fat compared to 80/20 ground beef, fewer calories and no cholesterol, and a B vitamin and mineral micronutrient profile that is comparable to beef. And of course, sticking to our brand innovation guardrails, our latest burger contains no GMOs or bioengineered ingredients. The 3.0 burger patties began to arrive on store shelves earlier this week and will be sold in our familiar two-pack as well as our first-ever value four-pack as we continue our march toward price parity and beyond. Later this summer, our one-pound ground beef pack with the new 3.0 recipe will also become available throughout retail with both 3.0 products launching at our U.S. foodservice partners beginning in June. Additionally, as we have previously mentioned and consistent with the importance of human health to our mission, we expect to introduce a second Beyond Burger patty option with substantially less than half the saturated fat of 80/20 beef later this year. Our goal of the second patty option is to provide consumers with even greater choice, not unlike the presentation of animal beef with 80/20 and 90/10 cuts. We are supporting the launch of 3.0 with an ambitious marketing program to tell the story of this latest burger's great taste and health advantages. Specific examples of our 3.0 marketing efforts include our recent mobile pop-ups in select U.S. cities that offered consumers free exclusive first taste of the new product ahead of its in-store availability, increased social media activity to build consumer awareness and excitement, shopper marketing programs to incentivize consumer trial, among others. Second, we are accompanying the 3.0 launch with the announcement of the plant-based diet initiative at Stanford University School of Medicine. We are establishing and funding this five-year initiative to support peer-reviewed clinically significant studies on the health implications of a plant-based diet, including plant-based meat. This project will inform Beyond Meat's rapid and relentless innovation initiative, and our efforts to continue to optimize taste and health while importantly, assisting in establishment of a publicly accessible repository of peer-reviewed data and literature on the health benefits of plant-based meats. Third, we are investing significant focus and spend against our goal of achieving price parity for underpricing animal protein in at least one of our product categories by the end of 2024. We are attacking this objective internally as well as leveraging the support of external global resources that bring many decades of COGS optimization experience to bear in partnership with us. Specific investments and activities include: the establishment of more localized production within close proximity of our highest priority markets; more integrated end-to-end production processes across a greater proportion of our manufacturing network; scale-driven efficiencies in procurement and fixed cost absorption; further diversification of our core protein ingredient supply chain; continued improvements in throughput across our manufacturing network; certain product and process innovations and reformulations; and packaging optimization. Clearly, a critical component of our cost-down effort is scale, and I'll take a moment here to elaborate more fully on our strategic investments in capacity in the U.S. and abroad. We are continuing to optimize commercial production at the Pennsylvania plant we acquired late last year and in support of strategic QSR customers in our retail business, we are adding new lines in our Columbia, Missouri facilities. As recently announced, we've commenced full commercial production at our new facility in Jiaxing, China. This new plant represents our first end-to-end production facility outside of the U.S., coming just one year after our initial entry into Mainland China. I'm extremely proud of our operations team and our China management who worked so hard to achieve the significant milestone despite travel constraints and other COVID-related barriers. We expect the Jiaxing facility to significantly speed our path to market while improving our cost structure and the sustainability of our operations in China. As discussed, we are pursuing the same playbook in the EU, where the construction phase of our new facility in The Netherlands is largely complete. We have been conducting production trial runs over the past several weeks and look forward to full commercial production in the near future. As in China, we expect this local production to make a strong contribution to our cost down and sustainability objectives for the EU. And in both economies, the EU and China, we are making investments in strong local teams to further accelerate and help manage our growth therein. As noted, these forward investment and activities have an impact on today's operating expenses and where we are growing into infrastructure gross margin but are important pillars in support of long-term cost down and growth alike. Finally, in early March, we completed, under highly attractive terms, our largest capitalization transaction yet. We closed $1 billion convertible senior notes offering with a final aggregate principal amount of $1.15 billion after the exercise of the greenshoe option. Net of fees and a simultaneously capped call transaction we entered into, the deal raised $1.04 billion in net proceeds for Beyond Meat. We see a rapidly growing global market for plant-based meats. We recognize our first mover position, and we will leverage these proceeds to accelerate our capture of market share. I've touched on many of these initiatives today, thematically or specifically. Given their importance to our investment strategy and future growth, I'll take a moment to summarize seven core buckets of activities. First, we will further our capacity expansion goals, both at existing and new production sites here in the U.S. and abroad. Second, we will expand the Manhattan Beach project here in the U.S. and establish innovation centers in the EU and China with the goal of advancing the sensory performance of our existing platforms toward their animal protein equivalents, exploring longer-term disruptive technologies and approaches, accelerating and broadening our product pipeline for retail and foodservice customers and supporting our cost-down program through ingredients and process innovation. Third, we will continue the build out of our new campus here in L.A., which will house along, with our headquarter operations, the Manhattan Beach project and its customer-focused innovation centers. Fourth, we will further scale up and expand our commercialization activities including our first fully dedicated pilot production facility here in the Los Angeles area. Fifth, we are launching our most aggressive cost-down initiatives yet, with the goal of realizing a step change reduction in unit production costs within the next two to three years. Sixth, we'd be investing more heavily in our marketing activities around the taste and health attributes of our product lines. And seventh, we will continue to bring in talent required to strengthen critical areas in our business operations, both domestically and abroad. In summary, we believe we are well poised to embark on our mission of driving the next phase of Beyond Meat's growth as we cross the bridge to mainstream consumption. With that, I'll turn it over to Lubi to walk through our first quarter financial results in a bit more detail.

