Earnings Call Transcript - BYND Q3 2021

Operator, Operator

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to Beyond Meat Incorporated, 2021 Third Quarter Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Lubi Kutua, Vice President, FP&A Investor Relations for Beyond Meat. Thank you. You may begin.

Lubi Kutua, Vice President, FP&A Investor Relations

Thank you. Good afternoon and welcome. Joining me on today's call are Ethan Brown, Founder, President, and Chief Executive Officer, and Phil Hardin, Chief Financial Officer and Treasurer. By now, everyone should have access to the Company's third quarter earnings press release, and investor presentation, filed today after the market closed. These documents are available on the Investor Relations section of Beyond Meat's website at www.beyondmeat.com. Before we begin, please note that all the information presented on today's call is unaudited and during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Forward-looking statements in the earnings release that we issued today, along with the comments on this call, are made only as of today and will not be updated as actual events unfold. Please refer to today's press release, the Company's annual report on Form 10-K for the fiscal year ended December 31, 2020, the Company's quarterly report on Form 10-Q for the quarter ended October 2, 2021, to be filed with the SEC and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please also note that on today's call management will refer to adjusted EBITDA, adjusted gross profit, and adjusted net loss, which are non-GAAP financial measures. While we believe these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release or the investor presentation for a reconciliation of adjusted EBITDA, adjusted gross profit, and adjusted net loss to their most comparable GAAP measures. And with that, I would now like to turn the call over to Ethan Brown.

