Earnings Call Transcript - BYND Q2 2023

Operator, Operator

Good day. And welcome to the Beyond Meat Inc. 2023 Second Quarter Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Also, please note that this event is being recorded today. I would now like to turn the conference over to Paul Shepherd, Vice President of FP&A and Investor Relations. Please go ahead, sir.

Paul Shepherd, Vice President of FP&A and Investor Relations

Thank you. Good afternoon and welcome. Joining me on today's call are Ethan Brown, Founder, President and Chief Executive Officer, and Lubi Kutua, Chief Financial Officer and Treasurer. By now everyone should have access to the company's second quarter 2023 earnings press release filed today after market close. This document is available in the Investor Relations section of Beyond Meat's website at www.beyondmeat.com. Before we begin, please note that all the information presented on today's call is unaudited. And that during the course of this call, management may make forward-looking statements within the meaning of the Federal Securities laws. These statements are based on management's current expectations and beliefs, and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Forward-looking statements in today's earnings release, along with the comments on this call, are made only as of today, and will not be updated as actual events unfold. We refer you to today's press release, the company's annual report on Form 10-K for the fiscal year ended December 31, 2022, the company's quarterly report on Form 10-Q for the quarter ended July 1, 2023, to be filed with the SEC, and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please also note that on today's call, management may reference adjusted EBITDA, which is a non-GAAP financial measure. While we believe this non-GAAP financial measure provides useful information for investors, any reference to this information is not intended to be considered in isolation, or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of adjusted EBITDA to its most comparable GAAP measure. And with that, I would now like to turn the call over to Ethan Brown.

