Earnings Call
Beyond Meat, Inc. (BYND)
Earnings Call Transcript - BYND Q1 2022
Operator, Operator
Good day, and welcome to the Beyond Meat, Inc. 2022 First Quarter Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. 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 first quarter earnings press release filed today after the market closed. This document is available in the Investor Relations section of Beyond Meat's website at www.beyondmeat.com. Before we begin, please note that all the information presented on today's call is unaudited. And 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 31, 2021, the Company's quarterly report on Form 10-Q for the quarter ended April 2, 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 this non-GAAP financial measure provides useful information for investors, any reference to this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of adjusted EBITDA to its most comparable GAAP measure. And with that, I would now like to turn the call over to Ethan Brown.
Ethan Brown, CEO
Thank you, Lubi, and good afternoon, everyone. Though we navigated significant cost challenges in the first quarter of 2022, the majority of which relate to scaling for strategic product launches and are temporary in nature, we made strong progress against our long-term growth strategy and saw encouraging signs of resumed growth. First, we engaged in significant activity across our global quick-service restaurant partnerships. McDonald's conducted market tests of McPlant in the U.S., added the offering to all restaurants across the U.K. and Ireland, and continued trials in Austria. Currently, Yum! Brands Pizza Hut added Beyond Meat as a permanent menu item across Canada, while KFC conducted a nationwide limited-time offering in the U.S., noting recently that its launch of Beyond Fried Chicken resulted in more media impressions than any other product launch in KFC's history. Second, we launched three SKUs of Beyond Meat Turkey with the PLANeT Partnership, our joint venture with PepsiCo. Sales of Beyond Meat Turkey since launch have been a resounding success, exceeding our initial expectations. Third, adjusted for Turkey, we made continued progress on our cost-down program regarding material cost per unit. Despite short-term fluctuations, we do not see any fundamental change in our long-term margin targets of over 30%. Our cost-down program is a fundamental driver of this confidence. Fourth, we advanced the centric profiles of our product platforms as part of the Beyond Meat Rapid and Relentless Innovation Program. This defining focus year after year on reaching our North Star of the perfect indistinguishable build of meat from plants continues to be rewarded with product recognition. During the quarter, our products notched several accolades, including BuzzFeed's number one spot for plant-based chicken tenders, All Recipes Community Choice Awards for Best Plant-Based Meat Brand, Edge News Best New Product Award for Beyond Chicken Tenders, as well as the Best Plant-Based Burger and Sausage for the Beyond Burger and Beyond Sausage. Finally, Consumer Reports awarded the highest score for taste to the Beyond Burger, Beyond Breakfast Sausage Patties, and Beyond Dinner Sausage. We believe that through innovation, we are on a path to deliver against our North Star and unlock a meaningful percentage of the estimated $1.4 trillion worldwide meat market for our brand and appreciate these and other awards as encouragement along the way. Fifth, we saw important signs of post-pandemic resumption of growth. Foodservice entered Q1 with sluggish results but exited with solid momentum, contributing to March 2022 being among the largest revenue months in our company's history. Today, we are clearly in a period in which certain decisions we believe best position the Company to capture our long-term opportunity may generate adverse short-term results. In each instance, as we take a decision, we align around the path that we believe will build a profitable business of global scale over the long run. More specifically, we took several actions, each of which negatively and temporarily impacted margin. First, we interrupted steady-state internal production of base products to support the commercialization of innovative new items with key strategic customers, a decision we discussed in our Q4 call. In the balance of the year, we expect to reallocate internal production infrastructure to higher efficiency operations. Second, we successfully executed the nationwide launch of Beyond my Turkey, the biggest product launch in our company's history in terms of breadth, using an initially higher-cost manufacturing network with new product and market. As I mentioned, we are very pleased with the initial sales results, and we're now transitioning production into higher efficiency operations and have a clear line of sight to greatly improved unit economics in the second half of this year. While we do not take lightly the short-term margin impact of these longer-term investments, we are confident that through these actions, we are positioning the Company well to capture robust future growth. We now turn to Q1 2022 net revenue results. Overall, we posted net revenue growth of 1.2% in Q1 of 2022. We saw a solid increase in pounds of products sold, rising 12% year-over-year, which was partially offset by a 10% decrease in net revenue per pound, driven by increased trade discounts, strategic list price reductions in the EU, changes in sales mix, and decreases in the value of the euro relative to the dollar. In U.S. retail, we saw an increase of 7% in net revenue. However, looking at SPINS takeaway data for the 12-week period ended March 20, our brand saw a decline of 3.3%, excluding Turkey, versus a category increase of 2.8%. We believe this result is driven by four main factors: first, broader softness in the natural and specialty channel continues, and we over-indexed in this