Ethan Brown, Founder, President, and Chief Executive Officer

Thank you, Lubi and good afternoon, everyone. Before discussing our Q3 2021 results in detail, I want to provide context for my commentary and clearly differentiate between short-term variability on the one hand, and ongoing strong progress toward our long-term vision of becoming tomorrow's global protein company on the other. The broader context of my remarks can be summarized in two main points. First, my comments are our best understanding of an environment that is characterized by rapidly changing and we believe largely transitory dynamics. We are reminded, for example, that a quarter ago in Q2 2021, we posted record net revenues of $149 million. We believe our long-term thesis is strengthening and undeterred by current instability. We've been making bold investments in our innovation, manufacturing, operations, and sales and marketing capabilities across the U.S., EU and China. We make these investments not as hopeful thinking, but rather prudent planning against forthcoming launches and strategic growth activities. Second, my comments today are focused on the entirety of the quarter, how the business performed relative to our expectations as we began 2021, and our promising path forward. The headline for the third quarter relative to our expectations at the onset of 2021 is that it was a difficult operating environment. Highly variable demand, reflecting the Q2 retreat and then Q3 reemergence of COVID in the form of the Delta variant. Sustained labor shortages impacting certain customers, as well as our own facilities and other high impact supply chain disruptions are among the challenges characterizing the quarter. As we headed into Memorial Day, we, like many in the country, felt that the long shadow of COVID was finally receding. We saw growth in food service as restaurants and venues reopened to strong consumer demand and posted our aforementioned record quarter in Q2 2021. We began looking eagerly to resumption of activities with our strategic quick-serve restaurant partners, both in the U.S. and abroad, a key building block in our originally anticipated growth plan for 2021. Yet as the summer wore on and the Delta variant took hold, we did not see a sustained recovery. And as you will recall, in food service, COVID-19 disruptions in consumer behavior are particularly challenging for the segment of customers that we serve. Though in our largest active chain in the U.S. that does offer drive-through, we saw a meaningful uptick in velocity in the quarter. The majority of our customers today rely on in-store and in-venue consumption for sales. Accordingly, we were disproportionately impacted throughout the quarter, as the Delta variant dampened consumer activity within the core of our food service customer base. Further, within food service, we believe that the downward pressure exerted by the Delta variant was further exacerbated by labor shortages that drove reduced operating hours and menu rationalization. For our business, the extent that moving from test to fuller launches with our strategic QSR partners is an important contributor to our revenue build. The combination of COVID's long tail and related labor shortages has had a particularly disruptive dynamic that we expect will have a transitory impact on our growth trajectory. In short, as we planned 2021, we held cautious expectations that by the second half of the year we'd have our footing back in food service and specifically be more active with many of our QSRs; we saw further delays. Unlike 2020 when food service challenges led to a market increase in retail activity, as food service demand reduced, we did not see a corresponding increase in activity in retail at the brand or category level during the third quarter. We believe that the following broader behaviors and trends may be at play. This expectation is not intended to be exhaustive and with time, we expect we will gain a fuller understanding of the drivers behind third quarter demand levels. 1. Consumers reported fewer or less frequent trips to the store. 2. Consumers reported being less open to trialing new products. 3. Consumers reported less interest in healthy options. 4. COVID-related cancellations reduced the scope of our sampling programs as the Delta variant spread, which limited new consumer exposure to our brand and category. 5. To a lesser extent than food service, but still relevant, labor issues created complexity and possibly impacted demand at retailers, who delayed shelf resets and performed less frequent restocking. 6. With increased competition over the past two years, we're seeing, as expected, some impact on our market share. However, in looking at the Q2 to Q3 SPINS market share data, on a product mix neutral basis, it does not reveal competition to be a significant contributor to the aforementioned deceleration. Finally, when considering demand, it is worth noting the possible impact of our Q2 2021 revenues. We experienced a significant increase in shipping towards the end of the second quarter, driven in part by retailers stocking up for July 4th and the balance of the summer grilling season, and food service operators anticipating a broader reopening of the economy. We believe these heavier levels of shipping during the last month of Q2 likely negatively impacted Q3 reorders. Turning to supply chain, we experienced a series of disruptions throughout the quarter. These included: 1. labor shortages in our facilities, at a transportation partner, at co-packers, and at third-party logistics providers. Collectively, these labor issues added complexity across operations and impacted our ability to fill certain orders. 2. Additionally and significantly, severe weather interrupted water supplies for two weeks at our Pennsylvania production facility, as well as destroyed sizable amounts of packaging inventory at a related storage center. Though we were able to reallocate certain materials from other locations, the loss of packaging materials at our storage facility had a sustained impact on our ability to fill orders as we awaited the replacement of damaged inventory. I do want to take a moment to discuss the general balance of exogenous and internal factors that contributed to our results this quarter. As you know, at Beyond Meat, we're highly focused on driving with urgency continuous improvement in our products. This cultural bent is captured in multiple ways, including the language we use to describe our processes, such as the long-standing Beyond Meat Rapid and Relentless Innovation Program, our internal innovation initiative. We applied the same lens of continuous improvement to our own organization and this difficult operating environment highlighted areas of opportunity in our maturing company. As labor challenges, severe weather, and an explosion at one of our key suppliers each interfered with our operations in Q3, we worked to materialize planned redundancy more rapidly across our supply chain. Further, we encountered delays in some of our commercialization efforts, certain of which highlighted the need to expedite the consolidation of our scaling activities within a dedicated commercialization facility here in Los Angeles, one that is now underway. I think we weathered both literal and figurative storms throughout the quarter that brought into sharper focus areas for more rapid development; we are emerging as an even stronger organization. These disruptions notwithstanding, through Q3 2021, we remained highly focused on the execution of our long-term strategy. And accordingly, we are pleased to report that we continue to gain ground across key enablers of our long-term growth. Broadly, we've invested heavily in readying an impressive range of products for our QSR partners and put significant resources against expanded capacity for planned launches. Our efforts are of course not limited to the U.S. market. As in the U.S., in the E.U. and China alike, we continue to strengthen and grow our capabilities, including sales, marketing, manufacturing, operations, and innovation, among others, as we expand our presence in these important global markets. Finally, we expect next month to announce an exciting addition to our leadership team and operations, who will bring valuable and directly relevant experience in serving our QSR partners and scaling global food manufacturing operations. With this context as background, I will now provide greater detail into our Q3 results. We generated net revenues of $106 million, representing a 13% increase over the third quarter of 2020. Total retail net revenues were up 5% year-over-year, with continued strength in international retail, which increased 168% year-over-year, partially offset by weaker results in U.S. retail, which declined 16% year-over-year. Representative of the unusual patterns we're seeing, our third quarter U.S. retail net revenues were lower on a sequential basis, which runs counter to the general seasonality we were accustomed to seeing in our pre-COVID numbers. Our leadership position in