Thank you, Ethan, and good afternoon, everyone. We achieved net revenues of $108.2 million in the first quarter of 2021, representing an increase of 11.4% compared to the first quarter of 2020. Growth in net revenues in the first quarter was driven by a 14% increase in volume sold, partially offset by lower net price realization. The latter was mainly driven by increased trade discounts relative to the prior year and, to a lesser extent, by product mix shifts as we sold a greater proportion of large pack items in retail, which carry a lower net price per unit volume. Overall, net price per pound was $5.70 in the first quarter of 2021 compared to $5.83 in Q1 2020. Looking at our distribution channels in aggregate, retail net revenues increased 45% year-over-year, while foodservice net revenues were down 34% versus the first quarter of 2020. In retail, our volume of products sold increased 52% year-over-year driven by growth in the number of distribution points and contribution from new products. Overall, across U.S. and international retail, net revenue per pound was lower by approximately 5% year-over-year due to increased trade discounts and product mix shifts. In foodservice, net revenues declined 34% year-over-year as we continued to experience weaker demand due to the ongoing impact of COVID-19. We will face an easier year-over-year comparison in the second quarter of 2021, however, and therefore, expect to see year-over-year growth in our sales to foodservice customers. On a sequential basis, in the first quarter of 2021, sales to foodservice customers continued their steady, albeit moderate recovery from the Q2 2020 trough. Although we generally expect continued sequential improvement in our foodservice business as more of the population gets vaccinated and economic activity reopens, we still anticipate that recovery in our foodservice business will generally lag the broader foodservice sector given our exposure to certain channels that have been disproportionately impacted by COVID-19. Gross profit during the quarter was $32.7 million or 30.2% of net revenues compared to $37.7 million or 38.8% of net revenues in the first quarter of 2020. The year-over-year decrease in gross margin was primarily driven by higher transportation and warehousing costs, which reduced gross margin by approximately 350 basis points; lower net realized price, which represented a 150 basis point drag; higher depreciation expense, a 140 basis point drag; and increased fixed overhead costs, roughly a 100 basis point drag. With regard to transportation and warehousing costs, the year-over-year increase was driven by higher lane rates as well as higher inventory levels, particularly for pea protein as we aggregated larger quantities of pea protein due to 2020 volume shortfalls, primarily in our foodservice business. As we have mentioned before, we do not foresee any inventory obsolescence issues related to pea protein given its long shelf life, and we are gradually beginning to drive down these inventory levels as our revenue growth recovers. As for the increases in depreciation and fixed overhead expenses, the year-over-year increase was primarily attributable to our three newest production sites in Pennsylvania, China and The Netherlands. Operating expenses totaled $57.4 million or 53% of net revenues in the first quarter of 2021 as compared to $35.9 million or 37% of net revenues in the year ago period. The year-over-year increase in operating expenses primarily reflects a significant increase in production trial activities; increased head count levels as we continue to build out our R&D capabilities and support our international expansion plans; higher customer freight costs, which are included in selling expenses; and higher share-based compensation expense. Net loss in the first quarter of 2021 was $27.3 million or $0.43 per common share as compared to net income of $1.8 million or $0.03 per common share in the first quarter of 2020. Adjusted net loss, which excludes $1 million in expenses attributable to the early extinguishment of our former credit agreement, was $26.2 million or $0.42 per common share in the first quarter of 2021. Adjusted EBITDA was a loss of $10.8 million or 10% of net revenues in the first quarter of 2021 compared to adjusted EBITDA of $13.9 million or 14.3% of net revenue in Q1 2020. Turning to our balance sheet and cash flow highlights. Our cash and cash equivalent balance as well as our total debt outstanding was approximately $1.1 billion as of April 3, 2021. During the quarter, we completed a convertible senior notes offering with an aggregate principal amount of $1.15 billion after taking into account the exercise of a $150 million greenshoe option. The convertible notes, which carry a 0% coupon, have a six-year maturity and a conversion price of approximately $206 per share of common stock. In conjunction with the convertible notes offering, we also entered into a privately negotiated capped call transaction, which is generally expected to reduce potential dilution to our common stock up to a price of approximately $279.32 per share. Net of transaction fees and the capped call, the convertible senior notes offering generated approximately $1.04 billion in net proceeds for Beyond Meat. With respect to cash flow, for the three months ended April 3, 2021, net cash used in operating activities was $30.7 million compared to $17.2 million for the prior year period. Capital expenditures totaled $23.4 million for the three months ended April 3, 2021, compared to $12.4 million for the prior year period. The increase in capital expenditures was primarily driven by continued investments in production equipment and facilities related to capacity expansion initiatives, primarily in China and The Netherlands. Finally, with respect to our outlook for 2021, variability of customer demand levels, particularly in foodservice channels remains elevated as a result of COVID-19-induced disruption. Therefore, given low visibility beyond a limited time horizon, we are continuing to refrain from providing full year financial guidance at this time. However, in order to provide some degree of visibility into our near-term outlook, we will now provide, on an interim basis, limited quarterly guidance for net revenues. To this end, for the second quarter of 2021, we expect net revenues to be in the range of $135 million to $150 million, representing a year-over-year increase of 19% to 32% compared to the second quarter of 2020. As a reminder, recall that our second and third quarters are typically our strongest revenue quarters due to the summer grilling season. However, softer aggregate demand levels and foodservice channels may partially offset this typical seasonality. I'll also remind you that we intend to continue our aggressive investment agenda in 2021, laying the foundation for our longer-term growth by advancing our most critical strategic initiatives. As such, we continue to expect minimal operating expense leverage this year. While production trial costs tend to be highly variable from one period to another, keep in mind that sequentially, we typically step up our marketing activity in the second quarter as we enter the summer grilling season, and we will, of course, support the launch of our new 3.0 burger with a robust campaign. With that, I'll turn the call back over to the operator to open it up for your questions. Thank you.