channel relative to the category. For context, total category sales in Natural & Specialty declined 7.5% year-over-year during the 12-week period compared to a 4% increase in MULO. Second, across SPINS channels, MULO plus Natural and Specialty, we saw a shift in consumer purchase from refrigerated to frozen. Refrigerated plant-based meats, where we are heavily represented, were down 3.6%, but frozen plant-based meats were up 7.2%. This change from refrigerated to frozen in part reflects increased consumption of plant-based chicken in the frozen section versus plant-based beef in the refrigerated section. Third, we faced increased competition in the category. Nonetheless, we are encouraged that Beyond Meat remains the number one brand in refrigerated plant-based meats. Our brand velocity, which was 2.4 times greater than the category average, ranked highest among any of the top 25 plant-based meat brands. Lastly, fourth, we increased our promotional spending resulting in lower net revenue per unit sold. This increase in discounting in part reflects competitive dynamics in the category. However, the main strategic driver for us regarding price continues to be our own price parity goals, informed by the aforementioned cost-down program. Turning to our consumer panel metrics of household penetration, buyer rate, purchase frequency and repeat rates, I'd like to first acknowledge that beginning in Q1 2022, we have switched data providers from SPINS to Numerator. Thus, the numbers I reference will not be directly comparable to figures mentioned in the past. To be clear, the year-over-year comparisons that follow are based on the same Numerator data set. We are pleased to see that based on these measures, our overall brand health remains strong, even as our user base continues to expand. According to Numerator data through the first quarter of 2022, household penetration for the Beyond Meat brand stood at 10.3%, an increase of 180 basis points year-over-year, while our repeat rate increased 80 basis points year-over-year to 46.3%. Purchase frequency and buy rate declined by 3% and 13%, respectively, likely reflecting later new users, given the healthy increase in household penetration, as well as reduced year-over-year pricing in the latter case. Within the U.S. retail sector, we are pleased to secure recent distribution wins. These gains include the launch of Beyond Burger and Beyond Meatballs at approximately 2,000 Rite Aid stores nationwide and the expansion of Beyond Chicken Tenders in over 8,000 new outlets nationwide at retailers, including Albertsons, CVS, select Costco regions, Jewel-Osco, Kroger, Shoprite, Sprouts, Target, Walmart, and Whole Foods Markets, among others, bringing our total retail distribution of Beyond Chicken Tenders to approximately 15,000 locations. Also in U.S. Retail, as noted, a key milestone for us in Q1 was the nationwide launch of Beyond Meat Turkey. This innovative offering, a product of the Beyond Meat Rapid and Relentless Innovation Program, took a tremendous amount of work, countless iterations and close collaboration with the PLANeT Partnership. The intensity and duration of this research, development and scaling reflect the guiding principles of Beyond Meat. When we bring a new product to market, we aim to either create the category or win the number one position within. I'm proud of what our team has been able to accomplish together with PepsiCo and the market results thus far. This fantastic on-the-go snack represents Beyond Meat's first shelf-stable offering, thereby opening a new distribution opportunity for our brand. It comes in three delicious flavors: Original, Hot & Spicy, and Teriyaki. Nutritionally, Beyond Meat Jerky packs 10 grams of protein per serving, contains no cholesterol, GMOs, soy or gluten, and as always, is made with simple plant-based ingredients, including peas and mung beans, among others. Since its national launch in late March, Beyond Meat quickly established itself as the number one selling plant-based jerky brand, substantially accelerating the growth of the category. In fact, it more than tripled the category sales, and early velocity results are trending ahead of initial expectations. Time to launch, the Beyond Meat Jerky also rose to become number one on Amazon's hot new releases page. Furthermore, we expect to significantly increase our distribution of these products from approximately 56,000 stores today to about 80,000 by the end of May. If you've not already tried it, I highly recommend this delicious, lean, and convenient protein snack. Turning now to U.S. Foodservice, we saw signs of accelerating momentum late in the quarter, with March posting an 83% sequential increase relative to February and a 42% increase versus the prior year. We believe that the slow start to the quarter was likely related to Omicron, labor shortages, and a late return to school, among other factors. In our international business, our volume of products sold increased 22% year-over-year in Q1 2022. Although net revenues were down 7% year-over-year, primarily reflecting strategic price reductions and incentive actions in the EU. We expect to benefit from incremental distribution and velocity of our extended shelf-life burgers in the EU retail channel made in late Q2, and we are working to bring additional extended shelf-life products to EU grocery stores as soon as possible. More broadly, key developments in our international business continue to bolster our optimism for sustained long-term growth. Beginning in Europe with McDonald's, we are pleased with the continued strong performance of the McPlant in the U.K. and Austria. In the case of the latter, the announcement of a nationwide test of a second McPlant build, the McPlant Steakhouse. The McPlant Steakhouse features the Beyond Meat co-developed patty, served on a sesame seed bun, with lettuce, onions, tangy steakhouse sauce, and two slices of cheddar