U.S. retail continues to be borne out in product sales rankings, where we maintained our number 1 top-selling SKU position across all of plant-based meat and continue to own 4 of the top 6 best-selling SKUs in the category. Further, we gained distribution with a 23% increase in TDPs versus a year ago, according to SPINS for U.S. MULO for the 12 weeks ended October 3. As you know, increasing TDPs is a positive outcome for our brand over the long run, but can exert downward pressure on velocity. Specifically, we saw a 21% year-over-year decline in velocity for the brand in U.S. MULO for the same period. These dynamics notwithstanding, our brand velocity remains nearly three times higher than the category average on an absolute basis, which we believe strengthens our case for further distribution expansion with retailers. We continue to see consistent progress in important metrics such as household penetration and repeat rates. Household penetration for the brand increased to 6.4% according to SPINS/IRI Consumer Panel Data for the 52 weeks ended October 3, 2021, which represents an increase of 20 basis points sequentially and 90 basis points year-over-year. With more households buying our products, we were pleased to see that our repeat rates also increased 60 basis points sequentially to 52.6%. Our buyer rate decreased 4% sequentially, likely impacted by higher promotional activity in Q3, while our purchase frequency was modestly lower quarter-over-quarter to the tune of negative 0.3%. We continue to innovate in the retail space and just recently began the early stages of a national roll out of Beyond Chicken Tenders. This product, derived from faba beans, is a clear winner on taste, texture, and nutrition, as it delivers 50% less saturated fat than traditional chicken tenders, while containing no GMOs, antibiotics, hormones or cholesterol. We're pleased to report that right out of the gate, Beyond Chicken Tenders won the prestigious 2021 Food & Beverage award from the National Restaurant Association. You should expect to see more from us under this platform in the near future as we seek to offer a broad assortment of product offerings that grow our chicken portfolio. Turning to U.S. food service, we've maintained our number 1 brand position in terms of dollar share according to NPD data for the three months ended September 2021, despite the intense variability from Q2 to Q3. Net revenues decreased 7% year-over-year and were, as noted, well below our Q2 total. As I shared, a good portion of our U.S. food service business, about two-thirds historically but even higher now, is composed of outlets that were disproportionately impacted by COVID-19 and the emergence of the Delta variant. These include small independent restaurants, bars and pubs, corporate catering services, hotels, movie theaters, shopping arenas and amusement parks, among others. Internationally, our business again generated strong results with retail sales up 168% year-over-year and food service sales up 117% year-over-year, collectively reflecting gains in both distribution and average sales per outlet. I will now provide a brief update on some recent product highlights and key strategic initiatives. McDonald's initiated limited time offerings of the McPlant Burger made with Beyond Meat patties in three European markets, including Austria, The Netherlands, and the U.K. In addition, as you've likely noted last week, McDonald's initiated a small limited operations test in eight restaurants here in the U.S. We are excited to work with such an iconic global brand as McDonald's, and we're equally excited to see the overwhelmingly positive media response generated by the early tests in Europe. At the end of October, I was visiting our facilities in the Netherlands and had the opportunity to buy the new plant burger. It was, as expected, outstanding. On returning to the U.S. the following week, I was able to do the same in Los Angeles. In both instances, I watched and interacted with other consumers as they enjoyed the McPlant. Encouragingly, these consumers fit the mold of the flexitarian, and while not vegan or vegetarian, were enjoying the McPlant Burger. In Canada, we introduced Beyond Meat Nuggets nationwide at A&W on a limited time basis, marking another great milestone within our earliest QSR partners. This exciting product offers 18 grams of plant-based protein for a six-piece serving, and as always, is made from simple, plant-based ingredients, with no GMOs, antibiotics, hormones, or cholesterol. Also in food service, Pizza Hut launched a limited rollout of our latest product innovation, Beyond Pepperoni, at roughly 70 locations across five U.S. markets. This new product, co-developed with Pizza Hut culinary teams, truly showcases the strength of our innovation capabilities, as we overcame numerous technical challenges to ensure that Beyond Pepperoni is nearly indistinguishable from Pizza Hut's iconic original pepperoni, even down to its crispness properties. This limited offering at Pizza Hut in the U.S. comes on the heels of a permanent menu launch of Beyond Meat products at Pizza Hut U.K. in July. Given pepperoni's consistent ranking as the number 1 selling pizza topping in the U.S. and elsewhere, we are excited about the potential of this product line and are eager to expand its availability over the coming quarters. Last but certainly not least, in the food service space, we recently announced the expansion of our test with Panda Express to 10 major markets across the U.S. at 70 locations. This follows the initial success of Beyond the Original Orange Chicken at select Panda Express locations in Southern California and New York City, which garnered raised consumer and media reviews and sold out in less than two weeks at all SoCal stores, making it one of Panda's most successful regional launches to date. We are proud to be Panda's partner of choice to recreate their iconic and most popular menu item. But let me now provide a brief update on our progress in growing our operations in the EU and China. We're now capable of performing each aspect of the production process in-country in the Netherlands and China, from production of our dry blends to extrusion to finished goods assembly. Moreover, in the Netherlands and China, we're operating our highest throughput extruders yet. For some time now, we've been building towards full end-to-end production to both geographies, and reaching this milestone is a major accomplishment for our team. I'm extremely proud of them and their work. As you can imagine, scaling complex processes in different economies around the world can be challenging. Doing so during the last 18 months under COVID-19 conditions complicated the work of our employees considerably. As one example, due to travel restrictions to our Jiaxing, China facility, we're required to conduct a significant amount of scaling activities with new staff over video conferencing equipment. We continue to pursue our global cost-down program with the end goal of price parity with animal protein in at least one category—beef, pork, or poultry—within the next 2.5 years. Today, we are working through a robust pipeline of cost-reduction opportunities, including in the areas of raw ingredient procurement savings, waste reduction, throughput improvement, network optimization, including potential in-sourcing opportunities, warehousing and transportation efficiencies, local production in our global markets and packaging optimization. With these efforts already underway and those still to come, I feel very confident about reaching our cost parity goal within the committed timeline. In closing, it remains our objective and focus to insulate our long-term strategy from short-term conditions. Just as we did not adjust our focus and strategy as a result of record revenues in Q2 of this year, we continue to execute against our plan despite a difficult third quarter. As such, this remains a period of intense investments in our future. We will continue to make the innovation, commercialization, marketing, and global production investments necessary for long-term growth. These investments are not founded on hopeful thinking, but rather are the result of planning against key partnerships, market development initiatives, and other opportunities, many of which have been delayed due to COVID-19 and the Delta variant, labor shortages and supply chain challenges, including our own and those of customers. One of the benefits of being a relatively new public company, whose early experience in the public markets has been forged over the last 18 months, is enduring multiple stress tests that reveal both strengths and weaknesses, and generate accelerated learning. We are emerging from the pandemic and its attendant challenges far stronger as a result, and are continually making progress on our long-term growth pillars of taste, nutrition, and cost, as we prepare for 2022 and beyond. With that, I will now turn it over to Phil to walk us through our third quarter financial results and outlook for the balance of the year.

