Earnings Call
Beyond Meat, Inc. (BYND)
Earnings Call Transcript - BYND Q3 2022
Operator, Operator
Good day, and welcome to the Beyond Meat, Inc. 2022 Third Quarter Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. At this time, I would like to turn the conference over to Teri Witteman, Chief Legal Officer and Secretary. Please go ahead.
Teri Witteman, Chief Legal Officer and Secretary
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 third quarter earnings press release filed today after the market close. This document is available in the Investor Relations section of Beyond Meat's website. Before we begin, please note that all the information presented on today's call is unaudited. During the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please also note that on today's call, management may make reference to adjusted EBITDA, which is a non-GAAP financial measure. We believe these non-GAAP financial measures provide 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. With that, I would now like to turn the call over to Ethan Brown.
Ethan Brown, CEO
Thank you, Teri. And good afternoon, everyone. Last month, we signaled that the business continues to navigate a challenging period where broader economic conditions, particularly inflation, category-specific headwinds and increased competition have disrupted what has been over a decade of growth. This disruption has been in contrast to the year we had planned, where we expected a resumption of our strong growth trajectory as the pandemic receded in most of our markets. In my remarks today, I will briefly unpack what we believe are the key drivers of this disruption in our growth, the elements that we believe are transitory and those that may be more persistent. I will then walk through the full force transition underway toward accelerated cash flow positive operations in route to a sustainable growth model. Before doing so, I would like to take a moment to offer a broader perspective; as is the case with many emerging industries that challenge the status quo, the path to mainstream adoption is rarely straight and smooth. Turbulence along the way generally does not signal a diminished long-term total addressable market, or TAM. The history of innovation is replete with examples of this phenomenon. We are in one such moment as a brand category and are operating with urgency and decisive action to navigate it. We do so with an unwavering focus on our $1.4 trillion TAM, the global meat market, and continued execution of our long-held goal of achieving taste and price parity with animal protein. As we seek to pivot the business to cash flow positive operations and quicken our path to profitability, we are committed to transparency and accountability. To this end, in my remarks, I will center on a clear and highly focused set of actions that we are taking, which are intended to fortify the foundation of our business and drive long-term value for shareholders. For the next several quarters, I will return to these actions to track progress and provide a more fulsome look at the underlying financial metrics we are using Beyond free cash flow to form the backbone of a durable financial algorithm and total shareholder return equation. With that, I will now turn to a brief overview of current market dynamics. Current economic climate has not been timed to plant-based meat. The most quantifiable trend, which we believe is transitory, is a well-established history of consumers trading down among proteins during difficult economic times. This appears to be in full swing today. With persistent and record inflation in grocery stores, shoppers are seeking to dial out inflation by switching out higher cost proteins for lower-cost proteins, whereby declines in beef and pork rise and so on. And while these items are on either end of the continuum, consumers are trading down throughout, generally from higher cost beef and pork items to lower-cost chicken. In this environment, the category in Beyond Meat should be expected to see declines as consumers flock to cheaper proteins. Correspondingly, household penetration for the plant-based meat category according to numerator data slipped for a second consecutive quarter falling roughly 20 basis points from the second quarter of 2022. Recall that Q2 saw the first sequential decline in household penetration for the category since at least Q1 of 2018, which is as far back as the dataset goes. Finding trends in household penetration holds true for us and most of our peers as well, and we have seen some brands significantly retrench or exit the category altogether in the US. Despite the category slowdown, there has been a tremendous increase in the number of competitive entrants. As we have maintained, we believe that healthy competition within plant-based meat is a good thing as it brings investment in marketing to the category. However, in the current environment, we are not seeing this benefit of competition; instead, more companies are pursuing the same or fewer consumers. Though we remain the category leader in refrigerated plant-based meat, the volume of competition has eroded some of our share. As noted a moment ago, a shakeout does appear to be underway, and we expect more brands to either retreat or consolidate a less cluttered playing field to emerge in the midterm. A less tangible, though important dynamic is also present within the category today. As consumers intensify their focus on making ends meet, health and environmental considerations take a back seat. This phenomenon makes it more difficult to convey our core value proposition to the consumer. To summarize the current situation, we face an economy where blistering inflation pressure is shifting consumer behavior in the grocery store, an environment where competition has dramatically increased despite a broad and precipitous category slowdown, and a consumer base whose focus understandably turned to fulfilling immediate basic needs rather than pursuing the broader benefits that represent our core value proposition. These trends have precipitated a substantial drop in revenues for our business, the impact of which is a series of knock-on effects across our income statement. They include a sizable reversal and expected improvements in gross margin as we contend with lower overhead absorption, greater variability in our inventory reserves, and excess capacity and related underutilization and termination fees within our co-manufacturing network. Our path forward in this environment is clear and at its foundation is a pivot from the growth-above-all operating model that has characterized our business to date to one that prioritizes positive cash flow and sustainable growth. This strategic shift is designed to stabilize the business, nurture our most important growth paths, and position us to capitalize on renewed category growth as the economy emerges from its current state. We will use the following three tenets to underpin our path to cash flow positive operations and sustainable growth, and I will return to these in subsequent quarters to track progress. One, we are significantly reducing operating expenses, while