cheese. We're excited to see this product extension, the first of the McPlant, which demonstrates a simple way to offer more varied menu options to consumers seeking to diversify their protein options. In Europe, as in the U.S., I am pleased to share that Beyond Meat products continue to earn distinguished recognition. Specifically, the Beyond Burger was named Good Housekeeping UK's Best Vegan Burger in their Annual Barbecue Test as well as the Best Vegan Burger by Which?, the U.K.'s leading consumer association. In The Netherlands, we were a two-time winner in the Wheels of Retail Awards from Disto Food for Best Overall Innovation for Beyond Mints and Best New Fall Substitute Brand. The Wheel of Retail Awards have been the most important prize for product introductions in the Dutch supermarket sector for 44 years. In China, in late March, we announced the launch of our flagship store on Pinduoduo, one of the country's largest e-commerce platforms, which boasts hundreds of millions of users nationwide. With this announcement, Beyond Meat became the first global plant-based meat brand to launch a store on Pinduoduo, featuring locally-produced Beyond Burger, Beyond Beef, and Beyond Pork products. Our launch on Pinduoduo represents our third such launch on a major Chinese e-commerce platform, following our previous additions on JD.com and Tmall. And in China, as we are preparing to do in the U.S., we are excited to bring new innovation to market, reflecting our investment in local management, production, and innovation. We're excited to share the products coming later this year in China were developed with significant direction and execution by our Shanghai and Yajing teams. Before concluding, let me touch briefly on some global macro issues. As widely reported, the recent and ongoing conflict in Ukraine is disrupting key commodity markets. Some of these disruptions have a direct or indirect impact on portions of our supply chain. Though we don't sell in Russia and have indirectly sold only small quantities through a distributor into Ukraine, we have seen increased transportation costs due to higher fuel prices and increased pricing and scarcity of supply for a few commodities that we use in relatively small amounts. At this point, we are working through these issues, and the team has managed to avoid any significant disruption to operations. With that, I will turn it over to Phil to walk us through our first quarter financial results in greater detail and our outlook for the balance of the year.
Phil Hardin, CFO
Thanks, Ethan. We achieved net revenues of $109.5 million in the first quarter of 2022, representing an increase of 1.2% compared to the first quarter of 2021. The increase in net revenues was driven by growth in the U.S. retail channel, partially offset by declines in our other sales channels. For Q1 2022, average net revenue per pound was $5.13, down from $5.70 per pound in Q1 2021, primarily driven by increased trade discounts, strategic list price reductions ahead of expected cost reductions, changes in mix, and a negative impact from foreign exchange. Moving down the P&L to gross profit, gross profit during Q1 2022 was $190,000 or 0.2% of net revenues, compared to $32.7 million or 30.2% of net revenues in Q1 of 2021. While we are thrilled with its early sales performance and strong customer response, Beyond Meat Jerky manufacturing, still in its infancy, was a significant headwind to our gross profitability this quarter. We estimate the headwind this quarter at approximately 940 basis points of gross margin. The scale of the Beyond Meat Jerky launch is unprecedented for us, with the current distribution of approximately 56,000 locations already eclipsing our current U.S. retail distribution for all other products combined and expected to expand further to 80,000 locations by the end of May. To launch a first-time product at such a large scale and prior to the establishment of our own dedicated and streamlined process, we had to do so in an expensive and inefficient manner. In some cases, the initial path to finished good production requires a single batch to be processed across different facilities, incurring processing costs and transportation fees at each step of the journey. As we mentioned on the last call, as we look toward the remainder of the year, we expect this to improve. We have multiple initiatives underway, with one of the largest improvements already secured, as we recently signed a contract to consolidate operations with a third-party manufacturer that can produce Jerky with more automated equipment, lowering fees and reducing the need for multiple processing locations, thereby reducing costly shuttle transportation. We expect this capacity to come online in mid-Q3 of 2022. We also recently secured reduced pricing on mung bean protein, one of the key ingredients in Jerky, and we look forward to locking in other efforts already underway. In addition to the decrease in net revenue per pound, costs of goods sold increased $1.15 per pound year-over-year. We estimate Jerky accounted for approximately $0.68, with the remainder being driven primarily by increased manufacturing costs, including depreciation and higher transportation and warehousing costs, partially offset by improved material costs and reduced inventory reserves and write-offs relative to the year-ago period. Manufacturing costs, including depreciation, were up $0.90 per pound versus the prior year, with Jerky accounting for approximately $0.36 per pound, and the remainder primarily reflecting expensive inventory created in Q4 and sold through in Q1, as well as higher depreciation and other fixed overhead per unit. For the non-Jerky inventory we manufactured in Q1, although still impacted by new product launches, lower food service volumes than initially anticipated, and variability of demand across products, our costs improved later in the quarter as we stabilize the