Earnings Call Transcript
Beyond Meat, Inc. (BYND)
Earnings Call Transcript - BYND Q2 2022
Operator, Operator
Good day, and welcome to the Beyond Meat Conference Call. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Lubi Kutua. Please go ahead.
Lubi Kutua, Moderator
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 second quarter earnings press release filed today after market close. This document is available in the Investor Relations section of Beyond Meat's website at www.beyondmeat.com. Before we begin, please note that all the information presented on today's call is un-audited. 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 events unfold. Please refer to today's press release, the company's annual report on Form 10-K for the year ended December 31st, 2021, the company's quarterly report on Form 10-Q for the quarter ended July 2nd, 2022 to be filed with the SEC, and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please also note that on today's call, management may make reference to adjusted EBITDA, which is a non-GAAP financial measure. While 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. And with that, I would now like to turn the call over to Ethan Brown.
Ethan Brown, CEO
Thank you, Lubi. And good afternoon, everyone. We have a clear view of our vast long-term opportunity and its ever-increasing global importance and a strong confidence in the leadership position of our brand. In fact, in Q2 2022, we recorded our second largest quarter ever of net revenues, even as consumers traded down among proteins in the context of very significant inflationary pressures. We simultaneously, however, recognize that progress for us and for the sector is taking longer than expected. We now expect, reflecting this inflationary pressure on consumer spending, and specifically how this impacts higher-cost proteins and foods, a delay in post-COVID resumption of growth. Accordingly, we are taking a number of steps to reduce cash consumption to position the company for sustainable growth while we apply our near-term focus on the following key drivers. One, executing against a planned series of high-value market initiatives for strategic and foodservice partners; and two, strengthening our retail business through, among other measures, bolstering support for our core lines while bringing to market among other new products that will expand our portfolio, one of our best innovations ever, a delicious and convincing strip of steak. Cost-related actions underway include: one, significant reductions in general operating expenses. For this quarter, we reduced OpEx by approximately $14 million or 15% on a sequential basis; further intensifying reduction in production costs to drive continued sequential progress on manufacturing costs so as to recover healthy margins and reach pricing goals; three, realigning organizational structures across North America, the EU and China to increase regional focus, efficiency and speed; four, continued focus on managing down inventory levels; and five, an action that I will now turn to, yesterday, we instituted a reduction in force of approximately 40 positions. Given the high value of our team members and again, the tremendous opportunities that lay ahead, the reduction in force is a difficult measure. Beyond Meat is a team of tremendously dedicated, passionate and talented individuals who have come together in service to our mission, our customers, our consumers and our shareholders. I am proud of what our team has built and are building and the resilience that our company has shown over the past two years as well as now as we face, like others, challenging macroeconomic conditions. We are committed to treating those employees affected by this reduction in force with the utmost respect in providing assistance to help them in their transitions. The second quarter of 2022 saw a sequential contraction in US household penetration for plant-based meat for the first time in over four years. According to Numerator data even as a number of brands and SKUs expanded by roughly 60% and 70%, respectively, over the past two years. As consumers are expressly seeking value, we believe that high inflation in the sector's premium pricing relative to animal protein is largely, if not fully determining. Despite intense competitive pricing in the category by existing and new entrants on the one hand, and rising animal protein prices on the other, the category remains a premium one relative to animal meats. As such, it is subject to the same trading down behaviors that one sees during inflationary periods. Numerator data for the 12 weeks ended June 26, 2022, shows that the primary drivers of volume leakage for our own US business were indeed shifts to animal protein as well as to private label. This dynamic shrinking consumer buying power in grocery stores that favors lower-cost proteins and products exerted greater-than-anticipated pressure on category growth and in turn, our own growth. Turning to gross margin. Although we made sequential progress on manufacturing conversion costs, this was obscured by the sale of certain inventory items to the liquidation channel as well as increased inventory reserves for the same, the combination of which accounted for nearly 10 points of gross margin, pushing our gross margin down to negative 4.2%. Looking forward, though we do expect growth for the balance of the year, we need to continue to temper expectations given the clear precedent for consumers to trade down among proteins in grocery stores when buying power shrinks in inflationary periods. And earlier, we've indeed begun to see this trading down materialize and expect to continue for the time being. As such, we are issuing revised lower guidance for the full year 2022. Before