focusing on a more narrow set of strategic partner, retail, and food service opportunities, and utilizing lean value streams across our beef, pork, and poultry platforms. Two, for the time being, we will be emphasizing cash flow-accretive management of our inventory with a focus on profit dollars versus maximizing percent margin. Currently, we are further rationalizing our production network in the context of more moderate volume assumptions to improve overhead absorption, address underutilization fees, and support margin improvement. Three, we are applying a laser focus to our sales and marketing activities, emphasizing those opportunities that we believe strike the right balance between restoring near-term growth and nurturing our most valuable long-term opportunities. Though my comments today tend to focus on our US business and global partnership activities, we are applying similar measures across our EU and China operations. I will now address each of the three pillars of our go-forward strategy in greater detail. One, operating expenses. We continue to bring our total operating expenses down and expect to drive further progress. Compared to Q1 of this year, we have reduced total operating expenses by 23% from $97.8 million to $74.9 million in Q3, and we expect OpEx to fall even further in Q4 and thereafter. To date, we have instituted two separate reduction in force actions, one in August and one in October, totaling approximately 240 positions. Together, these actions represent more than 20% of our global workforce. With our most recent reduction in force, we are expecting operating expense savings of approximately $39 million over the next 12 months, excluding one-time separation costs of approximately $4 million. Although letting go of these dedicated, passionate, and talented team members was painful, these actions were necessary to right-size our organization, so that we are aligned with current business conditions. Moving forward, to support the execution of a more narrow set of key priorities while delivering further OpEx reductions, we are implementing lean value streams across the organization around our three product platforms of beef, poultry, and pork. Two, aggressively managing down inventory and rationalizing our production network. We are focused on maximizing cash flow generation and profit dollars when it comes to inventory management over percent margin. Specifically, in the context of a more limited number of segments, we are testing a pricing reduction that more quickly collapses the pricing delta between one of our core products and its animal protein equivalent. We are implementing these programs in a highly targeted manner, where we believe doing so will welcome new points of distribution and new consumers to our brand, while increasing volumes throughout our facilities and network. We expect these activities to accelerate our drawdown of inventory, which we already reduced by nearly $37 million since the end of Q1 and free up cash. In addition, we are taking immediate steps to rationalize our production network to address what we expect may be continued lower than previously planned growth. These activities include the further consolidation of production activities within our co-packing network, the full utilization of our own facilities by bringing in certain outsourced activities and in certain instances, redistributing production across our network to address volume commitments. These measures are critical to improving overhead absorption and minimizing unproductive idle fees. Three, restoring growth in retail and food service through a series of targeted innovation, sales, and marketing execution. In the midst of all the noise in the broader economy and the specific challenges facing our segment and brand, it's important not to forget something. We remain an innovation engine, working on one of the most powerful solutions to some of the most serious challenges facing our country and the world. As you will recall, this year we were recognized by American consumers as the most innovative company in food, as they in the same survey recognized Apple, Tesla, and Amazon as the world's most innovative companies across technology, transportation, and consumer goods. As such, even as we continue to reduce our operating expenses and implement lean value streams, prioritizing cash flow from inventory and right-sizing our production network, we will do what we do best: innovate as we challenge and push our way into our long-term $1.4 trillion TAM. Specifically, in retail, we plan to restore growth to our core product offerings of burgers, beef, and dinner sausage in the refrigerated set through exciting product renovation, and to leverage and support these renovations by pursuing distribution expansion, certain aforementioned strategic pricing activities, and targeted marketing. To that end, though we will not give a release date for our retail channel, I will say that I'm thrilled with the improvements the team has made on the broader Beyond Burger platform. Throughout its development, I've watched key customers and stakeholders come through our innovation center, try a version of this fourth generation product, and I firmly believe it is a meaningful advance toward our North Star of being indistinguishable from its animal protein equivalent. Though we have long emphasized the refrigerated meat case next to animal meats as one of the long-term engines of significant growth, we do not discount the importance of the frozen aisle in grocery. As such, we are bringing an increased amount of innovation to the frozen category. We are continuing to prioritize expanding distribution for our chicken tenders, which, as you may recall, received recognition from People Magazine Food Award, while adding a host of new easy-to-use, delicious offerings for busy families and consumers. This includes the recently announced Beyond Steak, which truly delivers the juicy tender and delicious bite of seared steak tips, with the added nutritional and environmental benefits of plant-based meat. This brand-new product, like our chicken, was also the recipient of a recognized award, which we will announce soon, and is now available at more than 5,000 Kroger and Walmart stores nationwide, as well as select Albertsons and Ahold divisions, with further distribution gains expected in the near future. Reinforcing our health value proposition, Beyond Steak is low in saturated fat with zero milligrams of cholesterol and has no antibiotics or hormones. Following up on the introduction of Beyond Steak, we launched Beyond Chicken Nuggets and Beyond Popcorn Chicken, which are rolling out at over 5,000 stores at national retailers like Walmart and Kroger, as well as select regional retailers like Ahold and Albertsons, and are expected to expand into more outlets in the near future. As with tenders, these chicken products deliver tangible health benefits to the consumer, including having 50% less saturated fat than the leading brand of traditional breaded chicken nuggets, zero milligrams of cholesterol, and no antibiotics or hormones. Frozen plant-based chicken is the largest