Thank you. And our first question is from the line of Bryan Spillane with Bank of America. Please go ahead.

Hi. Good afternoon, everyone. I have two questions. First, regarding the launch of the 3.0: Ethan, I think you said it's hitting store shelves now. Do you expect it to be fully in stock for Memorial Day and Labor Day, the major grilling holidays? Second, will you be doing significantly more merchandising than you normally do during that period?

Hi, Bryan, good to hear your voice, and I appreciate the question and to talk about 3.0. Yes, I mean we certainly planned this launch to make sure that we were locked in for the summer grilling season. So those dates were very meaningful to us as we push the team to finalize. You will see enhanced activity from us from a shopper marketing perspective. One of the things that's been challenging about COVID is the inability to do the robust sampling programs that we usually do. And in this case, we have such high confidence in this 3.0 version that we'd love to be doing that. But we'll get at folks in other ways, but you'll see promotional activity around 3.0, you'll see social media activity around it and other means of drawing consumer attention toward it. It's a great advance in terms of the overall sensory experience as well as nutrition where we're lowering the total amount of fat. We keep the saturated fat at 35% less than 80/20, added B vitamins and other micronutrients. So it's a similar profile to beef. Of course, no cholesterol and no GMO. So it's a very strong product, both living up to our promise to continue to improve toward the North Star of making an indistinguishable from animal protein as well as offering health advantages to the consumer. So excited to hear reactions from it. And so far, it has been very positive.

All right. Thanks for that. I guess just to follow up, I know you gave some guidance around 2Q, but there's going to be a lot of focus on gross margins. I'm not forgetting about absolute EBITDA levels because there are some investments. Lubi, could you give us a little perspective on how we should look at the first quarter as a benchmark for gross margins? Would they improve from that as we move through the year because you'll have more capacity in market in Europe and in China and you're working through some inventory? I'm just trying to get a sense for whether the first quarter gross margins should be viewed as a benchmark for the rest of the year. Thank you.