closing, I want to reiterate my enthusiasm for our brand and our long-term growth prospects. When research firm Brand Keys surveyed American consumers regarding the world's most innovative companies, Apple, Tesla and Amazon took the number one spots, respectively, across Technology, Transportation, and Consumer Goods. And Beyond Meat took the number one spot in Food according to a report released last month. I share this to note that despite the current economic environment, the long-term opportunity ahead of us remains, as I began, vast and substantial. We are grateful for the commitment of our partners, including some of the world's most valuable QSR companies, namely McDonald's and Yum! Brands and one of the globe's largest CPG companies PepsiCo with whom we share the Planet partnership joint venture. We note that the McPlant Burger co-developed with Beyond Meat is now a core menu item at McDonald's in the U.K. And then in July, McDonald's initiated a 270 store test of the McPlant Burger in Victoria, Australia. In Austria, following the nationwide limited time offer of a second McPlant build and McPlant Steakhouse, McDonald's just started nationwide limited time offer of a third McPlant build and McPlant test which is inspired by McDonald's popular big tasty burger. Also during the quarter, the limited time test in the McPlant burger in the San Francisco Bay and Dallas-Fort Worth areas concluded as planned. Turning to Yum!. We have launched or tested five Beyond Innovations thus far. This year is Beyond Fried Chicken LTO at KFC nationwide and Beyond Italian Sausage Crumbles at Pizza Hut in Canada which is now a permanent menu placement. Last year is Beyond Pepperoni test in the U.S. and the permanent addition of Beyond Beef Crumbles and Beyond Pork Crumbles at Pizza Hut Delivery in the U.K. These ongoing tests are a natural progression of our partnership with our strategic QSR partners, take time as well as iteration across product attributes, pricing and other considerations, and we are encouraged by the multiple introductions that we're seeing with both McDonald's and Yum! globally as we innovate together. Finally, we are thankful for consumers who continue to make Beyond Meat the number one brand in our retail category of refrigerated plant-based meats according to SPINS data. And we are planning aggressive steps across the balance of the year to further engage in consumer and grocery. I said many times that I believe the rise of plant-based meats to a prominent role in the global diet is inevitable. The benefits of such a transition driven by the unique effectiveness of plant-based meats in addressing climate and conserving natural resources are powerful. As Boston Consulting Group recently reported, the climate return for plant-based meats, measured in terms of carbon equivalent emissions avoided per dollar invested is unrivaled. Significantly investing climate returns per dollar invested in green technologies across a host of sectors, including transportation and electricity. In closing, it is our foundational belief that we can offer in the mainstream transition to plant-based meats by driving ever more intently toward products that are indistinguishable and taste great, that are clearly understood by the consumer to deliver health benefits relative to, and are at price parity or below that of their animal protein equivalents. We are focused intently on increasing efficiency operations and production while driving execution of our highest value growth initiatives across North America, the EU and China, and we confidently expect to emerge from today's economic conditions leaner, stronger and very well poised to deliver on the promise of our brand. With that, I will turn it over to Phil to walk us through our second quarter financial results in greater detail and our outlook for the full year 2022.
Phil Hardin, CFO
Thanks, Ethan. In the second quarter of 2022, we reported net revenues of $147 million, which is a 1.6% decrease from the same quarter in 2021, our highest revenue quarter in Beyond Meat's history. This decline was primarily due to a 14.2% reduction in net revenue per pound, despite a 14.6% increase in total pounds sold. For Q2 2022, our net revenue per pound was $4.88, down from $5.69 in Q2 2021. The drop was mainly due to lower pricing per pound, including the effects of sales to liquidation channels and various pricing adjustments, such as the list price cuts in the EU implemented in Q1 2022, fluctuations in foreign exchange rates, and higher trade discounts. Regarding gross profit, we experienced a loss of $6.2 million, or 4.2% of net revenues, compared to a profit of $47.4 million, or 31.7% of net revenues, in Q2 2021. The negative gross profit was significantly impacted by sales of specific inventory through the liquidation channel and increased inventory reserves, which together represented a major setback, excluding the effects from Beyond Meat Jerky, amounting to about a 10 percentage point hit on gross margin. During our inventory assessment, we recognized that we had not anticipated enough demand from full-price customers in the US retail channel, leading us to sell some stock at substantial discounts in the liquidation channel. This inventory had an associated cost of around $10.5 million, generating only about $1.9 million in revenue and resulting in an $8.7 million loss. We also raised our inventory reserves, which further diminished gross margin. Beyond Meat Jerky constituted an additional gross margin challenge of roughly 670 basis points, representing a notable improvement from the estimated 940 basis point impact in Q1 2022, stemming from higher revenue per pound and a one-time true-up of $1.4 million mainly for pricing on Q1 volumes, alongside a decrease in