Ethan Brown, Founder, President and CEO

Thank you, Paul. And good afternoon, everyone. I will begin with a summary of our Q2 results. Net revenues in the second quarter came in at $102.1 million, which was down 31% year-over-year and slightly lower than we had forecast. This decline in net revenue is reflected deeper headwinds than we previously anticipated, combined with the cycling of one of our largest quarters ever, among other factors. The level of mix of our Q2 net revenues coupled with certain transitory items impacted our gross margin, which came in at 2.2%. These outcomes obscure the very strong progress we're making in positioning the business for sustainable operations and growth. We reduced COGS per pound by 14% or $0.73 year-over-year, reduced operating expenses by 33% or $27.5 million year-over-year and slashed cash consumption down nearly 50% or $45.5 million year-over-year, reflecting a business that is making early strides in implementation journey. Simply put, as we navigate what has proven to be a more prolonged crossover from early adoption to the mainstream than we anticipated, we are operating with increasing levels of efficiency. We're proceeding as we continue to drive costs out of our organization and products alike. Our updated and more cautious revenue outlook in the back half of the year will very likely delay our achievement of cash flow positive operations. Nevertheless, I want to stress that we will continue to aggressively manage the business toward the achievement of this objective. The net result should be sharply reduced cash consumption for the balance of 2023 as we move with pace to complete our cash flow positive milestone. I will now turn briefly to the three central pillars upon which we are driving the business to future sustainable growth. With respect to the first pillar, that is the use of value streams across our beef, pork, and poultry platforms to support operating cost, COGS reductions and margin expansion among other outcomes. We are still in the very early phase of our lean implementation journey. However, the continued emphasis across the organization on the horizontal flow of value to customers is generating results. Some of the more visible outcomes include progress across COGS, operating expenses, and cash consumption. With regard to the second pillar, the use of inventory reduction as a key lever toward achieving our cash flow positive objective, we continue to make solid progress and in Q2 reduced inventory by $15.2 million or nearly 7% sequentially. Year-to-date, we have reduced total inventory by nearly $30 million or roughly 12% bucking our historical trend, which typically sees a seasonal increase in inventory in the first half of the year. As we look to the balance of the year, we will continue to aggressively manage inventory levels with a goal of releasing incremental cash. Turning to our third pillar, which centers on near term opportunities to restore top-line growth, even as we nurture long term partnerships. We are focused on five main levers: one, addressing the broader narrative around the category; two, continuing to release new revenue innovations that bring us closer to our north star of being indistinguishable from animal protein; three, investing and resetting the retail fresh plant-based meat section; four, implementing pricing learnings for the last 12 months; and five, supporting our largest strategic partners. Though we recognize that there are broader economic headwinds at play, namely inflation and higher interest rates that are squeezing the spending power of the consumer, we're also acutely aware that there's ambiguity and confusion around the health benefits of plant-based meats and that this is weighing on the category's growth. As a brand and category, we have significantly more work to do to reach the consumer on the health benefits of Beyond Meat and plant-based meats respectively. There is a considerable gap between the strong health potentials of our products and the broader counter-narrative that is now afoot, and this gap appears to have widened. In the two-year period 2020 to 2022, the percentage of U.S. consumers who believe that plant-based meats are healthy decreased from 50% to 38% according to the Food Marketing Institute. As was the case during the ascent of plant-based milk, this change in perception is not without encouragement from interest groups, who have succeeded in seeding doubt and fear around the ingredients and processes used to create our and other plant-based meats. Nor is it without contribution from well-meaning, yet misguided comparisons of our products to kale salads, versus the animal-based meats they are intended to replace. It is in this latter framing that we belong and excel with clear nutritional advantages including no cholesterol, lower levels of saturated fats, the absence of antibiotics, hormones, and other veterinary drugs. We are attacking this misinformation, continuing to build a body of research, or work with Stanford School of Medicine, which, as you will recall, showed important declines in LDL or bad cholesterol, and the aforementioned TMAO after only eight weeks of replacing animal meats with Beyond Meat. Through collaborations such as that with the American Cancer Society, we are supporting broader studies on plant-based meats and related health outcomes. Our efforts also include third-party engagement, such as the American Heart Association's first-ever certification of a plant-based meat, Beyond Steak, as a heart-healthy food, as well as work with registered dieticians and nutritionists for purposes of educating consumers about the strong health benefits of plant-based meats. Last week, we launched a campaign long in the making, called 'There's Goodness Here' that shares and celebrates the farming origin of our ingredients and describes our process for turning plants into plant-based meat. The first installment of the campaign features one of our following farmers and connects to consumers the fields where protein is grown while explaining the clean and simple steps we use to build our plant-based meats. As you can likely tell, we are proud of our process and ingredients and are confident that the more consumers know, the more they will see the goodness in what we do. Goodness for the soil, due to the nitrogen-fixing nature of legumes that helps keep fields healthy and productive. Goodness for the farmer who can use less fertilizer as a result. Goodness for the Earth, given the much lower greenhouse gas, water, land, and energy footprint. And goodness for the consumer who can enjoy the dishes they love while reaping the health benefits of our plant-based meat. In the area of innovation and renovation, a key part of the Beyond Meat rapid and relentless innovation program is to improve each of our pillars of beef, pork, and poultry over time so that one day they are indistinguishable from the animal protein counterparts. This is a goal that we share with consumers, with 53% of all consumers agreeing that plant-based protein products should taste indistinguishable from meat according to recent data from Intel. The good