Phil Hardin, Chief Financial Officer and Treasurer

Thank you, Ethan. And good afternoon, everyone. Let me provide a broad overview of our third quarter financial results before commenting on our outlook for Q4. We achieved net revenues of $106 million in the third quarter of 2021, representing an increase of 13% compared to the third quarter of 2020. Q3 2021 net revenue fell short of our initial guidance and we provided a press release on October 22 outlining the factors we believe led to our revised revenue guidance of approximately $106 million. So, I will not repeat those factors here. Growth in net revenues was primarily driven by a 143% year-over-year increase in sales to international customers. Partially offsetting the increase in international, U.S. net revenues declined 14% in the third quarter of 2021, compared to the third quarter of 2020 with U.S. retail down 16% year-over-year, and U.S. food service down 7% year-over-year. Taking a closer look at our distribution channels in retail across the U.S. and international, our volume of products sold increased 8% year-over-year with international up 123% and the U.S. down 9%. Net revenue per pound for total retail was lower by approximately 2% on a year-over-year basis, primarily reflecting increased trade discounts in the U.S. In food service, total volume of products sold increased 24% year-over-year, with international up 55% and the U.S. down 3%. Net revenue per pound for total food service was up 8% year-over-year, driven by reduced trade discounts in international compared to the year-ago period. Moving down the P&L to gross profit. Gross profit in the third quarter of 2021 was $23 million or 21.6% of net revenues, as compared to $25.5 million or 27% of net revenues in Q3 of 2020. In Q3 2020, adjusted gross profit, which excludes $1.8 million of expenses related to inventory write-offs, and reserves and product repacking costs attributable to COVID-19, was $27.3 million or 28.9% of net revenues. We incurred no such costs in Q3 2021, so our gross margin and adjusted gross margin for Q3 2021 are the same at 21.6%. The year-over-year decrease in adjusted gross margin was primarily driven by increased transportation costs, inventory write-offs, warehousing fees, depreciation, and amortization, partially offset by improved co-manufacturer fees. On a sequential basis, the decrease in gross profit was driven by increased sales discounts, increased inventory write-offs, increased warehousing, transportation costs, and depreciation and amortization. Turning to OpEx, total operating expenses were approximately $77 million in the third quarter of 2021, as compared to $44 million in the year-ago period. A year-over-year increase in operating expenses primarily reflects growth in overall headcount levels, mainly to support the Company's operations, innovation, and marketing capabilities. Increased spending in marketing activities, higher professional services fees related to recently established consulting agreements, higher restructuring expenses, primarily reflecting increased legal expenses, increased production and trial activities, and higher outbound freight costs included in the Company's selling expenses. On a sequential basis, the increase in operating expenses primarily reflects higher professional services fees, increased marketing activities, higher restructuring fees, and increased outbound freight costs. Net loss in the third quarter of 2021 was $54.8 million or $0.87 per common share as compared to net loss of $19.3 million or $0.31 per common share, and adjusted net loss of $17.5 million or $0.28 per common share in the third quarter of 2020. Adjusted EBITDA was a loss of $36.8 million or -34.5% of net revenues in the third quarter of 2021 compared to adjusted EBITDA of $4.3 million or -4.5% of net revenues in Q3 2020. Turning to our balance sheet and cash flow highlights, our cash and cash equivalents balance was approximately $886 million and total debt outstanding was approximately $1.1 billion as of October 2, 2021. For the nine months ended October 2, 2021, net cash used in operating activities was $191 million compared to $42.7 million in the year-ago period. Capital expenditures totaled $104.3 million for the nine months ended October 2, 2021, compared to $38 million for the year-ago period. The increase in capital expenditures was primarily driven by continued investments in production equipment, facilities related to capacity expansions, and initiatives. Let me now provide some commentary about our near-term outlook. Overall, we continue to operate in a challenging and variable macro environment, affected in part by ongoing uncertainty related to COVID-19, labor issues at both retail and food service customers, significantly increased transportation costs, raw ingredient and packaging inflation, and global supply chain challenges which have had a minimal impact on our business thus far, but could represent potential headwinds nonetheless. Combined is the dynamic nature of our category which remains nascent. This backdrop adds significant variability to our realized end customer demand, thereby increasing forecasting complexity. As such, although our outlook does not assume a significant deterioration in the operating environment as it stands today, it does reflect some conservatism, which we believe is appropriate, given the challenges I just highlighted. For the fourth quarter of 2021, we expect net revenues to be in the range of $85 million to $110 million. The following factors worth highlighting are embedded in this guidance. First, we anticipate a moderation in year-over-year growth across all channels due to the fact that this year, our fourth quarter contains five fewer shipping days compared to the fourth quarter of 2020. Second, we expect our fourth quarter results to be impacted by knock-on effects from the operational challenges in Q3. Although we expect to be fully recovered by the end of this month, these issues presented some headwinds early in the quarter. Third, in both U.S. and international food service channels, ongoing labor challenges, as well as general caution based on COVID-related uncertainty are also expected to have a dampening effect. Finally, we expect a moderation in sequential growth due to accelerated orders in the third quarter of 2021 that would otherwise have been expected to materialize in the fourth quarter. In terms of profitability, as Ethan described, we continue to invest in support of our long-term growth strategy, which includes investment in people and infrastructure. Moreover, with our expectation of accelerating food service activity next year, including in the QSR space, we are maintaining a robust schedule of product production trial activities to prepare for the commercial launch of new product innovations. We're investing in marketing activities to drive awareness and trial. We expect to see a steady increase in the pace of cost-down initiative implementations, some of which require upfront investments. These activities will continue to exert pressure on our profitability in the near-term. However, given the long runway we continue to see ahead of us in the global plant-based meat category, and in order to maintain and expand our leadership position within the sector, we believe these early levels of investment are necessary and will ultimately maximize value for our shareholders over the long term. With that, I will turn the call back over to the operator to open it up for your questions. Thank you.