Jerky's share of our product mix. In Q2 2022, the cost of goods sold reached $5.09 per pound, which was $1.20 higher than the prior year. We believe Jerky was responsible for about 57% of this increase, while the remaining increase was due to escalating manufacturing costs, including depreciation, material expenses, higher transportation and warehouse costs, and increased inventory reserves compared to the previous year. Specifically, manufacturing costs rose roughly $0.48 per pound year-over-year, with Jerky contributing approximately $0.26 per pound and the rest primarily attributed to costly inventory created in Q1 and sold in Q2, as well as higher per-unit depreciation. In our Q1 earnings call, we mentioned that manufacturing costs were on a positive trajectory, and this was reflected in a sequential reduction in those costs, thanks to continued enhancements at our manufacturing facility in Devault, Pennsylvania. Costs associated with cereal increased approximately $0.44 per pound year-over-year, with about $0.29 of that increase attributable to Jerky, which is not yet reflected in the Q2 2022 figures. We also indicated in our last earnings call that we were working to qualify products made from lower-cost pea protein isolate (PPI) from various suppliers. We've successfully achieved the capability to manufacture many products using 100% low-cost PPI, providing us flexibility in introducing additional low-cost PPI into our formulations while also managing our existing work-in-progress and inventory commitments. Furthermore, we continue to explore cost reductions across our ingredients and packaging, recently securing lower prices on certain packaging components and finalizing contracts for various ingredients. For logistics, which includes internal transportation and warehousing, costs rose $0.15 per pound in Q2 2022 compared to Q2 2021, excluding outbound freight costs associated with shipping finished goods, which is counted under SG&A as a selling expense. The increase in logistics costs is mainly due to heightened transportation and warehousing costs, although these costs have shown improvements sequentially due to better execution strategies and a recent re-bidding of our transportation contracts. Our team is dedicated to reducing our inventory, and as we lower these levels, we anticipate additional declines in warehousing costs. Q2 saw significant headwinds from inventory challenges. Sales through liquidation channels fully impacted our revenue per pound without affecting cost per pound. Additionally, we faced increased inventory reserves, adding around $0.14 per pound in costs compared to Q2 2021. We are enhancing our processes for quicker responses to changes in demand and are committed to lowering our overall inventory levels to mitigate risks. Moving to operating expenses, they were $83.5 million in Q2 2022, an increase of $17.6 million from $66 million in Q2 2021. This rise was chiefly due to higher personnel costs and non-people expenses, including consulting and marketing expenses related to launching new products. Operating expenses as a percentage of revenue decreased from 89.4% in Q1 2022 to 56.8% in Q2 2022. The sequential reduction in operating expenses, totaling $14.3 million less than Q1 2022, was primarily driven by cuts in marketing and commercialization spending. For Q2, non-people-related expenses represented around 61% and 55% in Q1 and Q2 respectively. We started managing these down in Q2 and plan to enforce further reductions throughout the year. Additionally, we've initiated bracket pricing to encourage customers to order larger quantities for more efficient truck utilization, aiming to reduce outbound freight expenses, a key component of our operating expenses. We are also analyzing our personnel costs closely. Despite hiring more staff in Europe and China this year, we ended Q2 with slightly fewer non-production employees worldwide than at the start of the year. We will continue to manage the workforce through natural attrition and performance evaluations. To further curb spending, we announced a workforce reduction yesterday, impacting around 40 employees or approximately 4%. This should lead to an annual reduction in operating expenses of about $8 million, although we anticipate incurring one-time separation costs of about $1 million in Q3 2022. Regarding our balance sheet and cash flow, our cash and cash equivalents stood at $454.7 million, with total debt at approximately $1.1 billion as of July 2, 2022. Our inventory decreased to $254.7 million, down $29.1 million from $283.8 million at the end of Q1 2022. We also saw an increase of $12.8 million from $241.9 million at the end of Q4 2021, and we expect this downward trend in inventory to continue. For cash flow in Q2 2022, we used $70.5 million in operating activities, which is $19.3 million less than the $89.8 million used in the year-ago period. In our Q2 2022 operating cash flows, we contributed around $6.7 million to develop our new innovation and headquarters facility in the L.A. area, recorded in prepaid rent, compared to about $26.6 million in Q2 2021. Capital expenditures for Q2 2022 reached $20.4 million, down from $28.1 million a year earlier. Looking ahead, for the fiscal year 2022, we anticipate net revenues between $470 million and $520 million, marking a year-over-year growth of 1% to 12%. Previously, we guided for $560 million to $620 million. The majority of this adjustment came from three main areas: first, a decreased outlook for Europe and the Middle East, where plant-based meat growth has shifted from about 7% in 2021 to a contraction of approximately 14% year-over-year in the first half of 2022 according to Nielsen data. While gaining market share, the ongoing decline in this segment is