single subcategory in all of plant-based meats and continues to grow at a double-digit pace, so we are pleased to be expanding our presence with additional chicken items. Turning now to food service: in the last year alone, Beyond Meat has executed an impressive number of launches and tests across the globe with our strategic partners. Specifically, in the last 12 months, we have had 25 trials for permanent menu launches with nine distinct products across our beef, pork, and poultry platforms in 18 countries. Though these activities do not result in immediate sustained revenues, they represent very important seeds that we are planting for future growth. For example, across the McDonald's network, we have been busy launching the McPlant in Australia, the US, UK, Ireland, Germany, Portugal, Taiwan, Austria, and the Netherlands. As of today, we are pleased to share that McPlant has already become a permanent menu item in the UK, Ireland, Austria, and the Netherlands. Moving on to Yum!, we tested Beyond Kentucky Fried Chicken here in the US early this year, and we've launched Beyond Meat toppings with Pizza Hut locations across Singapore, Germany, Kuwait, UAE, Canada, Guatemala, and El Salvador, with Canada, Guatemala, El Salvador, and Singapore already converting to permanent Beyond Meat menu items. Most recently, we are excited to be testing Beyond Carne Asada at Taco Bell locations in and around Dayton, Ohio. The Carne Asada product represents the toil and ingenuity of many special and talented people across the Yum! and Beyond Meat partnership. It was not easy to bring to life and getting it right took countless iterations, but ultimately, we achieved resounding success. It is something new to the world, delivering the taste, mouthfeel, and satisfying experience of its animal protein equivalent, and importantly, it is being offered at the same price as its animal protein equivalent. If you are in or near Dayton, it is well worth the trip to Taco Bell to taste the future. As I round out some of the latest strategic launches, I'd like to turn to Panda Express. In early September, Panda Express brought back Beyond the Original Orange Chicken to over 2,300 US locations for a limited time offering, following a successful regional launch last year. As with McPlant at McDonald's and Beyond Carne Asada at Taco Bell, I encourage you to stop by Panda Express and enjoy the absolutely delicious Beyond the Original Orange Chicken. The tasting is believing. The final piece in this third pillar of our strategy is a more aggressive and more narrowly tailored application of our taste, health, and planet message, focusing on those consumers who are most able to hear us during these difficult economic times. When I think about the first order of business and our long-term vision of building meat from plants that is indistinguishable from its animal protein equivalent, I am confident that we are advancing year by year. And when I think about the next critical step in our long-term strategy, driving down the cost of goods of our products so that we can sell at or below price parity with animal protein in at least one category, I'm equally confident we are advancing toward that goal. What we need to do better is in connecting with the right consumer at the right time around the substantial broader benefits of going Beyond so that we can make the leap from early adopters to the early majority. I believe this is the case with both our health and planet messaging as a brand and as a sector. With health, we have allowed special interest groups to have a field day in casting doubt on the health profile of what they call fake meat. I'd like to spend a moment on this point. We care about our ingredients and are proud of our process because we care about health at the very foundation of our brand. I refer back to recent research conducted at the Stanford School of Medicine as part of our five-year plant-based diet initiative with the University. In the first clinical trial published in the American Journal of Clinical Nutrition in August 2020, researchers reported declines in LDL or bad cholesterol and TMAO when participants switched from animal protein to plant-based Beyond Meat over successive eight-week periods. TMAO is a compound that forms in the gut and has been correlated with heart disease and certain cancers. As we move forward, we will announce a major partnership with a national health organization and take other steps to highlight to consumers the tangible health benefits of Beyond Meat. Second, we need to do a better job helping the consumer better understand the connection between our products and climate. Again, focusing on the right consumer at the right time when we have the greatest chance of being heard. The climate impact of our food production system exceeds that of our transportation system globally, and correspondingly, plant-based meat is one of the most immediate and powerful tools available to the public for addressing climate change. Here again, I return to research, which I shared earlier, conducted at the University of Michigan in 2018, which performed a life cycle analysis of the original Beyond Burger versus a 0.25-pound US beef burger and found that producing a Beyond Burger generated 90% fewer greenhouse gas emissions, used 99% less water, and required 93% less land. As I have long maintained, marketing is a lot easier when we can share the real benefits of our business and long-term vision. It's true, and in our case, and as these and other data points suggest, we have a very real and compelling story to tell consumers about health and our planet. What you'd expect from us going forward is more pronounced, narrowly targeted messaging around taste, health, and planet directed toward those consumer segments most likely to listen to our voice. In closing, last month, as on this call, I signaled a change in our growth strategy, which is the recognition of today's challenging economy and tomorrow's opportunity. We are and will be here for the long game. To reiterate, the three main pillars we are using to advance positive cash flow and implement a sustainable growth model are: one, continued reduction in OpEx and a narrowing of focus on key strategic partner, foodservice and retail opportunities, while making further efficiency gains through lean value streams across our beef, pork and poultry platforms; two, emphasizing cash flow accretive management of our inventory focused on margin dollars versus maximizing margin percentage and concurrently rationalizing our production network in the context of more moderate volume assumptions; and three, narrowing our sales and marketing focus to a core set of activities that we believe will strike the right balance between restoring near-term growth and nurturing our most valuable long-term opportunities. I look forward to returning to our call in the New Year to update you on our progress across this critically important pivot and plan. With that, I will turn it over to Lubi, our new Chief Financial Officer and Treasurer, to walk us through our third quarter financial results in greater detail and reiterate our outlook.