Operator, Operator

Thank you. At this time, we will be conducting a question-and-answer session. One moment, please, while we poll for questions. Our first question is from Bryan Spillane with Bank of America.

Bryan Spillane, Analyst (Bank of America)

Hey. Good afternoon, guys.

Ethan Brown, Founder, President, and Chief Executive Officer

Hey, Bryan.

Bryan Spillane, Analyst (Bank of America)

I just had two related questions on how we should be thinking about expenditures going forward. I think there's still about $800 million of cash on the balance sheet related to the convert you did earlier this year, and so just trying to get a sense of how quickly that money is going to be deployed. Again, assuming some of that is infrastructure, some of that is going to be hiring people. Just trying to get a sense of the cadence of that as we begin to look over maybe the next year or two? And then maybe just a second related on expenses. Ethan, we might have talked about this on the last earnings call, but some of the commentary you made about what you are observing with consumers, especially in U.S. retail, seemed to suggest that maybe consumers are not getting the message for lack of a better way to describe it. So, do you see a need maybe to not just increase marketing spend, but to really maybe sharpen the message a bit so consumers understand the health proposition and the taste proposition of the products?

Ethan Brown, Founder, President, and Chief Executive Officer

Great, both good questions, and let me begin with a more general view on the first around pace of spend. I want to even take a step further back than I did in the comments to give my perspective on what this quarter was about. A lot of different disruptions occurred throughout the quarter. If you look at where we've been in the second and third quarter of this year—149 last quarter and 106 this quarter—if you take the average of those two, 127.5, that were our results this quarter; we'd be up 30% year-over-year. I'm not excited either way on these results other than to say that there's a lot of lumpiness in timing issues in them. The stance that you see is not a stand against the current activities; it's really about the future, and I think the future is around the corner for us, and that relates to all these deals that you've heard about over the last 12 months, whether it's the joint venture with PepsiCo and the PLANeT partnership that were public about putting a product into the market next year in 2022. With that, you look at the McPlant tests here in the U.S. and then the larger activities in the Netherlands and Austria and the U.K., for example, which from everything I've seen in the media have been successful. Then you look at the activities across our Yum! partnership, whether it's KFC in China or Pizza Hut here in the U.S. for the Pepperoni test or Pizza Hut with ongoing distribution in the U.K. of three different Beyond toppings. And then, of course, you heard Taco Bell earlier this year talk about plans with us. All of these things are accumulating within our system and requiring us, in a good way, to make investments to be able to serve these future opportunities. You go into whether it's Canada and A&W or the Panda Express here in the U.S., you look at continued roll out of new products in retail. Of course, internationally we're making significant investments and as I mentioned in my comments, I just got back from the EU. All of those are not about this year and these results during this period of what we would characterize as instability, but rather for 2022 and beyond. And so I think it's an opportunity for us to continue to lay the core foundation of our future growth. If you look in the years ahead and start to think about what type of revenue would come in from those opportunities, I think this level of spend in OpEx is entirely appropriate for those. I wouldn't expect continued acceleration of OpEx trending year-over-year. What we're doing is building to a particular loss point that we see in the pretty near future versus this setting the trend for percentage of revenue OpEx for many years forward.

Phil Hardin, Chief Financial Officer and Treasurer

The only thing I would add is we want to maintain flexibility and use a mix of co-manufacturers and our own manufacturing. As we look forward, we'll continue to look for what best allows us to serve our customers and realize the best economics and give us flexibility there. That'll be a factor in this as well. Potentially doing some of our own manufacturing versus co-manufacturers could have cost implications that are favorable. We're going to weigh all those things in addition to supporting our customers and looking at new products.

Ethan Brown, Founder, President, and Chief Executive Officer

Just to circle back on my comment, I wouldn't expect continued acceleration of OpEx as a percentage year-over-year. What we're doing is building to a particular loss point that we see in the near future versus setting a long-term trend for OpEx as a percent of revenue for many years.

Bryan Spillane, Analyst (Bank of America)

Okay. So fair to say the environment hasn't discouraged you; you're spending what you need to spend to get where you want to get from a revenue perspective over the next year or two?

Ethan Brown, Founder, President, and Chief Executive Officer

Yeah, absolutely. No, it has not discouraged at all. I think the work we're doing is foundational and the pipeline feels quite strong.

Bryan Spillane, Analyst (Bank of America)

Then Ethan, just on the marketing message, anything that needs to be changed there?