news is that we continue to make strong strides in this direction, all against the static target. In Q2 alone, we released a series of important iterations within our core platforms of pork and beef. One, we launched what we internally called 'sausage free,' the refrigerated plant-based meat section, where Beyond Meat remains the number one selling brand according to SPINS' latest 12 weeks ending July 16, 2023. We are pleased with and point to early feedback on a renovated dinner sausage product as evidence that despite current headwinds, we steadfastly march forward against our promise of enabling consumers to eat what they love while simultaneously having a positive impact on their health, on the climate, environment, and animal welfare. Earlier this summer, the tasting table posted a review that captures the results of our latest sausage renovation efforts, which apparently went beyond the indistinguishable goalpost. The title of which reads, 'the revamped beyond bratwurst and hot Italian sausage are shockingly better than pork links.' We are pleased that it is the number one selling plant-based inner sausage in retail according to SPINS data for the latest 12 week period ending July 16, 2023 and have rolled this renovation out to food service as well. Two, we are providing consumers with a sneak peek of our latest beef formula in the form of a soft launch of Beyond Stack Burger at Kroger and select Albertsons as well as New Seasons in Northern California. Like our renovated dinner sausage, this newest iteration of our burger represents the latest in our flavor and texture advances and is winning early praise. We further cook this taste and texture innovation to food service as the Beyond Smashable burger. Lastly, even as the Beyond Burger is the number one selling plant-based burger across retail according to SPINS for the latest 12 week period ending July 16, 2023, we are actively working on our next iteration, the Beyond Burger 4, where we are incorporating certain elements of the Beyond Steak and Beyond Smashable Burger. Accordingly, we will be monitoring consumer and customer reactions closely and are excited by early results. In the frozen section, we continue to expand distribution and one of our new innovations, Beyond Steak, which is the number one selling new plant-based meat item at retail according to SPINS data for the 12-week period ended July 16, 2023. Interestingly, recent data from a regional chain show that more than 50% of households that bought Beyond Steak were new to the plant-based meat category, and that two out of three households repurchased Beyond Steak, reinforcing that this is a product that is resonating with consumers. With our newest renovations and distribution expansions and the balance of our product portfolio across retail, we are increasing our investment in store execution, particularly in the U.S. In the turbulence of the last four years, with a pandemic changing consumer behaviors, high inflation, and the entrance and exit of competitive players in the plant-based meat section, the reset and re-grounding, particularly in the refrigerated meat case, is overdue. We recognize that the once clearly demarcated plant-based sections of the fresh meat case can be in certain retailers far less defined today. In addition to working with retailers on this issue, we are doubling down on field resources to focus on shelf availability and presentation as we bring new innovations to market. As you may recall, a little over four years ago, we set a goal that within five years, we would be able to produce and sell at a cost and price respectively that is at parity with animal protein for at least one product in one of the three platforms of beef, pork, and poultry. I'm pleased to share that we are indeed doing that now with a meaningful product in food service, and expect to be able to report more of the same over the next year. Regarding the last 12 months of pricing exercises, we've learned more about different elasticities across our product lines. These elasticities may support a more varied approach to pricing that will enable us to more aggressively restore margins even as we move toward price parity where it matters most. We are pleased to see the continuation of the new plant nugget alongside the McPlant Burger in the German market, as well as the McPlant Burger across the UK, Ireland, Austria, Netherlands, Portugal, and the most recent introduction, Malta. As the McPlant platform takes hold, it is exciting to see countries such as Austria build and promote unique McPlant Burger offerings such as the Steakhouse Burger and McPlant Fresh. We believe the success of the McPlant platform in the EU speaks to consumer and government recognition that plant-based meats are a powerful tool in addressing climate and broader environmental concerns. We are investing in team innovation and partnerships in the EU to be able to serve this growing trend. For closing out, I want to emphasize how at Beyond Meat, we view the current category trough and how this perspective informs the strategy and tenor behind our response. Like many innovative disruptions throughout history, what we initially thought was going to be a quicker pace of mainstream adoption has proven to be slower. In my comments today, I emphasized familiar points of focus for us as we navigate the chasm between early adopters and mainstream consumers, continuing to improve our products toward our true north, amplify our health message to counter incumbent industry positioning and noise by educating the consumer, and lastly collapsing the cost structure of our product lines to improve margins to where it matters most to offer products at parity to animal protein. Continuing to pursue each of these levers while focusing on increasing operational efficiency, driving COGS reductions, and sharply limiting cash consumption along our path to cash flow positive operations. Though we believe equally in the force of social good behind our brand, human health, climate, natural resource conservation, and animal welfare, one cannot help but notice the urgent intensification of climate dialogue across global leadership and societies. With what may be the hottest period on record in the last 120,000 years, and the many well-covered heatwaves, storms, fires, and other extreme weather events across the planet this summer, the abstract notion of climate change is increasingly tangible to the everyday consumer. The greater use of plant-based meat is a powerful tool in our global response, particularly because it targets greenhouse gases, namely nitrous oxide and methane, which are not only highly potent but also have a shorter residency in the atmosphere. We believe the transition to a more plant-based food system is not only inevitable but gaining urgency. Despite current challenges of a nascent category and brand, we are highly confident that Beyond Meat is well positioned to play a leading role. With that, I'll turn it over to Lubi, our Chief Financial Officer and Treasurer, to walk us through second quarter financial results in greater detail, as well as update our outlook for 2023.