So Bryan, I'll let Lubi give more detail on this, but I wanted to set some context around margin. So what we're doing now is we're continuing to expand the business for the opportunity ahead. And that relates to all of our strategic partners. It relates to the fact that we're in retail work, we're doing very well, the total points of distribution, etc. So we are running the business according to a plan that has not changed. It's only accelerated. Yet we're doing that in an environment where the volume and throughput is contracted due to COVID. And so you're going to see the impact on margin there. But what's interesting about this is, as we continue to expand both infrastructure and personnel to get at some of the scale-driven efficiencies and margin gains, there's obviously a temporary movement in the other direction, right? That's normal, and that's something that we're very comfortable with. But I don't think it's something that is representative of the future in terms of where we'll go on margin. Lubi is going to unpack kind of where those costs are, whether it's in warehousing or fixed overhead or depreciation, etc. But that's the general picture that exists.

Yes. Sure, Bryan. Regarding our gross margin performance in Q1, part of the reason we are not providing specific guidance for Q2 gross margins is that there remains considerable uncertainty around the foodservice side of our business. That can have a significant impact on volumes, which are a major driver of the volume leverage from our facilities. Without being too specific, there were factors that affected our margins in Q1, such as warehousing, which was influenced by the levels of pea protein we had on hand, and transportation costs. I expect some of those pressures to continue into the second quarter. With the 3.0 product launching in Q2, we will support it with strong marketing and promotional activity, so there are a few offsets. As I said, we don't want to be too specific on margins, but you should generally think about Q1 and then layer on the few items I mentioned.

All right. Thanks, Lubi. Thanks, Ethan. Very helpful.

Yes. Sure.

Our next question is from the line of Robert Moskow with Credit Suisse. Please go ahead.

Hi. Thank you for the question. I hope you can hear me. Could you give us a little more color on the distribution losses in Europe and how quickly you can regain placement? Are you going to switch to a new distributor, and does that take several quarters? Also, when you look at your ramp-up from the first quarter to the second quarter in terms of your sales guide, how much of that assumes a big pickup in foodservice demand related to Europe or even in the U.S.? It looked like you lost some outlets in the U.S. as well, I think about 2,000. Can you tell us what is in that sequential assumption?

Good to hear from you and thanks for the questions. The distribution losses in the EU are entirely related to switching from a distributor and sales partner there to a new system, including adding our own personnel in Europe. This is part of a larger program and reflects our ambition not only for the EU but also for China, where we are setting up our own operations. These are very large markets and are favorable for our products and value proposition. We are moving from a model that helped us initially gain traction to one where we are investing significant management, facilities, and our own sales team. This is a natural progression and maturation of our approach to the EU market, and I do not view it as enduring. It will be a short-term reduction in outlets. Since the quarter ended, we have added about 2,400 new spots globally, including in Europe. You may have seen that we won a prestigious award in Germany: a consumer survey of 10,000 representative Germans ranked us among the top five most innovative brands in the market, right alongside Tesla. We have very strong brand resonance with German consumers. This was simply a transactional adjustment as we begin to invest more in our own team in the EU. The adjustment in the U.S. distribution was really driven by COVID impact. Those were independent operators that either closed or have been struggling. We have picked up very good partners in the U.S., and I had a terrific conversation this morning with a compelling partner I can’t name yet. We will continue to see growth in foodservice points of distribution in the U.S. and globally. On ramping from Q1 to Q2 and the role of foodservice, look at the foodservice contribution over the last three quarters. We are not expecting a massive uptick in activity there, so you can back out what the retail impact might be. Importantly for shareholders and investors, the numbers we are committing to for the second quarter do not assume any massive onboarding by one of our strategic quick-serve restaurant partners. Growth will continue with the foodservice and retail partners we have today and with the products we currently offer.

Okay. So the bulk of it then is a ramp-up at retail. Does that also include new stores that you're getting into at Walmart and Target? I think there was a press release a few weeks back about that. Is that in those numbers? And is there may be an inventory build related to that?

Yes. So you have seen that, and I appreciate you picking up on it. We have gotten some really good distribution wins across the first quarter, both in getting new products placed with existing partners and in opening new stores more broadly, whether it's Walmart, Kroger, Target, Wegmans and others in the U.S., and of course the CVS placement we had. Internationally, we continue to grow with Migros, Albert Heijn and Sainsbury's and the like. Overall, you see strong expansion in retail, and the year-over-year numbers reflect that: 45% year-over-year in our U.S. and international retail combined, with international up 189%. We're just getting started, and that should explain why we're making on-the-ground investments in the EU and in China.