Lubi Kutua, CFO
Thanks, Ethan. We recorded net revenues of $82.5 million in the third quarter of 2022, in line with the updated guidance we shared on October 14 and representing a 23% decrease compared to the third quarter of 2021. This result fell short of the expectations that informed our outlook on our Q2 earnings call, primarily as a result of weaker-than-expected demand in the category and especially within our core subcategory of refrigerated. Net revenues during the third quarter were also negatively impacted by increased competition, certain customer decisions such as reductions in targeted inventory levels and postponed and/or canceled promotions, as well as delayed and/or canceled product promotions and introductions relative to our prior plans. In aggregate, total volumes sold during the third quarter of 2022 declined 12.8% compared to the year-ago period, primarily due to the factors I just described, while net revenue per pound decreased approximately 11%. The decrease in net revenue per pound was primarily attributable to strategic, but limited price reductions in the US and broader list price reductions in the EU, increased trade discounts, unfavorable changes in foreign exchange rates, and to a lesser extent, changes in sales mix. Turning to gross profit, gross profit in the third quarter of 2022 was -$14.8 million or -18% of net revenues as compared to $23 million or positive 21.6% of net revenues in Q3 of 2021. Gross profit in the third quarter of this year was negatively impacted by approximately $7.2 million, or -8.8 percentage points of gross margin of underutilization fees and one-time termination costs associated with certain co-manufacturer agreements, of which approximately $5.9 million was related to Beyond Meat Jerky. Including such underutilization and one-time termination costs in total, Beyond Meat Jerky contributed a gross profit loss of $5.8 million, or -7 percentage points of gross margin during the period. As Ethan alluded to, the decline in overall gross profitability is largely emblematic of the swift and meaningful deceleration in demand, which has necessitated a significant curtailment of our production volumes in short order. Generally speaking, it is the pace and magnitude of this volatility that presents the greatest challenge from an operating perspective as it is difficult to adjust and/or rightsize the production network at a commensurate pace. Overall, cost of goods sold per pound was $5.60 in Q3 2022 compared to $4.19 in Q3 2021, or an increase of $1.41 year-over-year. We estimate Beyond Meat Jerky accounted for approximately $0.47 of the increase with the remainder being driven by increased manufacturing costs, including depreciation and increased material costs, and to a lesser extent, higher transportation and warehousing costs. The increase in manufacturing costs is primarily reflective of the volume deleveraging impact I described a moment ago. As an example, although COGS depreciation expense in Q3 increased by approximately 13% sequentially on a per-pound basis, depreciation nearly doubled versus Q2. While this is a single example of just one component of our COGS, the theme is generally true across our other COGS buckets and is informative of the potential impact our efforts to stabilize growth and right-size the network could have. Moving down the P&L to OpEx, operating expenses for the third quarter of 2022 were $74.9 million, down 2.7% year-over-year and down 10.3% quarter-over-quarter. The year-over-year decrease was primarily driven by lower selling expenses, which include our cost of outbound freight and non-people general and administrative expenses, partially offset by higher marketing expenses and restructuring costs, which consist mainly of legal fees. The sequential decrease in operating expenses was driven by reduced people expenses, including stock-based compensation, lower general and administrative expenses, and lower selling expenses, partially offset by higher marketing expenses and restructuring costs. As announced in our October 14 press release, we made the difficult but necessary decision to implement a secondary reduction in force, which impacted approximately 19% of our global workforce. Through this action, we expect to generate approximately $39 million in operating expense savings over the next 12 months, excluding one-time separation costs, which will largely be incurred in Q4 2022. As a result, we expect total operating expenses to be in the mid-$60 million range in Q4 of this year, subsequently falling to the low $60 million range per quarter thereafter. Moving further down the P&L, loss from our unconsolidated joint venture increased to $8.7 million compared to $0.6 million in the year-ago period and $1.4 million in Q2 2022. This line item relates to our joint venture with PepsiCo, the PLANeT Partnership LLC, or TPP, and in the latest quarter reflects an increase in inventory reserves at TPP, as well as a planned increase in marketing. All in, the net loss in the third quarter of 2022 was $101.7 million or a net loss of $1.60 per common share compared to a net loss of $54.8 million in the year-ago period or a net loss per common share of $0.87. Now turning to our balance sheet and cash flow highlights. Our cash and cash equivalents balance was $390.2 million and total debt outstanding was approximately $1.1 billion as of October 1, 2022. In Q3 2022, inventory decreased to $247 million as compared to $254.7 million at the end of Q2 2022 and decreased from $283.8 million at the end of Q1 2022. The inventory decline was driven by continued progress in reducing our finished goods and work in process