Lubi Kutua, Chief Financial Officer and Treasurer

Thanks, Ethan. On the surface, Q2 was a disappointing quarter for us as net revenues and gross profits fell short of our expectations. However, as I will discuss shortly, several factors are indicative of the continued progress we are making in improving the intrinsic operating performance of our business, giving us reason to be optimistic for the long-term. These factors include our underlying gross margin performance when adjusted for certain transitory impacts, our ongoing progress on cost containment and operating expense management, our fifth consecutive quarter of inventory reduction, and the steep reduction of our overall cash consumption year-over-year. Although the operating environment within our sector is proving more challenging than previously anticipated, we believe the foundational work against which we are making good progress will better position our company to capitalize on the opportunity ahead of us. Let me now dive into our Q2 financial results in a bit more detail. Beginning with net revenues, volume of products sold declined by 23.9% year-over-year, while net revenue per pound decreased 8.6% year-over-year, resulting in an overall net revenue decline of 30.5% compared to the prior year period. On an absolute basis, the decrease in volume of products sold was primarily driven by the decline in our U.S. retail channel, and to a lesser extent a decline in U.S. food service. In U.S. retail, the decline in volume primarily reflected weaker than expected demand in the category, cycling of significant jerky selling in the year-ago period, and to a lesser extent the impact from competition. U.S. Food Service was similarly impacted by weak overall demand and a difficult year-over-year comparison, as Q2 2022 was a particularly strong quarter for U.S. Food Service, driven by restocking that channel following its reopening post-COVID. With respect to pricing, the roughly 9% year-over-year decrease in net revenue per pound was primarily attributable to changes in product sales mix and increased trade discounts, partially offset by reduced sales to discount channels, which suppressed price realization on certain items in the year-ago period. As it relates to product sales mix, relative underperformance of our core products, namely burgers, ground beef, and dinner sausage generally has a negative impact on net price realization for our business. As for trade discounts, special promotional programs intended to attract new users to our category drove a meaningful increase year-over-year. Although these programs showed initial promise they did not scale well at retail, and ultimately did not bring about the desired increase in new category users. We will be refocusing our promotional spending in view of these learnings from these programs. Moving on to gross margin, our Q2 gross profit was $2.3 million or gross margin of 2.2% of net revenues. Although this represents over 6 points of margin improvement versus the year-ago period, including the impact of depreciation expense from the change in our accounting estimate associated with the estimated useful lives of our large manufacturing equipment, it fell short of our previously stated expectation to drive sequential margin improvements throughout the year. Gross profit and gross margin were positively impacted by lower materials costs, lower inventory reserves, and lower logistics costs per pound, partially offset by higher manufacturing costs excluding depreciation, and as I just discussed, lower net revenues per pound. Total COGS improved by $0.73 per pound year-over-year and we are pleased to see our cost-down initiatives yielding savings on materials costs, and the reduction in logistics costs attests to some of the early results from our network consolidation strategy. Within manufacturing costs, overall success in reducing tolling fees on a year-over-year basis was partially offset by underutilization fees, which we view as transitory of approximately $800,000 driven by softer demand and some startup delays as we ramp up production lines within a new co-manufacturing site. COGS in this quarter was negatively impacted by the flow-through of higher cost inventory produced in the fourth quarter of last year, when we curtailed production volumes in response to weak demand, resulting in the capitalization of inventory bearing high labor and overhead cost. Turning to operating expenses, we saw a year-over-year reduction of 33% from $83.5 million in the second quarter of 2022 to $56 million this quarter. The main drivers of this were reduced nonproduction headcount expenses, primarily as a result of the reduction in force implemented in October 2022, lower legal and consulting fees, decreased production trial expenses, and lower outbound freight costs. This also represented a sequential quarterly reduction of 12%. We are pleased with our team's continued diligence in keeping costs contained, reflecting early success in our ongoing adoption of lean management principles. Moving further down to the P&L. In other expense income, we benefited from meaningfully lower realized and unrealized foreign currency losses, as well as higher net interest income year-over-year. In addition, the loss from our unconsolidated joint venture TPP was lower year-on-year reflecting very limited economic activity in the JV this quarter, as we continue to transition our jerky business to Beyond Meat. Overall net loss was therefore, $53.5 million in the second quarter of 2023 or net loss per common share of $0.83, compared to a net loss of $97.1 million or $1.53 per common share in the year-ago period. Adjusted EBITDA was a loss of $40.8 million, or negative 40% of net revenues in the second quarter of 2023, compared to an adjusted EBITDA loss of $68.8 million, or negative 46.8% of net revenues in the year-ago period. Now turning to our balance sheet, our cash and cash equivalents balance, including current and non-current restricted cash was $225.9 million, and total debt outstanding was approximately $1.1 billion as of July 1, 2023. Inventory fell to $207.1 million, a reduction of $15.3 million compared to the previous quarter, demonstrating continued progress against our inventory drawdown initiatives. As I mentioned, this represents our fifth consecutive quarter of inventory reduction, and we remain highly focused on driving further reductions in the balance of the year. Turning to cash flows, net cash used in operating activities in the second quarter of 2023 was $46.2 million or a $24.3 million decrease compared to the year-ago period. Capital expenditures totaled $1.8 million in Q2 2023, compared to $20.4 million in the year-ago period. Our total cash consumed in Q2 amounted to $47.7 million or 49% less than a year ago figure of $93.2 million. Taken together, these improvements in COGS, operating expenses, inventory drawdown, and cash consumption demonstrate that we continue to make real strides in managing our business more efficiently. However, where we are experiencing greater than expected pressure is on net revenue growth and its attendant implications for gross margin. We attribute this at least in part to persistent weakness in the category that transcends Beyond Meat. But as Ethan discussed earlier, we continue to pursue several growth strategies to drive better outcomes on our top-line. Let me now provide some commentary about our 2023 outlook. As Ethan mentioned, we do anticipate a return to modest year-on-year revenue growth in the second half of 2023, as we cycle notably weak comparisons from a year ago, and as we expect to see continued expansion of newer products in U.S. distribution, growth in international markets, and continued progress with key strategic accounts internationally. However, greater than expected category headwinds, particularly in the U.S., are resulting in a more cautious outlook for the balance of the year. And as such, we now expect net revenues for the full year to be in the range of $360 million to $380 million, representing a decrease of approximately 14% to 9% compared to 2022. Gross Margin is now expected to be in the mid to high-single digit range, reflecting both the Q2 outcome as well as the expected impact from reduced revenues. Operating expenses are expected to be approximately $245 million or less, and capital expenditures are now expected to be in the range of $20 million to $25 million. Finally, with respect to the company's previously stated target of achieving cash flow positive operations within the second half of 2023, we now believe this objective is unlikely to be met in light of the current operating environment, which points to greater category headwinds than previously expected. Nonetheless, we remain committed to significantly reducing our rate of cash consumption in the second half of the year as compared to the first half. And we will be prudently managing our cost base in the coming quarters to move towards our ultimate north star of cash flow positive operations. With that, I'll conclude my remarks and turn the call back over to the operator to open it up for your questions. Thank you.

Operator, Operator

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

Adam Samuelson, Analyst

Yes, thank you. Good afternoon, everyone.

Lubi Kutua, Chief Financial Officer and Treasurer

Hey there.