network, matched labor to production needs, and optimized where we produce each SKU based on the overall best economics. The result is an inventory that still reflects elevated production costs but on a trajectory that is improving. For example, Q1 2022 finished goods conversion costs in our East Coast facility were 23% lower than in Q4 of 2021. We are also currently running an RFP process with our third-party manufacturers that we expect will result in tolling fee savings. Finally, as you may recall, in 2021, we saw a sequential increase in revenue between Q1 and Q2, from $108 million to $149 million. As grilling season in the Northern Hemisphere approaches, we expect a similar uptick in Q2 of this year, further driving leverage in our costs. Logistics costs, including those associated with internal transportation and warehousing increased $0.32 per pound in Q1 2022 versus Q1 2021. Note, this excludes the outbound freight associated with shipping finished goods to our customers, which is included in our SG&A as a selling expense. The increase in logistics cost per pound was primarily attributable to increased transportation costs and increased warehousing costs. In transportation, we experienced headwinds from both an increase in cost per mile and miles driven per pound. In this area, we also have an RFP underway to secure improved rates for established lanes, and we're implementing changes to further reduce the use of expedited trucks. Warehouse costs increased primarily due to increased inventory year-over-year. Similar to Q4 2021, before taking into account Jerky, we saw continued improvement in our materials costs per pound on a year-over-year basis. The material cost per pound increased $0.02 year-over-year in the aggregate; we estimate Jerky represented a $0.26 drag, implying a $0.24 per pound year-over-year benefit from all other products. As part of our cost-down program, further decreasing material cost is a key focus area for us, and we have multiple efforts underway to negotiate more favorable pricing, utilize less costly ingredients and streamline our packaging. We've seen recent success in one ingredient from eliminating a distributor and going straight to the manufacturer and are especially excited by the ongoing progress we are making in using less expensive pea protein isolates or PPI. While we have secured PPI supply through a previously disclosed multiyear contract, we are seeing success in qualifying and utilizing greater proportions of PPI from less expensive suppliers stemming from our strategic sourcing efforts. Our current cost-down efforts in this area are focused on allowing us to migrate to the exclusive use of these lower-cost ingredients and on our initial rounds of testing are looking promising. Lastly, with respect to COGS, changes in inventory reserves represented a $0.09 per pound benefit in Q1 2022 versus the year-ago period, despite a $0.06 per pound drag from Jerky. Moving down the P&L to operating expenses, operating expenses for Q1 2022 were $97.8 million, up from $57.4 million in Q1 2021. The year-over-year increase was driven mainly by increases in marketing, non-production headcount expenses, G&A primarily driven by ongoing consulting agreements, and increased selling expense driven by higher outbound freight costs. Turning to our balance sheet and cash flow highlights, our cash and cash equivalents balance was $547.9 million, and total debt outstanding was approximately $1.1 billion as of April 2, 2022. Inventory increased to $283.8 million, up from $241.9 million at the end of Q4 2021. In terms of cash flow for the three months ended April 2, 2022, net cash used in operating activities was $165.2 million compared to $30.7 million in the year-ago period. Note, contained within our operating cash flows, we contributed approximately $37 million towards the build-out of our new innovation and headquarters facility here in the L.A. area, which was recorded in prepaid rent in the first quarter. Capital expenditures totaled $21.5 million in Q1 2022 compared to $23.4 million in the year-ago period. Next, I will provide some commentary about our 2022 outlook. For the fiscal year 2022, we continue to expect net revenues to be in the range of $560 million to $620 million, corresponding to year-over-year growth between 21% to 33%. In Q2 2022, we expect a similar sequential uptick in net revenues to what we experienced last year, followed by accelerated year-over-year growth in the second half of the year, driven by recent distribution gains, acceleration in international markets as a result of price resets, broader availability of extended shelf-life products in the EU, anticipated new product launches, and expected QSR launches and trials both in the U.S. and abroad. Additionally, we will be cycling easier year-on-year comparisons in the latter part of this year. Although we are not providing specific margin guidance at this time, we did want to provide some additional context for our Q2 2022 margins. We expect Q1 2022 margins to be the low point for '22, with continued progress in Q2, albeit still well below historical levels, accelerating back into higher margins later in the year. The high cost of Beyond Meat Jerky will continue to be a headwind in Q2, but we expect substantial improvement in Jerky unit economics in Q3 and Q4. For 2022, our current expectation is to incur capital expenditures of roughly $100 million, down from $136 million in 2021, although we will continue to look for opportunities to reduce this further by increasing the efficiency of our existing assets. Also, as we disclosed in our 10-K, we anticipate our contributions to complete the build-out of our innovation center and headquarters facility will be approximately $71 million in 2022, of which we already contributed $37 million in Q1, as previously noted. With that, I'll turn the call back over to the operator to open it up for your questions. Thank you.