Yes. Okay. Thank you.

Our next question is from the line of Adam Samuelson with Goldman Sachs. Please go ahead.

Yes. Thanks. Good afternoon, everyone.

Hi, Adam.

Hi. I guess my first question, Ethan, is about the recent capital raise of $1.1 billion from the convertible. I'm trying to understand what you'll be using the cash for. You've been burning a little cash and there's still investment in the business, but the model to date has been fairly capital light in terms of how much of your manufacturing and supply chain you bring in-house. The size of the capital raised suggests a big step change in how you're structuring production and the supply chain. Could you dive into that a bit and provide more color?

Yes. No, thank you. That's a very good question. I'll walk through the key buckets and set context for the overall philosophy behind what we did. This is a defining moment for our industry and for our brand. It's an opportunity to continue to lead the sector, grow, and push this value proposition into the market. We wanted to be as well capitalized as reasonably possible so we could position ourselves to move at a pace that matches the opportunity. If you look at the relationships we just signed with McDonald's and with Yum! Brands, and at many of the names we were active with before COVID in the QSR space, none of those relationships have gone away. I wanted to be in a position where we had the personnel, the facilities, and the research and development to be the best partner they can possibly have, even as we continue to grow in retail. That is the main reason we raised a significant portion of the capital. More specifically, we are continuing to expand our capacity. Some of these opportunities mean that a single QSR relationship can require many additional production lines, both downstream and upstream, so we want capital available to respond to their needs. We're also adding new sites to our production network over time. The facility we built in China is state of the art, but it will not suffice to serve the market we envision there, so we will build another one as a follow-on. Our Los Angeles campus includes a state-of-the-art innovation center as well as headquarters, and that facility is for both us and our key customers, who will be able to use it and participate in our development work. Driving cost down is enormously important. We will continue to spend to reduce system costs, which relates to our current position where we're expanding production capacity and personnel to serve customers and retail consumption. That expansion is burdening margin a bit now, but it will pay back as throughput increases across those facilities. We want to continue to reduce costs and build the right facilities in the right locations to get local market access. That's why you've seen us invest in the Netherlands and in Jiaxing, and we'll continue to do that. On marketing, we have a story to tell. There is still a lot of noise about the ingredient and other issues, so we want to be focused on helping consumers understand that the products are healthy and can support their personal health goals. The work we're doing with Stanford over the next three years is an example of that approach. We're not looking to hand wave; we want data that helps consumers understand how powerful this tool can be for their health. Finally, we are continuing to build talent and invest in the best people. Our innovation group here will expand dramatically over the next several years, and we are establishing innovation groups in Asia and the EU. The market is ready for us, and once we get through this COVID period, you will see those funds well deployed for shareholders.

No.

Figured I'd try. I appreciate it. I'll pass it on.

Our next question is from Ken Goldman with JPMorgan. Please go ahead.

Hi everyone. Thank you. Ethan, thanks for clarifying the Germany situation, that's helpful. Relatedly, I believe your slide deck shows about 3,000 fewer U.S. foodservice locations now than a quarter ago. Is that correct? Is it mainly due to your customers closing entirely? Are they independent operators, or does this reflect a loss of business for Beyond in particular?

Yes. It's absolutely COVID-related, and these are very small independent operators that I know; I'm sure you've seen this in your community. After a certain point, folks are having trouble continuing to make a go of it. But as I mentioned, they're picking back up. We picked up about 2,400 locations right after the quarter, up to the end of the quarter and today. So it's, I think, just very much a COVID-related phenomenon.

You're assuming I ever leave my home. That's not a fair assumption to make at this point. And then I wanted to ask, your main competitor at retail, their share gains were decelerating for a couple of months there, then their product price got slashed in March, at least what we're seeing in Scanner and then their share gains reaccelerated. So I know you've said not to expect your pricing to be reactive to competitors. I totally get that. But just seeing the share trends, does it make you any less likely to stand your ground here? Or are you still sort of saying, look, we're going to produce to our costs and produce and price to our costs rather and face it mainly on what we're seeing in our business rather than competitors?