Adam Samuelson, Analyst

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

Ethan Brown, Founder, President and CEO

Sure, no, thank you for the question. And I'll maybe start and then hand it over to Lubi for some additional detail. But first and foremost, I want to stress some of the things that we covered in prepared remarks that despite bringing down the forecast somewhat for the balance of the year, we are very excited to be coming out of what we view as a trough in the category and resuming growth in the third and fourth quarter. So I don't want to lose sight of that. You'll also see an improvement in gross margin, we believe in the third and fourth quarter, particularly as we move further away from higher cost products that we produced during earlier quarters and can take advantage of some of the lean work we've been doing around cost down on COGS. You will also see us continue to make really strong progress on reducing operating expenses down 32%, as I mentioned year-over-year, and then cash down about 50%, near 50. On top of that, you can indeed see an improvement in products. This is a core part of the answer that I’m going to give you on how we are thinking about continued growth. First and foremost, if you look at whether it's a steak product and all the reviews it's getting in the fact that it's the number one new plant-based meat product in the category, or look at the recently renovated dinner sausage, where that is also the number one plant-based sausage in the category. And then you look at our burgers, which continues to be the top-selling plant-based burger. We are shifting into both a new formula and texture that we're releasing in food service as the Smashburger we have released and just demoed and trialed in retail something called the Stack Burger, which captures some of those improvements. Continuing to improve the products while continuing to operate the business much more efficiently, I think the last piece is attacking ahead on this ambiguity that exists around the health benefits of plant-based meat and particularly Beyond Meat, which are extremely strong. We are attacking this through research and through partnerships, whether it’s the American Cancer Society we’re doing, or the certification from the American Heart Association, or on our steak, the work with Stanford School of Medicine. All the things I mentioned in my prepared remarks. But we're now taking it a step further and going to be much more aggressive in our marketing around the goodness within our products. And I think if you were looking at some of our marketing recently, last week, we released, 'There's Goodness Here', which is a campaign focused on celebrating the ingredients we use, the farmers who grow them, and the process that we use to turn the plant material into meat. All these things are part of our health message and our health story. So as we look at this second half of the year, that efficiency continues throughout the organization, the reduction in cost of our goods, and then the restoration of a message around the entire category. We view those as key to the resumption of growth. We're also looking at some more tangible things as we offer this forecast but in the U.S. and in Europe, and things of that nature.

Lubi Kutua, Chief Financial Officer and Treasurer

Yeah, Adam. I would just add that given some of the pressures that we've seen in the broader environment, we are navigating some challenges that are reducing the overall effectiveness of promotional spending. And it's an impact that transcends the plant-based meat category. I think others more broadly in the industry have reported similar phenomena going on in the areas that they play in. So in relation to your question and sort of how we're thinking about this, we are definitely taking learnings from. We had some targeted promotional programs earlier this year, which were really intended to bring more consumers into the category. But I think what we're seeing is, for various reasons, some of which Ethan mentioned in his prepared remarks, there are things that are putting a lot of pressure on our category in particular, some of which is related to messaging, which we're starting to I think, be a little bit more vocal about. If you look at our recent campaign that just came out, certainly our goal is to be sharper in terms of how we deploy our promotional spending. We expect to see some benefits from that in the latter part of this year and as we move forward.

Ethan Brown, Founder, President and CEO

May I just add a little bit to that? I think that one of the key issues is that the category itself is facing some headwinds. If we look at, if I kind of start more broadly, and you look at the overall consumer, and some of the diminished outlook the consumer has around their own financial situation. And then you look at what consumers are doing in the protein space, including animal protein, where they're trading down among proteins and also buying less protein. Then you get to our category where we are a high-priced product, and we’re not going to do particularly well in that environment. But also, they'll have this kind of ambiguity around health. You can see how potentially pricing is going to be less impactful, given you're not bringing new people into the category because of those macro conditions, and then some of the category headwinds. For us, it's really around restoring the category message and making sure the consumer understands that, and has a reason to come into the category. At that point, we think some of the promotional activities will be more effective.

Adam Samuelson, Analyst

There was a lot there, a lot of color. I appreciate it. I'll pass it on.

Operator, Operator

And our next question will come from Peter Galbo with Bank of America. Please go ahead.

Peter Galbo, Analyst

Good afternoon, everyone. I have a couple of quick modeling questions. First, should we consider any differences in revenue expectations between the third and fourth quarters? Second, regarding cash burn, it appears you're indicating an improvement in the third and fourth quarters, which has been around $50 million per quarter over the past year. Could you provide any insight into the expected level of improvement? Thank you.

Lubi Kutua, Chief Financial Officer and Treasurer

Yeah, just quickly on the cash flow, it's not that we're walking away from that in any way, shape, or form. It's just with the top-line coming down somewhat, we wanted to caution that it was going to be unlikely within the timeframe we've specified. That said, you should see a sharp reduction in consumption across the balance of the year. Certainly internally, it's easy to drive the business toward achieving that goal but would rather keep that as an internal goal and give a little more room externally on when we cross over to cash flow positive moving.