more substantial than we expected. We successfully launched extended shelf life for our burgers in March but have faced delays in releasing similar versions of other products, which we are still targeting for the near term. Second, we revised our expectations for US retail, where the majority of our business focuses on refrigerated products instead of frozen. According to SPINS data, the contraction rate for refrigerated plant-based meat has worsened from negative 3.6% in the 12 weeks ending March 20, 2022, to negative 12.5% in the following 12 weeks into July 10. This overall pressure within our key subcategory has overshadowed any advantages from recent distribution expansions. Lastly, we lowered our forecast for Beyond Meat jerky. It's essential to note that we recognize revenue and COGS in our financials as we sell into the PLANeT Partnership, and we also account for our share of the losses from this partnership in our equity and losses line. Although Beyond Meat jerky has significantly expanded the plant-based meat snacks sector, our initial revenue expectations were high, and product velocities are now falling below our forecasts. Given the prolonged supply chain, this decrease will disproportionately affect new production and revenue for Beyond Meat in the latter half of 2022. In terms of anticipated gross margins for Q3 2022, while we do not foresee the same liquidation and inventory challenges as in Q2, the revised revenue forecast adds pressure on gross margin management, potentially affecting capacity utilization, which could lead to exit fees for certain supply chain contracts and reduce fixed cost leverage. We expect gross margins to be in the low to mid-single digits for Q3 2022, improving in Q4 2022 but still remaining below historical levels. For the fiscal year 2022, we currently project capital expenditures around $80 million, down from $136 million in 2021. We will continue exploring ways to further minimize this amount by postponing additional spending. In the latter half of 2022, we anticipate cash contributions to our innovation center and headquarters build-out of $12 million, with an additional $15 million now deferred to 2023 for completion. I will now hand things back to the operator to open the floor for questions. Thank you.
Operator, Operator
We will now begin the question-and-answer session. Our first question comes from Alexia Howard from Bernstein.
Alexia Howard, Analyst
Good evening, everyone.
Ethan Brown, CEO
Hi, Alexia. How are you?
Alexia Howard, Analyst
Good, good. Thank you for the comprehensive So I guess we're all sort of looking at the guide down on the sales side for the second half, and that does imply a slowdown, I think, from the rate that we saw quarter. What do you think is going to take to refrigerate the category particularly in the U.S. and in Europe? I mean is this something that it's obviously going to be a work in progress for some time, but what do you think the key factors are there? And how long is it going to take to actually see some sort of turnaround.
Ethan Brown, CEO
Sure. Alexia, thank you again for the question. So I think to start, a key data point is the following: If you look at the price of our ground beef today on retail average 12 weeks using spend data, we're selling at $8.35 a pound. If you look at the USDA ground beef data for the month of June, the price per pound was $4.90, so you have $8.35 per pound price versus a $4.90 per pound price. I can talk a lot about all the different influences and things that are going on in the economy. But that is a very difficult proposition when consumers are experiencing very high levels of inflation, and their buying our product in grocery is declining. So I think that there are a number of confounding factors. We went from an endemic into record inflation, highest in 40 years. And for a sector that's still gathering its feet and is still in sort of the first set of downs, that's a very difficult set of conditions to navigate. Now, the good news is our strategy has always been about three things. It's been, first and foremost, about getting the taste right so that we are indistinguishable from animal protein. The second has been about making sure that consumers understand that our products have health benefits relative to animal protein. And the third, and most relevant here, is price. So we've always known, right, that we need to drive our cost structure down and offer the consumer a price point that is the same as animal protein. So the pullback you're seeing against our sector is very consistent with that belief. And so in a kind of unfortunate way, it's reinforcing our strategy, and it's propelling us and challenging us to try to wring cost out of our system as quickly as we can. And while there's a lot of things that are obscuring our cost-down initiatives, we are seeing progress, particularly on a sequential basis. On manufacturing costs and logistics costs and things of that nature. Now what we need to be able to bring that into the market is a resumption of volume growth so that we can spread out those costs among more production. So what's needed to reinvigorate the category? One is to get out of this economic situation where consumers are trading down on proteins. I think it's very well understood that, for example, SPAM rises during periods of recession. SPAM is having a record year, I think, the seventh year in a row where they continue to grow, and you see that being accentuated in particularly difficult economic times. You see consumers trading down to lower cuts of meat, so we have to get through this period to see a resumption of growth. And I think it's pretty simple and we're focusing on that.
Operator, Operator
Our next question comes from Peter Galbo, Bank of America.