Yes. No, it's a great question. Thank you. And I believe so strongly in running this business for the long term and not reacting to any short-term issues. And I think our reaction to COVID has been somewhat painful to the business in that regard and then I've been continuing to invest even though the revenue is contracted, but it's the only way to do things in my view. So same thing on pricing. Like it's really interesting to see what's going on with competition. And you mentioned one of our competitors. But we will continue to outgrow the category. I think we're up 16%, category is up 6%, gaining market share. The most recent market data actually went up quite a bit, 18.7%, I think, in April. So gaining all these different points of distribution, 46% over last year. And yet all this competition is occurring, right? And so kind of things I look at, and I'll get to your question, but the buyer rates, the frequency rates, the repeat rates and household penetration, all those are going in the right direction. And buyer rates are highest in the category, plant-based meats. And so that's a really gratifying number for us. And yes, there's this competition and there's just massive discounting. And yet we're still the number one product as the last four-week data. Beyond Burger is still in a more product four of the top six, there's all this discounting. And so kind of things I look at, and I'll get to your question, but the buyer rates, the frequency rates, the repeat rates and household penetration, all those are going in the right direction. And buyer rates are highest in the category, plant-based meats. And so that's a really gratifying number for us. And yes, there's this competition and there's just massive discounting. And yet we're still the number one product as the last four-week data. Beyond Burger is still in a more product four of the top six, there's all this discounting. And so kind of things I look at, and I'll get to your question, but the buyer rates, the frequency rates, the repeat rates and household penetration, all those are going in the right direction. And buyer rates are highest in the category, plant-based meats. And so that's a really gratifying number for us. And yes, there's this competition and there's just massive discounting. And yet we're still the number one product as the last four-week data. Beyond Burger is still in a more product four of the top six, there's all this discounting. And so kind of things I look at, and I'll get to your question, but the buyer rates, the frequency rates, the repeat rates and household penetration, all those are going in the right direction. And buyer rates are highest in the category, plant-based meats. And so that's a really gratifying number for us. And yes, there's this competition and there's just massive discounting. And yet we're still the number one product as the last four-week data. Beyond Burger is still in a more product four of the top six, there's all this discounting. And so kind of things I look at, and I'll get to your question, but the buyer rates, the frequency rates, the repeat rates and household penetration, all those are going in the right direction.

Thank you for the color.

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

Great. Thanks so much. I guess first question, Ethan, I just saw the release, I think it was maybe last week, a couple of weeks ago, a lot of releases. It's just incremental distribution of retail in Europe. It sounds like that's healthy. And then your commentary today kind of implicitly saying kind of more of that bump coming in Q2 maybe in Q3 is more retail driven. So I'm just curious, like if we think regionally, should we be expecting a little bit more of a bump, let's say, in international off of some increased distribution in Europe relative to what we're seeing in the U.S.? That's the first question. Thanks.

Yes. I mean I think we're going to continue to see some strong growth out of Europe for sure. There were some statistics I was looking at the other day where our international in this first quarter alone was half of our total for 2020. So international, as you can see, is very strong for us, and that's why I'm putting so much money behind Europe and China and trying to get market share as quickly as I can over there. So yes, I do think you'll see a relative uptick. But we're also gaining distribution here in the U.S., so it's hard to predict what level of relative gain we'll see.

All right. Cool. And then I guess, just kind of the standard pricing question, realize obviously investing an effort to reduce costs to reduce price. If we think about kind of the cadence of that pricing decline, and I'm speaking just to beef because I feel like that's kind of what you've spoken to before, would you say that the rate of that price decline potentially tracks more closely to the rate of that reduction in costs, so therefore, there could be some price reduction this year, but if I'm thinking forward three years, right, there could be even more or more of that price reduction would maybe come later as you continue to bring manufacturing in-house?

Absolutely right. I don't want to imply that we won't offer discounts this year. With the summer months ahead, you'll see us do what any brand would and increase promotional activity. But overall our approach to pricing is to act more in lockstep. You'll see that as our long-term initiatives take effect — aligning production, bringing more manufacturing in-house, implementing integrated and continuous production lines, comparing to local sourcing, and pursuing ingredient innovation. Those changes tend to take effect toward the latter part of the three-year period, so I expect to see a greater step change then than earlier.