balances, partially offset by an increase in raw materials and packaging. In terms of cash flow for the three months ended October 1, 2022, net cash used in operating activities was $34.7 million, a $35.9 million decrease compared to the year-ago period and a $35.8 million decrease compared to Q2 2022. As we have communicated, cash consumption continues to be a key focus area for us, and although we expect to drive further improvement over the next several quarters, we expect cash used in operating activities to increase sequentially in Q4 2022 as the benefit from collection of receivables in Q3 is expected to meaningfully moderate. Within cash flows from investing activities, capital expenditures totaled $18 million in Q3 2022 compared to $52.9 million in the year-ago period, and we invested $10 million in our joint venture pursuant to the second tranche of our predetermined capital contribution schedule. We expect to invest a further $6.5 million in the JV split equally across the fourth quarter of 2022 and the first quarter of 2023. Let me now provide some commentary about our 2022 outlook as well as some high-level comments about 2023. As previously communicated in our October 14 press release, for the full year 2022, we expect net revenues to be in the range of $400 million to $425 million, representing a decrease of approximately 14% to 9% compared to the full year 2021. Given the implied level of sales for the fourth quarter of 2022, combined with the gross margin pressure that I described earlier, we expect the fourth quarter gross margin to be negative, albeit sequentially higher than Q3, as we do not expect to incur similar co-manufacturer termination fees. For fiscal year 2023, we are targeting cash flow positive operations within the second half of 2023. To be clear, this target implies the achievement of a full quarter of positive free cash flow, defined as cash flow from operations, less capital expenditures during the second half of 2023. We intend to discuss the building blocks of this objective in greater detail following our Q4 2022 earnings call next year, but for now, I will share some high-level qualitative information. Given our near-term pivot to an approach that prioritizes cash flow and profitable growth above immediate market share capture, we expect 2023 growth to exhibit ongoing pressures as we transition the business model. To drive our cash flow positive objective, there are four key levers. First, as Ethan described, we are focused on stabilizing and subsequently restoring growth within our core portfolio of refrigerated SKUs, which in turn is expected to contribute to meaningful gross margin improvement back into positive territory. To reiterate, restoring growth in our core entails closing existing distribution gaps, launching renovated and improved versions of our core SKUs, deploying strategic promotional programs aimed at drawing in new consumers and securing new doors, and focusing our marketing efforts on consumers whose receptivity to our value proposition is believed to be high. Second, we will manage our operating expenses within a tight range by adopting lean business practices and driving greater accountability among individual budget owners across the organization. Third, we will maintain a strong focus on drawing down inventory levels to free up cash from our balance sheet; and finally, we will tightly manage our CapEx budget to a level substantially below 2022 and either of the previous two years. Taken in combination, we believe these measures will serve as key enablers of our cash flow positive objective in the latter half of 2023. With that, I'll conclude my remarks and turn the call back over to the operator to open it up for questions. Thank you.
Operator, Operator
Thank you. We will now begin the question-and-answer session. Please limit yourself to one question and re-queue for additional questions. First question today will come from Alexia Howard of Bernstein. Please, go ahead.
Alexia Howard, Analyst
Good evening, everyone. First of all, thank you very much for really focusing on how you get back to cash flow positive. You've obviously given us a quantification of the savings from the two reduction in forces or the most recent reduction in force that you've just put in place. But the level of cash burn is still quite high. Lubi, thank you for going through the components, and I recognize you're going to give us more details on the fourth quarter. Is there anything else you can tell us about how much you could reduce the input cost or the COGS ingredient packaging side of things? How much the plant cost could come down by reducing the use of unnecessary co-manufacturers? Is there anything else that you can give us that will give us an idea of how much those all of that cash burn can come down by so that we can get some visibility into what the drivers are? Thank you and I’ll pass it on.
Lubi Kutua, CFO
I apologize. We were muted. Alexia, thanks for the question. Although I can't provide the exact level of specificity that you're asking for, let me try to give some qualitative information here that hopefully will help you in your modeling. So we put out a target to be cash flow positive within the second half of 2023. Clearly, there isn't a path to getting there if we don't restore our gross margins back to positive territory. Now we're not prepared just yet to give you sort of an exact target for gross margins for 2023. As I said in my prepared remarks, we'll be providing more detail at our fourth quarter earnings call. But clearly, restoring the gross margin back into solidly positive territory is high on our priority list.