Operator, Operator
We will now begin the question-and-answer session. The first question today comes from Peter Galbo with Bank of America. Please go ahead.
Peter Galbo, Analyst
Phil, I wanted to get some clarity on the Q2 gross margin. It seems that the 940 basis points impact from Jerky in Q1 is partly carrying over into Q2, but not entirely. Can you share how much of an impact you're expecting on margins in Q2 specifically from Jerky, aside from the other inflationary pressures? Understanding that will help us gauge a more realistic Q2 margin number, especially considering that Q1 was a significant surprise on the downside. Any insights would be appreciated.
Ethan Brown, CEO
Sure. So I'll take a high-level approach and then hand it over to Phil, who can give greater detail. The underlying theme here from my comments will be around we continue to manage the business to open up the longest and best long-term growth outcomes that we can. When we have opportunities like this, even though they're going to be somewhat challenging in the near term, we're going to pursue them, and we did that here because of a clear line of sight to much better margins in Jerky as the year progresses. Phil can give some detail on that. The other area that was bringing some pressure on the cost front and in margin was around the higher-priced inventory that we were selling through as the quarter progressed. We'll see some continued pressure from that for a bit more this year, but not too long. Again, it was this decision framework where we look at some long-term opportunities, that we need to reorient production away from steady state for a bit to fulfill those opportunities. Now we're in the process of relaunching back toward more steady-state production. If we didn't feel we had good line of sight to restore over a longer period of time to these 30% plus margins, we would feel differently. But we want to try to maximize our ability to grab as much of the total addressable market we can over a longer period.
Phil Hardin, CFO
On a per-unit basis, we anticipate that most of the improvements will occur later in the year. In the second quarter, the performance for each pound of Jerky may resemble that of the first quarter. There are various challenges that complicate giving precise guidance. The quantity of jerky sold and the minor lower of cost to market related to jerky on our balance sheet also play a role. This quarter was relatively clean, so there weren't significant issues. These factors will influence the overall figures, but we expect the cost per pound to start improving more in the third quarter with the new facility set to come online. As you analyze this, keep in mind the key themes mentioned by Ethan.
Peter Galbo, Analyst
Okay. Got it. And then just as a follow-up, guys, the cash burn rate close to $190 million when accounting for CapEx in the quarter. I mean, at current steady state with 2Q also probably being a challenged quarter, how are you starting to think about needs for future growth capital as you start kind of working down the cash number from the convert from last year?
Ethan Brown, CEO
Sure, sure. So I'll go ahead and follow the same sequence then hand it over to Phil, but wanted to give some quick comments. I wouldn't take this quarter's cash consumption and then just kind of play it out and assume that we're out of cash based on that. We are taking several measures to reduce overall cash consumption, and there's particularly high cash consumption in certain areas this quarter. If you look at OpEx, we did slow substantially the rate of OpEx growth Q4 to Q1, and we continue to look at reducing OpEx as the year progresses. Second, on the CapEx side, we have a reduction from 2021, and are also looking at ways to reduce that further. The bigger one here is also inventory. We built up a lot of inventory coming into the summer link season. We expect to wind a lot of that down across the course of the year, which will generate quite a bit of cash. Improving margin as the year progresses will also help and contribute. Lastly, we've been in a holding pattern for a bit here coming out of the pandemic. We are starting to see some resumption of growth, although we caution that will materialize in a bigger way in the latter half of the year. But as that happens, we should start seeing more favorable quarterly cash consumption, and we feel good about that. We do have a plan to manage cash through to a point where we feel comfortable, and at that point, we'll look it up. Right now, we feel good about where our runway is.
Phil Hardin, CFO
Yes, Ethan. The only other thing that I'll add to that is if you look at our operating cash flows, they include a line for a prepaid leasing expense, which is associated with the build-out of our R&D and headquarters facility. We contributed $37 million to that account in Q1. The expectation for the remainder of the year should be only about $34 million in totality. So, we're very front-end loaded on some of the costs this quarter.
Operator, Operator
The next question comes from Robert Moskow with Credit Suisse. Please go ahead.