Peter Galbo, Analyst
Hi, guys, good afternoon. Thank you for taking the questions. Phil, thank you for the comments on the gross margin cadence. I think that's helpful just in terms of setting expectations for the rest of the year. I was wondering if you'd be able to kind of do the same with the revenue phasing in the back half, if there's any sort of split you're imagining whether that's at the midpoint of the range? Or just anything else to help us there. Thanks.
Ethan Brown, CEO
At this point, we're just providing full year revenue guidance. And so you obviously know what the first two quarters are. So we're not providing additional detail.
Peter Galbo, Analyst
Okay. Fair enough. I had to try. And then on the cash burn guys, I guess you did see pretty significant improvement at least quarter-on-quarter and even year-over-year. Just as you continue to kind of liquidate some of the inventory in the back half of the year, should we see that number continue to sequentially improve? I know you're talking about some of your OpEx spend being down further sequentially. Just anything to help us on the cash burn going forward? Thanks very much.
Phil Hardin, CFO
We are very focused on controlling our cash expenditure, particularly regarding inventory. Our goal is to sell existing inventory and utilize current ingredients without necessarily liquidating everything. The teams are working diligently to optimize our supply chain and manage our inventory effectively. We expect to reduce our inventory balance throughout the rest of the year. Additionally, we are also working to decrease our operating expenses. We recently made some layoffs, but we believe there are further opportunities to cut non-personnel operating expenses. This remains a key area of focus for us as we aim to lower our cash consumption rate as the year progresses.
Peter Galbo, Analyst
Okay, thanks very much.
Operator, Operator
Our next question comes from Adam Samuelson of Goldman Sachs.
Adam Samuelson, Analyst
Yes, thank you. Good afternoon, everyone. So I guess Ethan, I wanted to come back to the point you made about the price competitiveness of your product versus ground beef and you gave that roughly $3.5 or so kind of price gap on the shelf at retail. And I guess I'm kind of thinking about that in the context of your gross margin. So if you just help us think about the pathway, not only for you to lower the price gap versus ground beef to improve kind of the consumer appeal in tough consumer times or not, but to do so profitably and help us think about some of the levers on the COGS side that you have and you've got line of sight to that can give you that magnitude of not only get the gross margins up from where they are now but the unit costs down even more to enable the price reductions.
Ethan Brown, CEO
Sure. So I'll answer that, and then I also want to give maybe a bit of a more complete answer to Alexia's question. So I think you can see the sequential decline in manufacturing costs. You see a similar sequential decline in transportation and warehousing. And particularly on the transportation and warehousing, I think it is being driven by better execution. We just did a recent RFP on our trucking lanes, and we're taking other measures to really start to bring down our overall manufacturing cost structure. And in part, we're also looking now at a design-to-value strategy where we have such expertise in our understanding of ingredients and processes throughout the world of plant-based meat and we're looking at, how do we strip cost out from a design perspective out of our products and potentially offer a portfolio strategy into the market so that we can get more broadly and more quickly to a profitable lower price point. So the idea is not to continue to orient the business towards just lower pricing without improvement on margin or cost structure, but rather is to allow the cost structure improvements that we're seeing to help drive that lower pricing. We do need the volume to pick back up, and we have some strategies there that we're going to try to deploy even during this difficult economic time. But it does get down to just continued blocking and tackling quarter-after-quarter, bringing these costs down, and we're starting to see some good results. Again, they're a little obscured by things like depreciation and just the lower volume we have. But it is an effort to make sure that we're doing that intent of driving the cost structure down as we bring our pricing down. But to get back to the original question about reinvigorating - the thesis remains the same. The need for the sector remains the same and in fact, is increasing in importance year after year. We've made a very significant amount of investment over the last three years in commercializing and scaling products for large QSRs and for our partnership with Pepsi the Planet partnership as well as new retail products. Our shift now is really toward a model where we can introduce and support those at a sustainable growth level. And so we're focusing on harvesting the investments we've made over the last several years. So what that doesn't mean is that we're pulling back from launches or tests with QSRs. You'll see a lot of activity from us in the next 12 months with our QSRs. You'll see it not only here in the US but globally. And that's really bringing to market the work that we've already done. So we're looking forward to that. You'll also see us really focus on strengthening our retail presence. I believe so strongly in the benefits of these relationships with QSRs to be able to create an environment where the mainstream consumer can experience our brand, that we've invested a lot over the last several years in that. I think one of the side effects of that is that our retail presence has probably been less powerful than it could be. And so we're making some investments in the retail space to better build out a brand block. If you think about what happened to the category over the last three years in retail. So we started with the fresh category really pioneering that. We had beef products, the burger, sausage, etc. And then a number of brands came in and it got kind of disorganized and disjointed as a category, particularly in the fresh space. And so what we need to do is allow the process to occur, which does in a lot of evolving industries. There will be some brands that fall away. There will be consolidation and things of that nature. But let's get back to a really clearly identifiable brand block in retail. Let's make sure that happens in refrigerated. Let's make sure that happens in frozen. So the Beyond brand offers consumers a lot of choice across both categories. So the new products that we're bringing into the market, particularly later this fall, we'll start to do that, and the product we're beginning next year in 2023, will start to do that. So reinvesting in the retail space to strengthen our retail lines is something that we're really going to focus on as part of the effort to bring growth levels back to where they were. But again, I don't want to dismiss the larger macroeconomic environment. We've got to get out of this particular phase with the consumer where there's so much pressure on their wallets and get to a more normal economy.