Okay. Makes sense. And I guess just lastly, obviously, appreciate the Q2 revenue guide and all the color around that. And then Lubi, thank you for all the comments you made just in terms of kind of trying to piece the different moving parts of the expense line together. But I guess, just to kind of ask more directly, if I'm just thinking about EBITDA, right, in Q2, I feel like normally, you do tend to guide EBITDA, not guiding to EBITDA this time. Is there anything kind of in those expense lines that could face more volatility that just caused you to refrain from guiding to EBITDA? Or frankly, you're just not guiding to EBITDA because optically, it doesn't always look great if expenses are up even though you are investing for the future? So I'm just trying to kind of gauge kind of any of that variability just in the near term and kind of how you're spending. And that's R&D advertising, what have you, net debt.

No, sure. I'll let Lubi expand on the details, but we are doing it for the former reason while, of course, enjoying the benefit of the latter. There's a lot of scaling and expansion going on, and that does make it difficult. We can't always, for example, stand up operations in China while we couldn't fly over there, and there are similar constraints. It's really hard to provide exact budgets in an environment like this when spending is tied to opportunity and large capital projects. That's the primary reason, but Lubi can expand on it.

Yes, sure, Rob. If you look at our operating expenses and the change we've seen from the first quarter of 2020 to the first quarter of this year, the increase is fairly substantial, but roughly half of it is due to increased head count alone. We are a growing organization, adding additional capabilities internationally and domestically. Another large portion of the increase is the scale-up commercialization activity we're doing to get products out the door, whether to large QSR partners we hope to work with in the future or to ready products for the retail channel. That expense bucket, the scale-up, is variable. We are scaling up some products that have never been commercialized, and we wanted to err on the side of caution and not provide an EBITDA target because we know we're still in the midst of a lot of commercialization activity that can be relatively variable.

All right. Perfect. Thanks so much, guys. I appreciate it.

Yes. Thank you.

Our next question is from the line of Michael Lavery with Piper Sandler. Please go ahead.

Good afternoon. Thank you. Just wanted to come back to U.S. foodservice, just to make sure I can understand this a little bit better because the trajectory over the course of 2020 for the outlet build was pretty positive, even really in the worst of COVID, going from like a 34,000 to 39,000 to 42,000 and 42,000 and now down to 39,000. I know New York isn't typical of the country, but I mean it's fun again here. And if anything, everything is opening or reopening, exactly the kind of independent operators, it seems like, you would be referring to. So just curious if you can really help us understand what happened now that those places would all be closing?

My sense is it's probably kind of a catch-up number in that this isn't the most real-time information we're getting. We distribute through distributors, and these are broad non-distributors. I don't think it was that on March 31 all these guys closed down or decided to skinny their menus; that happened over a period of time. But again, as I mentioned, we're gaining distribution back very quickly. We do feel this thawing that's occurring. It is still the mix of our business continues to really be disproportionate right over into retail. I think we're 75-25 retail to foodservice. If you look back to pre-COVID, it was much stronger on the foodservice side, 50-50, and even before that it was even higher on foodservice. So it's just a period where we have to let this thawing occur. As an example, we sell at a lot of stadiums and institutions. I'm down at one of the Laker games tonight, and it's 20% capacity, right? You have to show proof that you've been vaccinated. So it's still a very sticky environment in terms of going out and using the type of venues that Beyond Meat sells into. New York may be different, but that's the feeling we still have out here. That doesn't concern me at all. In fact, this morning, as I mentioned, I usually like to get ready for this call, but I had two very important customer calls; they were new customers in this space. So we feel pretty optimistic.

Okay. That's helpful. And just a question on international, looking at some of the same metrics with the outlets on sales, those sales per outlet are around half of what you see in the U.S. Should we expect that gap to narrow? Or is it more maybe a little bit of a burger, which is obviously your main product, is just a more culturally relevant occasion in the U.S.? Or how do you think about that? And is it the nature of those outlets or is it the consumer? And should that evolve over time?

So I think, first, the consumer in the EU has a strong appetite for these types of products in a way that's really recognizable. Our challenge has been getting there quickly enough with enough product. We're very small in terms of our overall distribution there. But in places like Germany, it's reassuring because people were saying that very large CPGs in Europe and globally were going to create issues for Beyond, yet here we are in some of their home turf beating them with a product we are still importing. As we get production up there and begin to invest in our own team, I'm really excited about what we'll see. Right now, it's simply a function of how small we are relative to what's going on in the U.S., and that's something we plan to correct over the next year.

Okay. That's helpful. Thanks a lot.

Our next question is from Jon Andersen with William Blair. Please go ahead.

All right. Good afternoon.

Hi, Jon.