Ethan Brown, Founder, President, and Chief Executive Officer

I think it's a great question. We need to continue to sharpen our message. The reason we did the Stanford work and had great results from that clinical trial was to create more data around the health benefits of our products. We have a five-year program with Stanford to continue studies in that regard, and coming out stronger in 2022 with our health message is important. More and more consumers are focused on climate as well. You've heard me say that climate is something we market best indirectly, but to the extent we can empower consumers who are feeling helpless about what to do in their individual lives, we're going to talk about that as well in 2022. So, you'll see our most aggressive marketing to date in terms of focusing spend on those broader attendant benefits of our products.

Bryan Spillane, Analyst (Bank of America)

All right. Thank you.

Operator, Operator

Our next question is from Alexia Howard with Bernstein.

Alexia Howard, Analyst (Bernstein)

Good evening, everyone. Can you hear me okay? Two questions. The first one is around key prices. We've obviously seen those surge on the yellow pea price by over 100% over the last year, and in recent months it's really jumped up. How much do you already have contracted out in contracts that are already captured for fiscal '22 given your demand expectations and what could that do to margin? That's the first question. The second one is more around the demand side here in North America, particularly in the retail channel. You showed in the presentation that the repeat rates were improving sequentially; do you have numbers around that and household penetration? You also mentioned retail penetration was up sequentially and yet the retail sales were down sequentially quite a bit even as velocity trends and total distribution points seem to be up year-over-year. I'm just trying to wrap all that up together and try and figure out what's going on with the demand and whether it has stalled somehow in the U.S. or whether it's really more supplier-related and all the other challenges you've been facing. Thank you.

Ethan Brown, Founder, President, and Chief Executive Officer

Very good question, thank you. I'll take the second one first, and then turn to Phil for the pea protein question. On the demand side, it's interesting. You're seeing household penetration increase; we're up at 6.4%, about 20 basis points sequentially and 90 basis points year-over-year. Repeat rates are up; I mentioned repeat rates increased to 52.6%, which is up about 60 basis points sequentially. Our buyer rate decreased 4% sequentially, likely impacted by higher promotional activity in Q3, while purchase frequency was modestly lower at negative 0.3%. We also saw brand awareness improve; we took the number 1 spot in total brand awareness, displacing MorningStar for the first time, with overall brand awareness at 61% compared to an average of less than 30% for other leading plant-based brands. So, on those metrics we're doing what we set out to do, which is lead this movement. We remain the number 1 product in retail for top SKUs, and number 1 in food service in dollar share per NPD. All these things would suggest this quarter wouldn't happen, which makes it unusual. In the absence of complete information, people try to come up with various theories. I'm resisting doing that other than to say there's unusual consumer behavior tied to the factors I outlined: Delta variant impacts, fewer store trips, less openness to trial, reduced sampling programs, and changes in the types of food people are preparing. I don't see any indication this quarter reflects a fundamental change in consumer sentiment toward our products. If anything, the partnerships and activities we have in the pipeline suggest the opposite and that things are strengthening into 2022. On the supply side, we had considerable issues—ongoing labor tightness during the year, severe weather in Pennsylvania that took out production in our facility for up to two weeks and ruined packaging, leading to a long tail. All these factors came into play. The reason we gave the fourth quarter the guidance range we did was we didn't want to go into another fire drill. The most immediate predictor of the future is what just happened, and we want to guard against running through another set of challenges. I feel really good about 2022. I feel cautiously optimistic about the balance of the year relative to what we communicated, and I think it's good to have this quarter behind us.

Phil Hardin, Chief Financial Officer and Treasurer

I'll take the pea protein question. We have fixed price agreements in place for most of our pea protein supply, so we don't expect to see impacts from pea protein isolate (PPI) in the near-term.

Alexia Howard, Analyst (Bernstein)

Great. Thank you very much.

Operator, Operator

Our next question is from Adam Samuelson with Goldman Sachs.

Adam Samuelson, Analyst (Goldman Sachs)

Yes. Thank you. Good evening, everyone.

Ethan Brown, Founder, President, and Chief Executive Officer

Hey, Adam. How're you doing?

Adam Samuelson, Analyst (Goldman Sachs)

Hi. Ethan, I was hoping to think a bit longer-term, because obviously a lot of noise in the short-term. As we think about a potential pathway to return to growth, clearly international expansion and some of your bigger QSR food service launches could be coming over the next 12 to 18 months. As we think about revenue mix, pre-COVID 2019 your business was basically 50-50 retail and food service and you were more U.S.-centric then. Now you've got manufacturing in Europe, you have manufacturing in China, some local production in Canada. How should we think about 2023-2024, what you would think is a good revenue mix between retail and food service and domestic versus international?

Ethan Brown, Founder, President, and Chief Executive Officer

Good question. Currently in the U.S. we're about 78% retail and 22% food service, which is a big departure from pre-pandemic. I'm investing heavily in food service, particularly in strategic QSR accounts, so I wouldn't expect 22% to hold. I do think you'll see an increase in food service within Beyond and a significant increase as we get into more of the strategic accounts we've been working toward over the years. Even in this past quarter, our largest QSR that offers a drive-through and in which we have a permanent item showed meaningful uptick year-over-year. I think the pattern we're seeing is consumers gravitating to fast food and drive-throughs during the pandemic, and we haven't captured as much of that because our distribution in food service is still skewed toward independents and venues. We're now about 81% in independent operators and venues and about 19% in larger strategic accounts. As we get into more of those larger strategic accounts, you'll see food service grow and it could approximate a 60-40 or 50-50 split depending on the quarter, though I don't know that we'll stay at exactly 50-50. On U.S. versus international, we're about 63% U.S. and 37% international today. I'm really pleased with international growth—up 168% in retail and strong food service growth as well. In Europe I saw a lot of encouraging signs and product performance. We're making significant investments in EU and China and I expect international to be a very meaningful part of our business going forward, particularly as QSR launches and tests pick up globally.