Adam Samuelson, Analyst
And if I just ask a quick follow-up. If I looked at the COGS spend, whether you want to do this year or the last 12 months, how much would you characterize as fixed that would have more obvious leverage if you got the volume throughput higher?
Ethan Brown, CEO
Well, I think even among the variable cost, one of the areas the teams have done great work on in the cost downstream is running the machinery faster. But you got to have the orders to take full advantage of that even from a variable cost perspective. So obviously, you can use the asset more fully if you're running harder, but it's also easier to produce with your variable costs if you're running full speed. And so obviously, there are obvious things like depreciation that are fixed, but volume drives full trucks; it drives better utilization in the co-manufacturer network. And so it really is a significant benefit to both the fixed and the variable cost.
Operator, Operator
Our next question comes from Ben Theurer with Barclays.
Ben Theurer, Analyst
Yeah, hey. Good afternoon. So one quick one because I think we need to ask it. So you've talked about some of the rollouts with McDonald's and some of the determination of those. Can you share an update on some of the initiatives or some of the potential plan things, particularly in the U.S. like second wave? I mean, we've seen it in other markets. So it feels like normal, but if you could add some additional color on that, Evan, that would be great. Thank you very much.
Ethan Brown, CEO
Sure. As much as I'd love to, I can. We are a supplier and really want to be respectful of McDonald's and how they want to approach analysts. I think you've heard us both be silent on the recent speculation, and that's all I need to say.
Ben Theurer, Analyst
Okay. I have to try it. So if we look into the CapEx and things you're delaying and basically reducing in this year and then pushing into next year, what are the things where you think you can actually save on the CapEx side in order to improve that free cash flow profile? And where do you think this is a must invest on the CapEx side, innovation, product development, etc., and capabilities there, I guess, is part of that. But if you could give us a little bit of a sense of what you're postponing, what's behind that so that we understand what the potential implication of that CapEx delay is. Thank you.
Phil Hardin, CFO
Sure. This is Phil. First, a significant portion of our build-out has been aimed at increasing capacity for both existing and new products. We now have ample capacity, and as forecasts adjust and we optimize the performance of our current equipment, we won’t require as much investment as we have in the past, especially since we've made considerable capital expenditures recently. Therefore, we don’t perceive this as a significant obstacle. Our teams have been very careful in their spending to ensure we manage our cash effectively. Given our current installed capacity, we don’t view this as a major challenge for the business right now.
Operator, Operator
Our next question comes from Rupesh Paris with Oppenheimer.
Rupesh Paris, Analyst
Good afternoon and thanks for taking my question. So I just wanted to touch on some of the pricing efforts that you guys discussed in the press release. And I think what we saw in the U.S. retail market, so first, you talked about list price increases. Just curious if that was originally contemplated within your guidance. And do you expect to make further adjustments in that market? And in the U.S. market, we did observe price reduction at Costco. Just want to get a sense of if you're starting to do price reductions as well in the U.S. retail market.
Ethan Brown, CEO
On the EU side, we experienced a nice volume increase year-over-year, but this was more than offset by a decrease in pricing, resulting in a 22% decline in revenue. We have been working to align our pricing with what competitors are doing in the EU. In the U.S., we secured deals and promotions throughout the second quarter, which is noteworthy given that while most others are raising prices, our category continues to engage in significant discounting. This highlights the necessity of ongoing sequential improvements in cost reduction, although we did make reductions in Europe.
Operator, Operator
Our next question comes from Robert Moskow with Credit Suisse.
Robert Moskow, Analyst
Hi, Ethan. Considering your revised sales outlook and your statement that you need significant volume increases, along with the lack of catalysts to drive that growth for the model to succeed, why not further reduce the workforce? A 4% reduction seems minimal. I'm asking this because you mentioned scaling up to support large quick serve restaurants for substantial launches, but there don't seem to be any upcoming opportunities. If those opportunities aren't on the horizon, would that mean you would need to make more significant cuts?