I have a couple of quick questions. Given that you're on the kind of we're launching 3.0, the new burger at present, I'm wondering if there's anything we can take from the introduction of 2.0, which was a big move forward in terms of taste and other sensorial aspects. And I'm just thinking here, are there any learnings around potential acceleration in the business that drove either through household penetration, spend rate, opening up new distribution opportunities, etc.?

That's a good question. To give you real insight onto that, I have to go back and look at that period, but that's a really insightful question. So I think what it does for us, one, it is just a better product. We did extensive central location testing with a statistically significant population of consumers. We did it against 80/20 beef, did it against our 2.0 product and did it against competitors. And the results were obviously strong enough for us to launch it. And what I like the most about this product is that it gets closer from a sensory experience to 80/20 beef. It is probably a bit of a more neutral taste to it because the underlying flavor chemistry is just better. I have talked about a lot, there's over 4,000 molecules that make meat taste like meat and we have chemists here that are trying to isolate those molecules and then find them in plants and then put those into the right flavor. And they're getting better at doing that. And so to your question, what this allows us to do and what 2.0 allows us to do is to create another moment to bring the consumer into the brand, right? So it gives us something to really market around as we head into our most important months of the year and bring in new consumers into the space. We've got some terrific earned social media recently. I mean it's fantastic that people that have been willing to post and talk about us, not as an ambassador but just as a partner to the brand from a consumer perspective. And I think with the 3.0, you'll see us get really active in that area because we want much broader swath of consumers to experience this product, it's better.

Yes, that's helpful. Thank you. Also, if we think about the EU and Asia, I'm really interested to get your perspective on the extent to which there are differences in those markets relative to the U.S. I'm thinking about things like consumer awareness and receptiveness to plant-based meats. Is more or less education required, or more marketing needed to build awareness and drive trial? Is it more or less competitive in terms of fragmentation and number of players? It would be really interesting to understand what and how you are going to need to play in those two markets relative to the way things have developed in the U.S.

Good question. So here's how I think we see it. Europe very well developed; consumer understanding, very high; competitive environment also high. So all of this is a much more mature market. And by the way, some of the technology in Europe, one of the reasons I want to do innovation over there is that they've got some pretty good technologies and some big universities working on things and stuff that we'd like to get a hold of. And so that, I think, is a European market. In China, it's kind of maybe a little bit different in the sense that the awareness in the general population is not as high. Now of course, the Asian markets have a long history of using kind of plant-based meat-like products, but this new generation that we're part of a plant-based meat, I would say, there's not as much recognition and a lot of education required. One of the reasons we picked the general manager that we did for China, just came out of a large consumer company and was a very high placed executive there, but she had a marketing background. And I wanted to make sure that we understood the China market well and could help capture the imagination and opportunity there. And so from a competitive perspective, it's more like start-ups. I think some global players are also over there, doing some things. But it's a different environment. It's not as mature from an understanding perspective or competitive. And so our spend there is going to be different than it is in the EU.

That's really helpful. If I can squeeze one more question in: regarding the McDonald's partnership, can you outline the approach you expect the customer to take when introducing the McPlant? I'm trying to get a sense of whether it will be a big bang or a very phased rollout. Who will dictate it? Will it be centralized, or will it be determined by the operators in each region and how they can ramp it?

First of all, I'm superstitious, since I was very worried that we'd have one analyst call where McDonald's wasn't mentioned. So thank you for mentioning McDonald's. They're going to take their own approach; it's such an important customer and partner for us. Our relationship with them has been great for a long time, and we had to keep reassuring people that was the case. I'm glad they finally allowed us to talk about that publicly. I don't want to speak for them. They will take an approach that fits their style of introduction, and I think you'll see some tests, but it's really up to them. Nothing good can come from me commenting on how they want to roll things out.

Okay, great. I appreciate it. Good luck on the quarter.

Thank you.

Yes. I'd just like to close it up and, listen, I appreciate everybody's patience. This has obviously been a difficult time for a lot of businesses, including Beyond Meat. But as I said, we have not deterred from continuing to invest in the opportunity that everybody sees and that we have a special position as a first mover on. So like everybody else, we're very much looking forward to COVID being a thing of the past, and look forward to rejoining with you guys in the next call and, hopefully, reporting some good results. So look forward to it. And thanks, again.

Thank you.

And that does conclude the conference call for today. We thank you all for your participation, and kindly ask that you please disconnect your lines. Have a great day.