Ethan Brown, Founder, President and CEO

Peter, regarding your first question about the revenue trends for the second half of the year, we aren’t offering specific quarterly guidance at this moment. Historically, the third quarter tends to be a bit stronger than the fourth due to seasonal demand, and I don't anticipate any major changes to that pattern this year. As for cash consumption in the second half compared to the first half, we are considering several factors. First, we need to meet our revenue projections for the remainder of the year. Along with that, we have to achieve our gross margin targets to generate gross profit. After reaching those goals, our focus will shift to managing operating expenses. We are also examining opportunities to defer some capital expenditures that we had planned for the second half of the year. Additionally, we remain committed to our inventory reduction efforts. When considering all these factors, we believe that overall cash consumption in the second half of this year will be significantly lower than what we experienced in the first half. These are the main elements that will help us achieve that outcome.

Peter Galbo, Analyst

Great, thank you.

Operator, Operator

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

Ken Goldman, Analyst

Hi, thank you. I wanted to ask about your strategy for R&D spending. It's down. But it's still 9% of your sales this quarter, which is meaningfully more than what we see from a typical packaged food company. And I agree you're not a typical packaged food company. But you talk about the biggest issue facing the category being maybe a misperception of the health benefits. You've had some recent launches. I hope it's not unfair to say the results are some good, some may be slightly disappointing. Why not divert some of this R&D spend toward brand building toward category building? If that's the biggest issue that you're facing, why not really maybe lean into that a little more?

Ethan Brown, Founder, President and CEO

Thanks, Ken. Appreciate the question. So I think the main response I have is that we are certainly emphasizing spend on the category narrative and also reaching out across companies to help us do this. There's a bunch of companies, obviously, in our category, all rising and falling with this narrative. Bringing together industry coalitions to address this is an important way to handle it. But we are looking at how do we reallocate funding toward marketing to clean up this messaging because it is just an education issue. The facts are there. The health benefits of our products are very strong. We see that in the work we do, not only with universities but in general, just seeing consumers and how their lives can change. So it’s a very good question. I won't comment specifically on how much we're going to allocate toward R&D versus this. The emphasis in your question is the right one.

Ken Goldman, Analyst

And then just quickly, how are you doing with meat eaters or flexitarians versus pure vegans lately? What are your data telling you about how the vegans are looking at your product or at your category compared to how they used to? Are they being affected by the marketing as well?

Ethan Brown, Founder, President and CEO

I think to a lesser extent, I mean there are the folks that I mentioned that would be susceptible to some of the more, let's say, I don't know, the foodies that would compare us to a salad or something of that nature. And we always resist that, right? I mean our point of relevance is the health benefits relative to animal protein, where those are extremely strong. So we continue to see the consuming family be a mix of basic flexitarians essentially. And that's where we want to be. I think the main issue with the categories is not bringing in enough new consumers. That's the number one issue. It's not necessarily the characteristics of the consumer. It's that the overall pie is not growing, and that's what we need to fix together. We're working on the other companies.

Ken Goldman, Analyst

Great. Thank you.

Operator, Operator

Our next question will come from Robert Moskow with TD Cowen. Please go ahead.

Robert Moskow, Analyst

Hi, Ethan, hi Lubi. As you look towards 2024 and beyond, do you consider the possibility that this business could become a $300 million business instead of over $350 million or a $250 million business? Adjusting expectations can be challenging, especially given the challenges you face regarding consumer perception and the environmentally conscious core consumers you have. Is that a potential strategy you might consider for resizing the company in that direction?

Ethan Brown, Founder, President and CEO

I strongly disagree with that future perspective. If you examine our operations and the positive trends we are experiencing, including our consistent growth quarter-over-quarter during what has been the toughest period for our business, the outlook is encouraging. For instance, in our strategic efforts, we are successfully selling both burgers and nuggets, which consumers are accepting well. Additionally, we recently launched a product with McDonald's in Malta. Interestingly, a competitor revealed that a major global burger chain in Germany has shifted to offering one in five of their signature burgers as plant-based. This indicates strong positive trends, whether it's through these market shifts, university responses, or the overall consumption of animal protein in certain European countries. In the U.S., while older generations may be hesitant, younger consumers are more open to these changes. Institutions are taking notice; for example, Aramark aims to increase their plant-based menu offerings to 50% by 2025, and Sodexo reports around 4% across more than 250 universities nationwide. This trend is undeniable. Although there may be some inconsistencies as is common with early disruptions, history supports our goals. Even as health-related discussions continue, a common crisis is becoming increasingly real for consumers, which cannot be addressed without addressing food issues. Our responsibility as a company is to enhance efficiency, reduce costs in our products, and ensure we're ready for the transition when consumers decide to make that shift. I firmly believe we will not regress in any way as you suggested.

Robert Moskow, Analyst

Yeah, appreciate the clarity. Thank you.

Operator, Operator

Our next question will come from Peter Saleh with BTIG. Please go ahead.

Peter Saleh, Analyst

Great. Thanks. I wanted to ask about the overall category and really what you're seeing. It seems like you're finding some success in some of these international markets, yet your sales in the U.S. continue to be under significant pressure. Maybe you can help us understand, are there any learnings that you can take from what you're seeing in international markets and apply them to the U.S.? What's happening internationally that's not occurring in the U.S. to drive maybe the trend better? Are the prices lower in international markets like Germany? What exactly is the difference that you're seeing better adoption there?