Robert Moskow, Analyst
I'm a bit unsure where to start. Regarding the 80% growth you mentioned from March to February in food service sales, that's a significant figure. Is March considered your typical run rate, or does it benefit from any limited-time offers? Additionally, I haven't heard about extended shelf-life burgers in the EU or the price reductions. Can you explain the reasons behind those decisions? Why is there extended shelf life in the EU but not in the U.S.?
Ethan Brown, CEO
Sure. So Robert, I'll take the first whack at this. I think on the question about March, I think we're just seeing a fundamental shift in consumer behavior, fans are coming back into the brand. We were happy to see that. I don't think there's any kind of one-time hit driving that, and we'll keep monitoring that as the year progresses. It was a very encouraging sign for us. On the extended shelf life, that has more to do with the requirements in grocery and where we are relative to those. By extending it, we meet more of the norm there versus what we were doing previously. So it's not a strategy to extend Beyond what's typical in the EU.
Robert Moskow, Analyst
Okay. And my follow-up is kind of a broader question about the price reductions in the U.S. and getting closer to traditional meat. We're in a time of unprecedented price inflation in conventional meat. Your strategy has been to reduce prices for plant-based burgers. I'm surprised that this hasn't yet brought in more consumers to the category. I wonder if you've done any research to indicate that the price is going to be the trigger that increases the trial and repeat, or could there be other factors that drive this?
Ethan Brown, CEO
I think there are really three things I've talked about a lot over the years. One is to continue to drive the taste profile, which we really do need to do and have terrific innovation coming later this year. Second, to continue to communicate the value proposition, which is around health to the consumer and then, to a lesser extent, environment. The third is price. In these quick-service restaurant environments, we feel very focused on price. But it's happening across the grocery as you see all these new entrants, and many of them are using price to capture early market share. The animal protein industry has substantially increased pricing to offset significant reductions in volume, but in our sector, we haven't had that opportunity. If you look at our sales year-over-year on a volume basis, we're up 12%, but because pricing has been so competitive, that’s not showing up; it's being offset. In retail, that’s certainly the case. Our velocity turns at 2.5 times the category average. We’re the highest of all 25 plant-based meat brands covered, so we feel really good about that. But it's not entirely up to us; we have to remain competitive in that environment. But over time, our approach is not to reach our parity roll through discounting rates but to keep driving cost reduction. We've done that through our cost program. If you look at the material costs quarter-to-quarter, we've been able to reduce those. There’s a lot of noise in our cost again, for long-term strategic reasons We decided to launch the Jerky, our biggest launch ever to 56,000 stores, which is a big expansion. We did it with a network of production facilities rather than a single location, which we're reorienting production toward now. We also launched for strategic quick-service restaurants, which drove our pricing up and our cost structure as we went away from steady-state production. There's a lot of noise in the system. But if you look at what we're doing, we take our cost-down program very seriously, and we will hit the price parity goal that I set three years ago. We have about two more years to get there. If you compare our Jerky to the average price of jerky in the marketplace, you'll see we're already pricing at parity. We wouldn’t do that if we didn’t have clear line of sight to the margins we want. There’s a lot of hand-wringing and concern about our quarterly results, but we're managing this business to create the longest-term growth opportunity that we can.
Operator, Operator
The next question comes from Ben Theurer with Barclays. Please go ahead.
Ben Theurer, Analyst
I want to focus on the three important factors, with taste being paramount. That's where everything begins. However, considering price and understanding the situation in international markets is also essential. When we review the results, it appears that in the U.S., the gap between volume growth and sales growth was not significant. Yet, it was remarkable to see the substantial expansion of volume in international markets, whether in retail or food service, increasing by 20% to 30%. Despite this, international revenues declined by 7%. Could you provide more insight into the pricing strategies used internationally? What factors have driven this, and can you clarify how much of it was due to pricing in local currency, how much was related to foreign exchange, and how much was a result of changes in promotional strategies within retail or food service?
Ethan Brown, CEO
Again, this is something Phil can add to, but I think everyone should take a step back and look at what we're doing. We were able to increase volume in retail in the EU by about 19% for the quarter year-over-year, but that was offset by a 21% reduction in net revenue. What we're trying to do here is align with competitive pricing in Europe while also building out capacity in terms of our own extrusion and downstream manufacturing, which is becoming more and more efficient. So it's not where it needs to be today, but it will get there. We wanted to continue to grow market share instead of waiting until we had full capacity set up in the production network. In food service, it was even more dramatic, with a 29% growth in volume. So, a strong uptick in volume offset by reduction in pricing. But over time, pricing will make sense from a margin perspective as we gain efficiency in our production network in Europe. Price continues to be a good lever, and it goes back to parities. If we can create products indistinguishable from animal protein in taste, and convey to consumer the health benefits, we can get to price parity or lower. It becomes unusual for a consumer not to choose the product in that situation. These factors take time; they are not linear; we will have fits and starts, and it will require patience, but these are the right steps and they will generate some near-term results we don't like, and that's okay.