Ethan Brown, CEO
Right. So I think we have taken some pretty significant reductions in overall OpEx, I think the sequential decline was something like 14% or 15% quarter-over-quarter. And we're going to continue to drive that. To the extent we don't want to continue to cut into our people costs. We have an incredibly talented team. We have, obviously, a tremendous amount of value in each and every employee here, but the more important thing is that I would probably dispute the idea there's no catalyst for resumption of volume. There are actually our catalysts. And we just can't predict the macroeconomic environment. But I think to keep an eye out for activity across the globe from us and from our strategic partners. And it may make more sense. But again, the big thing is let's get through, let's show some patience around this difficult economic environment. And then let's get back to some more normal conditions and growth in retail and in our food service business. But I wouldn't say that these QSR relations aren't coming to course. And I think that will be something that will become clear in the next six to 12 months.
Operator, Operator
Our next question comes from Ken Goldman with JPMorgan.
Ken Goldman, Analyst
Thank you. While we're on the subject of QSRs and partnerships, we have seen with other companies, trials with a particular QSR come to an end as expected. And sometimes, those turn into expanded partnerships several months later. So I wanted to understand a little bit better about how the trial you mentioned McDonald's, so I guess it's okay for me to kind of mention the specific customer. How did that go relative to your expectations? What were the learnings maybe? And especially, could you kind of compare, maybe contrast why the UK Ireland market was one that was ready for expansion when it seems maybe the U.S. was not. I'm just curious for some color there. Thank you.
Ethan Brown, CEO
I can't provide detailed comments on the McDonald's situation, but I believe the U.S. market is still developing. There's a strong desire for quick outcomes from our company at this early stage. Tests are conducted for various reasons, such as assessing pricing, demand, and incrementality, and based on the results, decisions are made. Currently, there's a lot of speculation in the media about the market's status. Regarding Europe, it appears to be quite advanced in the plant-based sector. European governments are actively promoting this shift. This transition is inevitable, and its importance is growing daily. We face a significant challenge, and our company plays a key role in addressing it. I find it unwise to predict outcomes during a recession or pandemic. Our focus should remain on executing our strategy aimed at enhancing taste, health, and pricing. Once we achieve products that are indistinguishable from animal protein and communicate their health benefits while maintaining competitive pricing, we will capture a substantial market share. However, external economic factors may create disturbances we cannot control. What we can influence is our effectiveness in reaching these goals. Our team is exceptional, with experienced individuals from the industry who understand efficient operations, including Doug and Bernie from Tyson. We need to concentrate on what we can manage, prioritizing our valuable customers such as McDonald's, Beyond Brands, and Pepsi. By keeping our heads down and diligently working, I believe we'll see significant growth in the sector over time. A similar phenomenon occurred with electric vehicles, and looking back at commentary from 2019 on Tesla shows how premature some predictions were. This challenges us to stay motivated. Thank you.
Operator, Operator
Our next question comes from Peter Saleh with BTIG.
Peter Saleh, Analyst
Thank you. I wanted to return to the discussion about Jerky for a moment. You mentioned that the velocity trends are slightly below forecast. Could you provide more details on what you're observing in that area? We are a few quarters into this, so I would appreciate any insights about where it's performing well and where it's not. Also, are there any changes Pepsi is considering to boost sales? Thank you.
Ethan Brown, CEO
I can say that the launch was significant, with over 80,000 locations at one point. They have done a fantastic job so far. Moving forward, they will allocate a larger portion of their budget to shopper marketing activities as they wait for fuller distribution. We need to observe how this develops, as this is a new area for us, a new partnership, and a new product. The growth might take longer than we initially expected, but it's an excellent product, and it’s encouraging to see it available in the market and gaining popularity.
Phil Hardin, CFO
I think I would add, too, that the Beyond Meat Jerky makes up a significant majority of the plant-based meat snack subsegment. So obviously, it's very, very big in the category.
Peter Saleh, Analyst
Great. And then it was nice to see that the OpEx kind of moderated pretty meaningfully, I guess, sequentially. Can you just talk about any other reductions you guys are expecting? Or how we should be modeling that in the back end of the year?
Phil Hardin, CFO
Yes. So we are expecting to further reduce OpEx as we go from Q2 to Q3. I think there are some moving pieces that make it difficult to predict exactly whether it be there's costs like the outbound customer freight, some of the marketing obviously, if we find lower funnel marketing with a very high return on ad sales that we're confident is incremental. We'll choose to invest there, especially given some of the commentary around volume. But we're targeting something in the mid- to lower 70s as sort of the Q3 number. And again, that can change as we get into the quarter a little more, but that's the current kind of model build.