Ethan Brown, CEO
That's great, Lubi. I can provide some additional insights. We will continue to reduce cash consumption. An important point to emphasize is that when there is a decline in volume and accompanying deleveraging, it can negatively affect gross margin and other areas. You can either wait for growth to return or adjust your production system and organization. I want you to hear directly from me that we are adjusting the organization and operational footprint to achieve positive cash flow in the second half of next year, regardless of any aggressive growth expectations. I think that is something that is new to our business, given the 12-plus years of pretty aggressive growth that we had enjoyed. I think we will enjoy again in the future, but for now, it's really about stabilizing the business based on a more reasonable revenue growth trajectory. And it's exactly as Lubi said regarding making sure that we'll see some growth in the core lines of beef burger and dinner, but again, nothing extraordinary. We are continuing to reduce the size of the network and eliminate idle fees, moving certain parts of production back in-house so that we can improve overhead absorption. We are also moving aggressively managing inventory, as we always think about it. Inventory is kind of sleeping money, and we need to start accessing much more of that. There are two benefits to that: One is, of course, you reduce inventory levels and free up the cash, but two is you can use some of that inventory to welcome new consumers into the brand at a time when they're economically stressed. We are going to implement some of that targeted pricing, which we can explain more later on the call. We're going to go ahead and implement. We have a whole cost-down program that is going quite well, and it's been driving us. The challenge is you're not going to see those results until we move through some of the inventory that we have now and start to see the conversion of raw material into products within the new production system.
Operator, Operator
Our next question will come from Adam Samuelson of Goldman Sachs. Please go ahead.
Adam Samuelson, Analyst
Thank you. Good evening everyone. Ethan, you mentioned some strategic pricing actions in your last response. Could you provide more details on those actions and the plan to free up inventory? Specifically, what do you anticipate the additional distribution could be? Also, where do you foresee the inventory balance at the end of the fourth quarter or the first quarter, and how will that help you access the cash on the balance sheet?
Ethan Brown, CEO
Sure. Thank you, Adam. I'm going to give you an answer that probably is one degree of specificity away from where I think you'd like it just because of competitive reasons and things of that nature. So part of the push toward cash flow positive and a sustainable growth model is to dramatically narrow our focus within food service and retail. The unifying theme in terms of what we're targeting are those opportunities that give us the highest probability of restoring growth also nurturing the most valuable long-term pathways that we have. We have a number of QSR partners that we're narrowing our focus somewhat to a handful that we're having great success with and want to nurture those. I think there is a lot of focus on our US business and our US retail appropriate to sell, but if you look at what's going on in Europe and focus momentarily on the launches and tests that I mentioned, plus the permanent menu placements, not only in Europe or Latin America and parts of Asia, we are planting seeds that we expect to be pretty significant volume drivers for us in the future. So we'll narrow our focus there. Then when you get into the retail space, my focus will be on restoring growth in the fresh meat case, where we really believe transformation can occur. Plenty of energy time and focus has gone into the third iteration of our Sausage platform and the fourth iteration of our burger platform. We expect to have those out. I can't give a specific deadline, but those should be helpful in restoring growth. Within that, there are select pricing programs that we are putting in place to target specific consumers. Unfortunately, it is a time of distraction for the consumer. Our story right now is several layers away from where consumers focus in terms of just basic needs. We are tailoring our messaging to sub-segments that are probably more receptive to hear us; for health, that's generally 40 and older and for our planetary message, it’s the much younger generation. So coming out with these innovations and targeting specific sub-segments of the population, with that messaging, and offering some introductory pricing is how we're restoring that fresh case. When you look at frozen, we’ve had good success with the tender products. I think we’re up about 24% in frozen over the last 12 weeks year-over-year, and then we launched a new steak product that I think many will view as one of our best products, and that is on track for an award announcement soon.
Operator, Operator
Our next question today will come from Robert Moskow of Credit Suisse. Please go ahead.
Robert Moskow, Analyst
Hi, Ethan. The script today and the task at hand, it's a very different task than what your vision of the company was originally. I'm just wondering, do you have the right people in place to execute this new approach? Are people ready to make this kind of pivot? Do you need to bring in different people to do it?
Ethan Brown, CEO
Yes, that's a great question. This pivot is big for sure, and I want to be very clear that it's coming from me. I feel very passionate about this change that we're making. I have no doubt about the long-term opportunity facing our company and our ability to go get it. We continue to produce the very best products, all those other things, right? What we have to do is change our mindset from one where it was growth above everything else to now pushing very quickly the business into a cash flow positive and a profitable position. That's necessary to endure this current economic situation and reach that longer-term goal. We have a lot of the right pieces in place and a good team. A lot of the language that I used can resonate with those who are aware of lean principles, engaging in an organization's-wide mindset. It is the number one goal. Everyone needs to sign up for pushing this into a cash flow positive position by the second half of next year. Any one who isn't should find another place to work. It’s coming from the top, I'm very passionate about it, and we have the energy to get it done. The focus is on achieving the goal of ensuring Beyond is the best in this category. There is massive growth potential and I want to make sure we capitalize on that.