Phil Hardin, CFO
We estimate that foreign exchange is approximately a three percentage point headwind, which is predominantly driven by the euro versus the dollar. The only other thing to note is that some of the trade discounts are somewhat lumpy, particularly while we’re rolling out lower prices. In some cases, you’re discounting so customers can get the product at a lower price that is already out there. So, you will see some kind of lumpiness in that line. We will continue to review what we’re doing with trade as we see how the new price points, which are a little different by country, play out. This will be something we learn as we go.
Ben Theurer, Analyst
Okay. And then my follow-up is around what you said about the capacity investments in Europe. Can you give us an update where you stand right now? How much of the product being sold in Europe still needs to be shipped over and then packed and marketed over there versus when do you expect to have like the level of production domestically or within the broader region available to improve cost efficiencies?
Ethan Brown, CEO
I wouldn’t want to give a timeline right now. But on a finished goods perspective, we're quite good in the EU production. The focus now is on integrating the backend of our production process, so we’re not shipping Work In Progress and such. I don’t think it’s too far off, and we feel good about bringing our costs in line with the pricing reduction in the not-too-distant future, but I don’t want to give an exact date.
Operator, Operator
The next question comes from Ken Goldman with JPMorgan. Please go ahead.
Ken Goldman, Analyst
Two for me. Ethan, you said on many occasions that your product is superior to the competition on a number of levels. If this is the case, why do you need to follow your competitors down on price to this degree? Wouldn't you have a bit more consumer loyalty that perhaps allows you to retain more price? Why pursue price parity with animal-based meat if it crushes your margins like this?
Ethan Brown, CEO
I think a couple things to address. First, this impact on margin is not long term; we have very good visibility to just come down our network and not continuously do all these launches. We're taking operating costs out of that while continuing to drive down material costs. As for pricing, it's a fair question; our product gets awards and recognition. However, we need to do a better job distinguishing ourselves to consumers. There's still confusion, particularly us and one other brand; I receive emails meant for them and vice versa. We need to clearly differentiate ourselves, and that will help quite a bit. But one main competitive pressure on pricing comes from outside the brand. I don’t think there's enough differentiation in the consumer's mind yet.
Ken Goldman, Analyst
And then question two, you described the market's reaction as I think 'hammering, ringing' in response to some of the investments you're making today. The message is that maybe some people are sort of missing the point about what you're doing for the long term. Your sales were up 1% year-on-year in the quarter while your SG&A was up 93%. Some investors are saying it’s great to hear your vision for a better future. But how do you think about balancing long-term opportunities and some shorter-term considerations for your shareholders? Is there a point where you need to adjust that spending to match what's happening in the world today?
Ethan Brown, CEO
Certainly. We will continue to reduce the growth in operating expenses. We have a reasonable CapEx plan for the year, and inventories will drive a lot of cash out. Margin should see improvement over the course of the year. When investors ask that question, I think it will be an interesting response. I don't believe this current condition persists, and the moves we're making today are really best for long-term growth. It’s not easy, but for those who understand the long-term value we are striving for, this is the right approach.
Operator, Operator
The next question comes from Alexia Howard with Bernstein. Please go ahead.
Alexia Howard, Analyst
Can we revisit the topic of cash burden since it's clearly on many minds? With you halfway through Q2, do you have any insights on the expected cash burn for this quarter? You've mentioned that the prepaid leases for the R&D center are decreasing. Did I understand correctly that the inventory cash burn might actually begin to reverse? I'm interested to know if there's anything else that could improve in the net income line as we progress through Q2.
Ethan Brown, CEO
Good question. I think the most precise answer I can give may lack specificity. The general trend here gets back to my point: I wouldn't take this quarter's cash burn and replicate it out and assume that's our current situation. We're taking steps that I mentioned, particularly on inventory to see cash freed up. We've had lower sales quarters, but that doesn't seem persistent. The operating outcomes should get better as we move through the year. We're confident about our cash position and are aware of it; when we feel we need to act, we will. But we believe we are managing it through careful use of funds.
Lubi Kutua, Moderator
Alexia, this is Lubi, I'll take that one. The Numerator data we actually found probably has better coverage of our total consumer base and demographics. It captures more omnichannel sales, which we think is becoming increasingly important for our brand. It captures more millennial consumers, which again we believe is an important demographic for our brand. So we made the decision to switch panel data providers based on those types of decisions.