Ethan Brown, Founder, President and CEO

That's a great question. The answer is somewhat nuanced, but the reasoning is clear. In Europe, the operating environment differs significantly from that in the United States. Consumers in Europe are highly concerned about climate and the environment, and the government shares this focus. They view changing food production as a key method for adapting to climate issues within the necessary timeframe. This is related to the specific sources of greenhouse gas emissions. For instance, nitrous oxide and methane from animal protein are very potent but remain in the atmosphere for a shorter time. By reducing these emissions, Europe can effectively address climate issues in a significant way. Consumers, especially young people in Europe, understand this. In contrast, in the U.S., concerns are more health-driven, and there has been a decline in the perception of our category's health benefits. A notable change occurred when a research institute indicated that in 2020, 50% of consumers viewed plant-based meats as healthy, but that figure dropped to 38%. This decline reflects the success of competitive marketing against us, which has effectively shifted consumer perception. As an industry, we now face the challenge of reversing this trend. The primary difference is that Europe has a clear reason for its actions, while in the U.S., the health messaging has deteriorated, and we need to reestablish that perception. That's our focus moving forward.

Peter Saleh, Analyst

Can I just follow up on the number, the 50% going to 38% perception? Has that continued to decline in '23? I'm not sure if you know. And what do you think it was going to take to kind of bend the curve there on that figure?

Ethan Brown, Founder, President and CEO

Yeah, I don't know second, but my guess is that it's going to start reversing. The reason that's going to start reversing is one, I think it sort of plays its course. At some point, there’s that people in the medical community and others start to push back and say, wait a minute, guys, this is going too far. This is a very helpful tool to combat diabetes and cancer. That's why you see easily stand up to going to certify first day ever, right at the heart of the state works, or the scamper work we're doing, or the work we're doing about cancer study. At some point, right, you strip out the noise and you start to see some of the key proof points. I think some additional work is being done outside of our company and in the broader category that also helps that. It could continue to worsen, but I think you'll start to see a rebound.

Operator, Operator

Our next question will come from Ben Theurer with Barclays. Please go ahead.

Ben Theurer, Analyst

Good afternoon, Ethan and Lubi, thanks for the call and for clarification. I wanted to dig a little deeper into the food service in the U.S. and it kind of feels like it was like that area where we expect a lot of growth with some of these announcements back in the past, Yum!, McDonald's and so on. But it kind of feels like it's not taken off and sounds like a level of these mid-teens somewhere on a revenue basis. So it doesn't really feel like it's delivering. On the other side, the international piece has done significantly better on food service. So maybe following on some of these questions around consumer trends, how do these food service channels, why is it so different that the performance of food service international versus food service U.S.?

Ethan Brown, Founder, President and CEO

Sure. I think it gets to the consumer again in each market. If we look at the EU, I think the consumer receptivity and readiness is there, and I think that our studio partners recognize that, and so that's where they're emphasizing. But I don't think it's a binary issue, right? I think that it's a timing issue. My strong view is that if you're in the U.S., you'll see a resumption of activity among QSRs. In fact, I think that's something that we feel comfortable about. It's very much part of the larger trends we just discussed. There was prolific growth and excitement around the category. You go through that and you go through the kind of trough of what they say, trough dissolution and then you come back up on the slope of enlightenment. I think we're kind of in that area where we're coming back out of it. I wanted to get through this quarter. I'm very glad it's over. I'm very glad to be in this quarter and for the balance of the year because I do think you'll see some of that resumption of growth, not in any way what we had a few years ago, but modest growth shows we're coming out of this. That's what I'm really looking forward to.

Ben Theurer, Analyst

Okay. Thank you.

Operator, Operator

Our next question will come from Michael Lavery with Piper Sandler. Please go ahead.

Michael Lavery, Analyst

Thank you. Good afternoon. I would like to ask a question that contrasts with Ken Goldman's. The discussion about health and the study findings are certainly intriguing, but in the U.S., consumers predominantly prioritize taste, with price and health considerations taking a backseat. How can you keep improving the product? This is clearly a significant factor for many consumers. While the 9% figure is substantial, can you provide insight into what might be on the horizon and how quickly product development could progress to make a difference for a substantial number of U.S. consumers?

Ethan Brown, Founder, President and CEO

It's a great question. Ken's question is fair, and it reflects the balance that we are constantly considering. I would reference the tasting table review of the dinner sausage, where we’ve always stated our north star is that our product should be indistinguishable. I have heard from others that the new sausage, what we refer to as sausage 3, is actually enjoyed more than its animal protein counterpart. Our efforts are leading us to strong progress. If you look at the steak product, you’ll find it absolutely delicious, with high levels of protein and less than a gram of saturated fat, along with many benefits. However, if there's uncertainty in the sector, those aspects tend to matter less. Price becomes less of a focus, even as we improve taste. Our primary goal in this area is to eliminate that uncertainty and educate consumers about the health benefits of our products. Once we achieve that, factors like taste will regain importance. While taste is crucial, we need to provide consumers with additional motivation since animal protein is also enjoyable. Therefore, we must excel in taste and offer other valuable attributes. For U.S. consumers, the key factors are taste and health.