Adam Samuelson, Analyst (Goldman Sachs)

Also, since you're looking at international growth, we mentioned an accelerated order which would be an order that would be unusual relative to what we typically see. We estimate that at approximately $3.6 million in international this quarter.

Phil Hardin, Chief Financial Officer and Treasurer

That's helpful. That's a lot of color. Thanks.

Operator, Operator

Our next question is from Rupesh Parikh with Oppenheimer.

Rupesh Parikh, Analyst (Oppenheimer)

Good evening. Thanks for taking my questions. I just wanted to touch on the gross margin line. First, a housekeeping on Q3. Is there any way to quantify the inventory write-off in your adjusted gross margins for Q3? And then I've a follow-up.

Phil Hardin, Chief Financial Officer and Treasurer

So, in Q3 2021, the unusual item we mentioned was water damage in one of our warehouses that was predominantly packaging, and that was about $1.9 million.

Rupesh Parikh, Analyst (Oppenheimer)

And that is included in your GAAP gross margin number. For Q4, is there any granularity you can give us in terms of how to think about gross margins? Is what we saw in Q3 a good reflection of Q4?

Phil Hardin, Chief Financial Officer and Treasurer

I think there are some things that could be a little unusual in Q4. First, we mentioned trade discounts; we don't anticipate trade discounts being as dramatic as this quarter. The inventory write-off was unusual and already occurred. We did capitalize some costs this quarter when we were running less than optimum as we struggled through some of these issues. So, there are costs on the balance sheet that will play out, which would offset some of the improvements. Overall, we would expect improvements from both fewer trade discounts and no repeat of the inventory write-off, barring other issues.

Rupesh Parikh, Analyst (Oppenheimer)

Okay, great. And then just my last question. Ethan, we've heard from other players about growth challenges within the plant-based protein category. Curious your take on what's really happening out there. Is there incremental pressure you're seeing at the category level or is this more company-specific?

Ethan Brown, Founder, President, and Chief Executive Officer

Thank you. I think the thing we're trying to make sense of—and the reason we summarized and then split the two quarters—is that we had a record quarter in Q2 and then a much more challenging Q3. There's a lot of unusual behavior: labor, stimulus effects, supply chain issues, and a slower-than-expected introduction of innovation into the category due to distractions. We've invested heavily in large QSR opportunities forthcoming. I don't think there's a sector-wide structural issue. We continue to see strong year-over-year growth in annual revenue. If the pandemic, labor issues, and supply chain challenges had not interfered, this quarter would have been quite different. So in my view this is more about timing and exogenous shocks than a problem with the category itself.

Rupesh Parikh, Analyst (Oppenheimer)

Okay. Great. Thank you.

Operator, Operator

Our next question is from Peter Saleh with BTIG.

Peter Saleh, Analyst (BTIG)

Great. Thanks for taking my question. I want to ask about the McPlant and the tests you guys are doing as it's now available in the U.K. and a couple of other markets. Is there anything you can share on initial performance that you're seeing there? And secondly, as it is being marketed there, can you give us a sense on how much of the marketing expense McDonald's is picking up and how much you guys are contributing?

Ethan Brown, Founder, President, and Chief Executive Officer

I can't share specifics and I want McDonald's to lead on that for good reason. All I can give you is the media reports, which have been very positive, and my own experience as a consumer, which was very positive. In the U.S., the initial operations tests didn't include significant advertising; they were more about back-of-house operations. So, there's not a lot of public marketing spend to comment on in those operational tests. Going forward in 2022, we expect a larger marketing year to support both McDonald's and other QSRs as we make the case to consumers that they can eat what they love at the restaurants they love and enjoy products from Beyond Meat with attendant benefits.

Peter Saleh, Analyst (BTIG)

Is there any reason to believe McPlant would have operational challenges in terms of cook times or ability to get it made quickly compared to a traditional beef patty?

Ethan Brown, Founder, President, and Chief Executive Officer

I haven't heard of operational challenges in the back-of-house. From the stores I've visited, they seem to be doing well with it. It's a great product; if you want reassurance about where we're headed, try a McPlant. It's delicious and we're excited about it.

Operator, Operator

Our next question is from Benjamin Theurer with Barclays.

Benjamin Theurer, Analyst (Barclays)

Thank you so much and good evening. Along the lines on the roll out, Ethan, can you share a little of the cadence, how you expect this to further roll out? And is the roll out happening in the UK contemplated in your guidance for Q4? It started at a low level but it's adding up. Is that part of your guidance?