Operator, Operator
The next question comes from Peter Saleh with BTIG. Please go ahead.
Peter Saleh, Analyst
I wanted to come back to the conversation around gross margin. Even if you exclude the beef jerky impact, when should we really see inflection on gross margins? Should we see significant inflection in the third quarter and then fourth quarter again? What pressure do you think is going to be transitory and eases significantly in the back end of the year?
Phil Hardin, CFO
This is Phil. If you look at this quarter from a cost per pound perspective, it’s very similar to Q4. Our manufacturing costs are too high right now on a per-pound basis. There's a lot of work underway there. We started making good progress late in Q1. We changed some shift schedules and made some other changes to align the optimal location for production. Some inventory will still be sold in Q2, so I’d expect Q3 to be when those improvements come through on the income statement. We should see a little in Q2, and we will need to see where we net out on a trade basis, too.
Peter Saleh, Analyst
Great. Also, Ethan, you mentioned in your prepared remarks more expected QSR trials in the second quarter. Any insights on whether these are with current partners or new partners? Are we talking about chicken, or still on the burger side? Any details will be helpful.
Ethan Brown, CEO
What I meant to say was more about the second half of the year, but the partnerships we have will continue to roll out tests, and while I can’t speak for them, you’ll see further activity from some of our major partners.
Operator, Operator
The next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.
Adam Samuelson, Analyst
Can we think about long-term profitability? You talked about reaching 30% gross margins. What revenue level do you think you need to be at to reach EBITDA and free cash flow positive? Given the OpEx structure of the business, I struggle to see a pathway to EBITDA or cash flow profitability in the near to medium term given the current OpEx spend.
Phil Hardin, CFO
This is Phil. Certainly, more volume helps us in that regard. We're not giving multi-year guidance here, but first, we must get our costs back in line. We've spent time discussing the reasons why it isn't right now while accepting that we need to grow into our OpEx base. We will also scrutinize all our OpEx and ensure that we’re satisfied with the return on our spend, and that’s ongoing.
Adam Samuelson, Analyst
Sure. Regarding the guidance for revenues, can you address what portion of your guidance contemplates new product introductions in 2022, including the Jerky, and how much encompasses incremental QSR activity?
Ethan Brown, CEO
I’m not sure we can provide that level of detail. The important takeaway is that coming out of a period, various reasons have slowed revenue performance below our expectations. We need strong quarter-over-quarter performance in Q3 and Q4 to sustain the growth targets we set, and we’re not backing away from that. We feel optimistic about it and this growth must develop, reinforcing our core business while enhancing opportunities.
Phil Hardin, CFO
Regarding the equity loss for the joint venture at $670,000, we treat the PLANeT Partnership as essentially a subsidiary. You will see the revenue and the costs through Beyond Meat and then the profit or loss from the joint venture reflected on another line. Does that make sense?
Operator, Operator
The next question comes from Ryan Bell with Consumer Edge Research. Please go ahead.
Ryan Bell, Analyst
How do you think about the strength and importance of brands in the alternative meat segment in retail and the degree to which the category can resist the push towards commodities like traditional meat? Is there anything you can do to maintain additional value as pricing becomes a key driver for share gains?
Ethan Brown, CEO
I think it revolves around continued innovation and clearly explaining the value proposition around the ingredients. In our case, we use very clean ingredients and a straightforward process. We don’t use genetic modification. There are characteristics we need to convey to consumers. But I don’t believe this pricing strategy seen by other companies is sustainable in the long run. We’ll be seeing some private labeling success, but as long as we continue innovating and delivering better products year after year, we haven’t seen that being a major issue for us. Our brand has significant recognition; awareness has increased, and household penetration has expanded recently.
Ryan Bell, Analyst
Regarding your innovation, with the beef jerky, you said you're pushing it out nationally, incurring costs to scale that quickly. When thinking about future innovations, was there something unique about the beef jerky and your relationship with the joint venture with PepsiCo? Or was it pressure to get to scale quickly and gain share rather than snipe small and focus on costs?
Ethan Brown, CEO
It was unique for us because we have never done a shelf-stable product like that. We wanted to disrupt the category and create something exceptional. When launching a product, we aim to either dominate the category or create it. We achieved that on significant scale in just a short time. It’s an immense endeavor, going from 45,000 locations with our regular product over 12 years to 56,000 with a new product. We feel positive about our approach. It’s important to consider whether you want us to run the business smaller to maximize margins or continue to make decisions that secure the longest-term value for investors. This approach is consistent with our goals since going public, and that won't change.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Ethan Brown, CEO
Just appreciate the good questions and look forward to chatting with folks about the second quarter results. Thank you.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.