Operator, Operator
Our next question today will come from Cody Ross of UBS. Please go ahead.
Cody Ross, Analyst
Hi, good evening. Thank you for taking my questions. Lubi, you talked about a good part of your goal to become cash flow positive is to turn gross margin positive. Can you just remind us or give us any color on what percentage of your COGS are fixed versus variable?
Lubi Kutua, CFO
I'm not sure that we've quantified that specifically, but the vast majority of our COGS basket is variable, and that's a function of the co-manufacturer model that we have today. A fair amount of our finished goods production is still done with our co-manufacturing partners, and therefore, the only fixed costs that we have embedded are associated with our own facilities where we do extrusion.
Operator, Operator
Our next question today will come from Peter Saleh of BTIG. Please go ahead.
Peter Saleh, Analyst
Great. Thanks for the question. Ethan, I just wanted to come back to a comment you made. You said you guys are going to focus on gross profit dollars and not necessarily gross margin percent. Can you provide more detail on what you will be focusing on in terms of products that drive gross profit dollars? Are there any products or channels that you'll be cutting that maybe were higher gross percent but lower on the dollar side? Just trying to kind of understand that comment in the context of what you guys gave us today.
Ethan Brown, CEO
Sure. It has to do with the pricing program we're putting in place on one of our items that is in our core. It won't be a blanket pricing for all segments, but we think it will be meaningful for us. I wanted the team to understand that the goal is to drive conversion of inventory and bring new people into the category. We're obviously not going to do anything that would be negative on a per unit basis, but the focus is on this program. I also think the days have changed; we launched a jerky product, partnering with Pepsi, I think it was a $30 million contribution this year to revenue. Although we now crossed into breakeven with that margin, it’s obscured by termination fees and idle fees. We're no longer going to launch any products that aren't cash flow positive and margin dollar contributors at the onset.
Lubi Kutua, CFO
Yes, I would just add that we're being very targeted with these programs. We're focusing on the core SKUs where we continue to have strong margins, and these won't be negative margins from a unit perspective. We're also looking at existing distribution gaps and opportunities to secure new points of distribution by implementing special programs aimed at bringing new consumers who may not have tried these types of products or our brand before.
Operator, Operator
Our next question today will come from Michael Lavery of Piper Sandler. Please go ahead.
Michael Lavery, Analyst
Thank you. Good evening. I wanted to return to fixed costs. I know we've touched on this a little bit, but for some of these underutilization penalties or for the new headquarters, which I believe starts at around $15 million a year and then builds, it's a meaningful outlay in terms of your spend. How much flexibility do you have on terminating or changing any of these contracts? Do you have commitments to the headquarters building? Is there a better way to think about running this?
Ethan Brown, CEO
Yes. So it’s a great question. We have kind of four buckets that we're looking at where we had entered into agreements several years ago that were aligned with a more rapid growth curve, and we're in discussions with those partners about how to address it. Regarding the headquarters question, we are consolidating a bunch of leases. So we won't change course on the headquarters, but we will consolidate into them. I think that's an important step, especially in this post-pandemic world where cohesive teamwork is critical. For idle fees and other issues, we're restructuring production in areas where we do have idle fees to ensure we are not overspending. Additionally, we are having difficult discussions with our partners, as I believe everyone has a role to play in navigating these challenges. It’s a big focus for me.
Operator, Operator
Our next question today will come from Rupesh Parikh of Oppenheimer. Please go ahead.
Rupesh Parikh, Analyst
Good evening and thanks for taking my question. So, just on international markets, I was curious if you guys have reviewed the business. Any thoughts on exiting any international markets to more quickly rationalize the business?
Ethan Brown, CEO
Yes. That’s a good question. I think in Europe; you will start to see some of the inventory eroded. I can't predict the future there, but we see trends that we like. There's an overhang of inventory. In China, it's so early to tell what’s going on because they're coming out of lockdowns. We are reducing expenses across our global operations and relying more on partners. We have a terrific partner in Europe and are working closely with them to continue to serve and grow the longer-term opportunity for Beyond in Europe while being a little bit more asset-light. We're looking at similar opportunities in China.
Operator, Operator
The next question today will come from Peter Galbo of Bank of America. Please go ahead.
Peter Galbo, Analyst
Hey guys, good afternoon. Thanks for taking the question. Lubi, can we outline some of the elements that get you to a projected compressed revenue next year? I heard you mention rationalizing some footprints across QSRs and retail partners, focusing more on the core. I think you'll be lapping the jerky load in from the first half of this year going into next year. But there will also be some positive contributions from items like steak and Popcorn Chicken. Can you just help us understand all of these factors?