Operator, Operator
Our next question comes from Cody Ross with UBS.
Cody Ross, Analyst
Hi, good afternoon, everyone. Thank you for taking our questions. I want to discuss the sales you achieved through the liquidation channel this quarter, and we appreciate the guidance you provided there. How do you assess your current inventory position? Additionally, how much more sales, if any, do you expect to process through this channel in the latter half of the year?
Ethan Brown, CEO
We're focusing on our process to ensure we recognize how our inventory ages. This sale was quite unusual for us, and given our current situation, we do not expect to see this level of volume next quarter. We believe we have set aside appropriate reserves. We will need to monitor our outlook and how we handle inventory as it moves through our system. However, we do not expect this level of impact in the future. We would prefer to derive some value from at-risk items rather than discard them.
Cody Ross, Analyst
Just to clarify, you will have some product go through that channel, just not the same magnitude in the back half.
Ethan Brown, CEO
That's our expectation. But nothing anywhere near as large likely as what we saw here.
Cody Ross, Analyst
Got it. And then I just want to turn quickly to your cash burn situation. You significantly improved this quarter, burning roughly $90 million of cash. You have about $450 million on the balance sheet; it's probably the biggest question we get from investors. I know you will be more tightly managing expenses going forward. But with the reduced sales outlook, it's hard to see how you won't need to access the capital markets in the next few years. Is that your assumption? Or do you see a pathway to an inflection in profits and cash flow on the horizon? Thanks.
Ethan Brown, CEO
So I'll take it in a general sense and then turn it to Phil. I think that the change in tone that I hope people are picking up on from me is that although our strategy remains the same, we really are moving into a phase right now given broader economic conditions. We are harvesting existing investments. We're orienting toward a more sustainable growth model for the time being. We're executing these planned QSR and food service launches. We're focusing on lifting our retail sector back up again, at our retail brand rather. And we're doubling down on cost and price. And all of those things we're doing with an eye toward reducing the consumption of cash, driving the business toward a more sustainable position. So I don't think we're going to offer a direct answer on future cash rates, but we are working extremely hard on bringing the business into a more sustainable position. I don't know if Phil wants to add anything to that.
Phil Hardin, CFO
Yeah, I just think it says a situation where the core initiative is definitely to improve our balance sheet and bring harbor to be a much more sustainable company, firmly in Q1 operational cash flows generate.
Cody Ross, Analyst
Got it. Thank you. I'll pass it along.
Operator, Operator
Our next question comes from Michael Lavery with Piper Sandler.
Michael Lavery, Analyst
Thank you. Good afternoon.
Ethan Brown, CEO
Good afternoon.
Michael Lavery, Analyst
You touched on some of the things that influenced your change in thinking on the guidance with just the Jerky philosophies and a couple of those sort of specific things. Was there any change in your food service expectations that was a driver of that as well?
Ethan Brown, CEO
Well, we update the forecast at really a kind of bottoms-up level. And so obviously, there's always movement, but it was definitely not one of the top three that we called out as a key driver, and we explained the significant majority of the reduction in the outlook.
Michael Lavery, Analyst
Okay. That's helpful. And just on the gross margins, you gave some nice color on how that should progress. But the jerky piece specifically that you've called out for the last two quarters, what's the sort of endgame there? Is that going to be a headwind that you just sort of live with? Or is there room to really improve how those impacts the gross margin overall as well?
Ethan Brown, CEO
I think once volumes begin to increase, you'll start to notice some of the reductions we've implemented. Until then, that won't be apparent. We've fully integrated our production process, making it much more efficient moving forward, but we still have inventory to sell through and need to see some volume before that efficiency is evident. However, once we reach full volume again, it won't keep being an issue.
Michael Lavery, Analyst
That's right. Can you say how much your sales to the Planet partnership? How much sales came from Jerky this quarter?
Ethan Brown, CEO
Yes. In Q2, our jerky volume was about $15.9 million.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Ethan Brown for any closing remarks.
Ethan Brown, CEO
Thank you. Thanks for the very good questions. I think the general feeling we have here has been echoed by other companies that this is a difficult economic period, and that's kind of it. It does not color our tremendous enthusiasm for the long-term opportunity. I think it does force us to bring in greater focus the need for a more sustainable position. But our strategy, serving these terrific QSR partners we have reinvigorating our retail brand, doubling down on cost and price, including through designing new products to value. All of these things are ways that we're reacting to these conditions and strengthening our business. So we look at it as an opportunity to get stronger, to come out a little leaner and resume the growth that we expect and look forward to showing. Thanks, everybody.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.