Michael Lavery, Analyst

Okay, great. Thanks for the questions.

Ethan Brown, Founder, President and CEO

I'll just do a shameless plug for a new burger. You should go out and try in food service what is called the Beyond Meat Smashed burger or in retail, sort of buying the Beyond Stack that has a new flavor formula and a new texture, which I think, again, got a review said something like early reminiscent something of that nature of animal burger. So we keep making better, not there yet. But again, let's clear on these other issues and that that will be really pleasing for consumers.

Operator, Operator

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

Rob Dickerson, Analyst

Great. Thanks so much. Just kind of a simple question. I mean it sounds like kind of back half U.S. retail revenues are expected to grow a little bit. I'm assuming that's clearly volume-based kind of easier compares off of last year's back half. But is there something unique that just kind of drives that volume? Because a lot of the conversation these days is what happens when you have student loan payments to kind of circle back a little bit and maybe the consumer is not so strong. And not a lot of companies have a lot of conviction in the strength of the consumer. And you're saying the consumer is still a little tight. We have a premium product at the same time, yes, revenues are going to get better. I don't know if that's just the kind of points of distribution or why you have that conviction?

Ethan Brown, Founder, President and CEO

It's a good question. There are a couple of factors at play. First, we are seeing lower year-over-year comparisons. Second, we have increased distribution in both retail and food service markets globally. We've also witnessed consistent strength in our strategic partnerships, especially in Europe. These elements are what are driving our results, rather than any indication that the consumer outlook is improving automatically. It's primarily these strategic actions that we are aware of.

Rob Dickerson, Analyst

Okay. Okay. Fair enough. And then I guess kind of late in the queue here, but I'll circle back to Ken's question. There's another question on R&D. I think it was labor, kind of R&D versus advertising and you talked about new Smash burger taste profile. I just feel like maybe not as much as an analyst, but just as a consumer that when you change the taste profile, like should we also be expecting kind of investment community to see new ads about that? Like you walk into the store and it’s going to show why it tastes better. Just something for a hook because I do feel like you are kind of on a rolling basis renovating the product, but maybe consumers don't know. So that's all. Thanks.

Ethan Brown, Founder, President and CEO

Yeah, it’s also a very good question. You should expect that. I think we've been focused right now during a period when a lot of these flowed through on cleaning up this health narrative. So I think a lot of our marketing for the balance of the year is going to hit that theme. Overall, my vision for this is that it would be very much like the release of any new product. Three, four, five, six, seven generate excitement on each of those. But I think right now, we have a broader category issue that we have to hammer home. Once we can fix that, then we can spend those dollars in a more tactical one.

Operator, Operator

Our next question will come from Andrew Strelzik with BMO. Please go ahead.

Andrew Strelzik, Analyst

Hey, good afternoon. Thanks for taking the questions. I had two quick ones. The first, what are you seeing in terms of competitive dynamics across the category? You mentioned your use of trade discounts in the quarter, and as you're seeing the pressures on the category, are you seeing more competitive activity, competitive intensity pick up alongside that? Or how are you expecting that to evolve going forward? That would be the first question. The second question is just on the margin side. There are a bunch of headwinds that you listed impacting the quarter, which of those do you see sticking around versus moderating through the rest of the year or within the high-level buckets as you mentioned, where you see the biggest opportunity for margin expansion?

Ethan Brown, Founder, President and CEO

I'll start with the margins. One temporary issue we faced, which we do not anticipate repeating, was tied to the flow-through of heavily capitalized inventory from last year. We made the right decision to slow production in order to manage our inventory levels for the remainder of the year, but this did result in some costs this quarter due to underutilization and other factors we don't expect to happen again at the same magnitude. So, we are optimistic about the rest of the year, and we're starting to see some improvements in our cost of goods sold. Regarding the broader category and competitive landscape, there are two perspectives on this. First, we need to ensure that we communicate the category message correctly to attract new customers. Ongoing discounting by us or major competitors mostly leads to consumer trade-offs, which isn't very productive. It's essential to focus on reviving the overall category message. A significant change has occurred in the category, which works to our advantage. We are still here, feeling strong, seeing enhancements in our products, driving down costs, and improving our operational efficiency. Our strategic partnerships are progressing well. Thus, we hold a lot of confidence in our future, especially as we encounter fewer competitors. There is a solid competitor in the market, a hospital, that is performing well, and that's beneficial for the entire category.

Operator, Operator

This concludes our question-and-answer session. I'd like to turn the conference back over to Ethan Brown for any closing remarks.

Ethan Brown, Founder, President and CEO

No, we appreciate everyone sticking with us through the quarter. We knew this was going to be a tough comparison, and it didn't materialize exactly as we wanted it to. The good news is we're through to a second half, which we hope will show a return to growth and the first in what will be, I think, a good climb out of this. We look forward to reporting that next quarter.

Operator, Operator

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.