Lubi Kutua, CFO
Sure. I think you actually answered your own question. If you look where trends have been recently, we've seen some pressure in our international markets. That’s not going to turn on a dime. There will likely be ongoing pressure, particularly in the first half of next year. However, we have a number of initiatives focused on stabilizing and eventually restoring growth within our core. This includes things like launching new iterations of key core SKUs. When you look at those activities, and to your point, starting to layer in contributions from steak, popcorn chicken, and other potential launches, we expect that some of the pressure we anticipate in the first half of the year will ease as we get to the second half.
Operator, Operator
Our next question today will come from John Baumgartner of Mizuho. Please go ahead.
John Baumgartner, Analyst
Good afternoon. Thanks for the question. Ethan, I want to dig into innovation because it's hard to think that there isn't cannibalization, whether it’s meatballs versus ground beef or ground beef versus patties. You're renovating products, but you're also launching the fourth iteration of ground beef. The competition has moved on to frozen meals and protein bowls. Why isn't Beyond also steering away from commodity products? Why wouldn't that benefit you more than trying to migrate consumers from beef 3.0 to 4.0?
Ethan Brown, CEO
That's a very good question. The move you've seen from us on frozen is in part response to that. You'll see more from us in the frozen space in terms of convenience and broader offerings. I don’t think that this part of your question is inconsistent with where we are headed. We've seen that our products continue to get closer to animal protein in taste and texture. As we drive down costs, BCG has done studies showing consumers want the product but not at a higher price. We want to drive toward taste parity, which we are getting closer to. I’m confident we’ll hit price parity in at least one product/category during the specified timeframe. I won't walk away from the massive global opportunity around beef, pork, and poultry. As we achieve price parity, the products become indistinguishable, and climate impacts worsen. As people become aware of real health benefits, I am confident we will see a transformation. Moreover, I would highlight our recent successes, launching 25 distinct products globally and securing market placements. We shouldn’t solely concentrate on frozen commodities but also leverage our strong presence in refrigerated meat cases and key QSR relationships for growth.
Operator, Operator
Our next question today will come from Ben Theurer of Barclays. Please, go ahead.
Ben Theurer, Analyst
Thank you very much and good evening, everyone. I wanted to follow up on your comments you just made around pricing and getting to price parity. If you look at the sales versus volume you shared in the press release, it shows that there has already been a lot of investments, particularly on the international side. Can you help us understand where you stand right now in terms of the price premium versus your commodity appeals, particularly on the international side?
Ethan Brown, CEO
Yes. One thing that requires patience is we've been able to realize significant savings in production, but those measures are congested right now because we have to draw down our inventory to shift to new sourcing for production. Internationally, we are too expensive, as I have heard consistently from markets like Israel and Singapore just recently. We've got to drive better coordination across our distribution network and retailers to avoid pricing escalating. Even in the US, the average consumer is signaling that they may not pay $3 more than a pound of beef. We come back to BCG's research; continue to drive down our price point while stabilizing our operations. We can see what happens once the economy settles and we achieve price parity, where the growth will likely re-emerge.
Operator, Operator
Our next question will come from Rebecca Scheuneman of Morningstar. Please go ahead.
Rebecca Scheuneman, Analyst
Great, thank you for squeezing me in. My question really stems from the $7.2 million fees included in gross margin. I'm trying to assess how much of that will continue in future quarters or how much was truly one-time. It seems the termination fee would be one-time, while underutilization fees may be ongoing. Could you clarify what we can expect going forward?
Ethan Brown, CEO
That's a good question. The majority were indeed one-time termination fees, but there are continuing capacity fees. We are reorienting the network to absorb some of those fees, so they’re not going to waste. The challenges we're seeing are industry-wide and reflective of a broader economic instability. The abrupt changes have created these financial pressures, and we’re repositioning accordingly to mitigate these effects.
Operator, Operator
Our next question will come from Ken Zaslow of Bank of Montreal. Please go ahead.
Ken Zaslow, Analyst
Yes, real quick question. Which of your programs, among the four steps that you have, do you think is most at risk or out of your control? Which ones do you think you have the most control over?
Ethan Brown, CEO
I think Lubi was referring specifically to four of the financial levers in our program. Of the three steps to drive OpEx reduction, we're comfortable there. Achieving cash flow positive really depends on a mix of discipline and our ability to work through inventory. The third is the execution of our focused growth strategy, and I think that has some uncertainty. We're narrowing our focus to some key retail activities, but in challenging economic conditions, the risk remains. We're going to structure the business to be viable even if there’s moderate growth. Even if the economy worsens, we’ll still be able to achieve our goals. The value creation for this business will occur as the projects we’ve initiated start to pay dividends.
Operator, Operator
And ladies and gentlemen, at this time, we will conclude our question-and-answer session. I would like to turn the conference back over to Ethan Brown for any closing remarks.
Ethan Brown, CEO
I think I've said it all. It is a pivot in our business model. It's a pivot from growth above all to cash flow positive and sustainable growth. I'm very excited about it. It's going to produce long-term results we have been aiming for, while doing so more efficiently. I look forward to building this together. Thank you.
Operator, Operator
The conference has now concluded, and we thank you for attending today's presentation. You may now disconnect your lines.