Ethan Brown, Founder, President, and Chief Executive Officer

I appreciate the questions on McDonald's. All I can say is that the media coverage and anecdotal information from stores have been positive. McDonald's controls the cadence of the expansion and the cases where they'll disclose more. The investments you're seeing this year across our food service platform have been significant because of what we expect in 2022. The new addition I mentioned to our management team is indicative of what we're preparing for next year.

Benjamin Theurer, Analyst (Barclays)

It feels like a story of two worlds with the U.S. being much more impacted and international performing well. What is in your control to get the U.S. back on track? What are you focusing on to reverse the declining growth rates in the U.S.?

Ethan Brown, Founder, President, and Chief Executive Officer

A lot of it is time. We were excited about summer and then the Delta variant returned and other issues arose such as facility outages and labor shortages. First, let's get distance from those operational challenges. Second, our core items are strong; we're continuing to cost-down those platforms and look at packaging and marketing for 2022. We'll get innovation out into the market, such as the new chicken platform, and continue to invest heavily in marketing to educate consumers about where to find our products—both in retail and in major food service outlets. The combination of the fog clearing and a strong marketing push and continued innovation gives me enormous confidence about where we're headed. The reason for more tepid quarterly guidance is simply we didn't want to go through these operational upheavals again, so we erred on the side of caution for the near term.

Benjamin Theurer, Analyst (Barclays)

You referenced Beyond 3.0 and rolling that out into the summer and mentioned some weakness. Any direct customer feedback on perception of Beyond 3.0 and what might need to change on innovation?

Ethan Brown, Founder, President, and Chief Executive Officer

There's a lot of noise in retail behavior this quarter, so it's hard to draw conclusions from it. However, we've been receiving recognition and awards that indicate progress in product improvement. We continue to focus on FGAT—flavor, grillability, appearance, and texture—and are making improvements across all four areas. Expect even better burgers in 2022. There's no single element we're focused on more than the others.

Operator, Operator

Our next question is from Jon Andersen with William Blair.

Jon Andersen, Analyst (William Blair)

Thank you. Good afternoon. With the food service difficulties largely COVID-induced and the push-out of some of the rollouts in food service, is it possible that that is having a second derivative effect on retail demand for your products? I've always thought of food service as a great trial vehicle in addition to being a source of sales itself. Could limited food service trials be impacting retail demand?

Ethan Brown, Founder, President, and Chief Executive Officer

Absolutely, in several ways. One is timing of our marketing and shopper plans. We brought on significant talent in marketing and shopper marketing this year, and this year would not have been the year to launch our national marketing campaign because we want to coordinate it with the rollouts in large QSRs. Waiting for that moment is a prudent use of resources. In 2022, when these partnerships and QSR rollouts materialize, we'll make a sizable marketing investment to ensure consumers know they can find Beyond Meat in restaurants, convenience stores, and grocery. There's also consumer behavior shifts—many are visiting fewer stores and returning to familiar fast-food choices and drive-throughs—and because we're not present in some of those outlets, that has hurt trial. Sampling in stores has also been limited. All of this creates a challenging operating environment, and the longer we can get past the Q3 disruptions, the better.

Jon Andersen, Analyst (William Blair)

You talked about price parity within 2.5 years in at least one category. What needs to happen for you to reach that, and are you committed to that within the time frame?

Ethan Brown, Founder, President, and Chief Executive Officer

We're committed to the cost-down program to reach price parity in one category within 2.5 years. The program includes raw material procurement savings, waste reduction, throughput improvements, network optimization, potential insourcing opportunities, warehousing and transport efficiencies, local production in global markets, and packaging optimization. Phil is leading this with an outside consulting group and we're making good progress. We believe beef is likely the first category to reach price parity. Commodity pricing dynamics also help, as some traditional protein prices have increased. With the initiatives we have underway and some of the products launching next year, you'll see movement toward price parity.

Jon Andersen, Analyst (William Blair)

Great. Thank you.

Operator, Operator

Our next question is from Ken Goldman with JPMorgan.

Ken Goldman, Analyst (JPMorgan)

Hi, thank you. I know this is a tough question to answer, but do you have any best guess as to what your annual sales number might have been excluding the supply issues? Just trying to get a sense of what it would have been if shipments had matched demand.

Phil Hardin, Chief Financial Officer and Treasurer

I can give you the color we have. When we sent out the release on October 22, there were really three buckets: 1) demand, which was the biggest driver when comparing results versus forecast; 2) operational issues like weather, which are significant but smaller than the demand bucket; and 3) knock-on effects into this quarter that we're largely working through now. Things are getting back on track, but they were definitely disruptive.

Ken Goldman, Analyst (JPMorgan)

Understood. I'll let it go there. Thanks very much.

Operator, Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Ethan Brown for closing remarks.

Ethan Brown, Founder, President, and Chief Executive Officer

Thank you. As I said, we really are looking to 2022 with a lot of optimism and the investments we're making today continue to be focused on that future and not on the more difficult operating period that we're all experiencing. I'm every bit as confident as I have been, and really look forward to getting back on the line with you guys in a few months and sharing what I think will be good results and good commentary on where we're headed. Appreciate it. Everyone stay safe and I'll be in touch soon.

Operator, Operator

Thank you. This concludes today's conference. Beyond Meat thanks you for your participation. You may disconnect your lines at this time.