Earnings Call Transcript
Beyond Meat, Inc. (BYND)
Earnings Call Transcript - BYND Q4 2020
Operator, Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Beyond Meat Fourth Quarter 2020 Earnings Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference may be recorded. I would now like to hand the conference over to your speaker today, Mr. Lubi Kutua, Vice President of Investor Relations. Please go ahead, sir.
Lubi Kutua, Vice President of Investor Relations
Thank you. Good afternoon and welcome. On today’s call are Ethan Brown, Founder, President, and Chief Executive Officer; and Mark Nelson, Chief Financial Officer and Treasurer. By now, everyone should have access to our fourth quarter earnings press release and investor presentation filed today after market close. These documents are available on the Investor Relations section of Beyond Meat’s website at www.beyondmeat.com. Before we begin, please note that all the information presented on today’s call is unaudited and during the course of this call, management may make forward-looking statements within the meaning of the Federal Securities Laws. These statements are based on management’s current expectations and beliefs, and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Forward-looking statements in the earnings release that we issued today, along with the comments on this call are made only as of today and will not be updated as actual events unfold. Please refer to today’s press release, our annual report on Form 10-K for the fiscal year ended December 31, 2019, our subsequently filed quarterly reports on Form 10-Q, and our annual report on Form 10-K for the year ended December 31, 2020, to be filed with the SEC, and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please also note that on today’s call, management will refer to adjusted EBITDA, adjusted gross profit, adjusted gross margin, and adjusted net income or loss, which are non-GAAP financial measures. While we believe these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today’s press release or investor presentation for reconciliation of adjusted EBITDA, adjusted gross profit, adjusted gross margin, and adjusted net income or loss to their most comparable GAAP metrics. And with that, I would now like to turn the call over to Ethan Brown, Chief Executive Officer of Beyond Meat.
Ethan Brown, CEO
Thank you, Lubi, and good afternoon, everyone. When we held our initial public offering a little less than two years ago, we articulated a vision for our business that was neither niche nor limited in ambition. We outlined our goal of taking the core building blocks of meat, amino acids, lipids, trace minerals and vitamins, and water, and organizing them in the familiar architecture of muscle, in order to provide consumers with a sensory experience that would be, in time, indistinguishable from animal protein. We celebrated and noted the importance of our success with mainstream consumers, whom we are currently reaching in the meat aisles of the nation’s supermarkets, among other venues. We wrote and spoke of a global brand that would be built on the pillars of taste and nutrition. And as we scaled and matured our manufacturing processes and supply chain, we aimed for affordability based on the strong efficiency advantages of our production model. We argued that if we could match the taste of animal protein, provide a clear case for superior nutrition, and someday offer it at a lower price than animal protein, it would be a rare consumer who rejected the thesis and products. As we began 2020, we shot out of the gate, posting net revenues in Q1 that were 141% above those we saw the previous year. And then the COVID-19 pandemic hit. Like many businesses, we saw significant declines in our growth rates, driven largely by reductions in foodservice activities. We chose to keep investing in our business even as short-term challenges persisted, a choice we continue to make today as we remain focused on the long-term. We invested heavily in China, built a sophisticated production facility in Jiaxing, and in the Netherlands, where we opened two facilities. One is an independent operation and one owned by our partners, Zandbergen. We grew our operations team and acquired a new production plant in Pennsylvania, and we signed a long-term lease for a brand-new corporate headquarters in Los Angeles, where we are building a state-of-the-art home for our growing research team and their laboratories, collectively referred to as the Manhattan Beach project. These investments and activities generated losses during this period of COVID-19 and revenue disruption, though they were non-negotiable as we lay the foundation for future growth. I’m pleased to share with you today two significant global partnerships, one with McDonald’s, and the other with Yum! Brands, the parent company of Kentucky Fried Chicken, Pizza Hut, and Taco Bell. I want to express our immense gratitude for these partnerships and the opportunity to be of service to these industry titans. Both deals truly begin and end with leadership at each organization, and I hope that all who share my optimism and belief in the positive role that consumers and corporations can play in shaping the future will join me in thanking Chris Kempczinski and David Gibbs, CEOs of McDonald’s and Yum! Brands, respectively, for their vision to offer expanded consumer choice on the menu. It is my strong belief that partnerships with such caliber are required to accelerate a flywheel of availability and scale-driven cost reduction, which is a dominant theme in our bid for ubiquity among consumers in the U.S. and abroad. Even as we have invested, we will continue to aggressively do so across innovation, commercialization, manufacturing, and marketing to drive success for our partners in foodservice. Over the coming months, we intend to offer an inaugural Investor Day to provide greater details around our strategic initiatives and global growth plans. While I recognize you undoubtedly have immediate questions regarding the potential implications of our partnerships with McDonald’s and Yum! Brands, we are not prepared to elaborate at this time. I want to emphasize that due to the likely phasing of these partnerships, any activity is likely to skew towards the latter part of this year, and therefore, the potential impact on Beyond Meat in 2021 is likely to be fairly modest. Let me now turn to our full-year and Q4 financial results. Despite tremendous disruption to our business from COVID-19, our 2020 net revenues for the year were up 37% relative to 2019. Our ability to grow in 2020 was largely driven by strong retail performance, where net revenues were up 108% for the year, offsetting declines in foodservice. Specifically, foodservice net revenues were down 31% from the prior year. The pullback in foodservice volume not only manifested in a lower top line but also affected gross margins. Despite these trends, we were still able to complete the year with a 30.1% gross margin or 32.9% adjusted for COVID-specific expenses. This defined our Q4 results, which included $102 million in net revenues for the period. Our retail channel sales were up a full 85% year-over-year, helping mitigate the 54% decline in foodservice. In U.S. retail, our recorded net revenues of $62 million for the quarter were up 76% year-over-year. Strength in our U.S. retail business was propelled by robust consumer takeaway in both measured and non-measured channels. We continued to hold the number one product position in our category, and sales of Beyond Meat products were up 46% year-over-year, while the plant-based meat category itself grew 29%. This contributed to a 200 basis point year-over-year increase in market share for the Beyond Meat brand. In the fourth quarter, increases in total distribution points were primarily driven by incremental distribution gains at Walmart, as well as our introduction of new retail skews, including Beyond Meatballs and Beyond Breakfast Sausage Links. We continue to see growth in household penetration, buyer rates, purchase frequency, and repeat rates. According to SPINS IRI data, our U.S. household penetration increased to 5.3%, representing a nearly 200-basis-point increase versus a year ago. Our buyer rates increased 12% sequentially and approximately 66% compared to the prior year. Additionally, our repeat rate stood at 55.3% compared to 51.9% in Q3 and 43.4% a year ago. Despite the challenging macroeconomic backdrop and variable consumer buying patterns, more U.S. households continue to buy our products, they are buying them more frequently, and on average, they are spending more per household on our products. Internationally, retail net revenues increased 139% year-over-year, driven mainly by distribution gains in Canada. Turning now to foodservice, we experienced greater pressure on our revenues from COVID-19 than anticipated for the fourth quarter. Foodservice sales fell to 26% of our total revenue mix, down from 59% in Q4 2019. Domestically, we witnessed a progressive deterioration in demand as a quarter unfolded, likely due to the resurgence of COVID-19 infection rates seen late last year. We expect recovery in our foodservice business to lag the broader foodservice sector. All of this said, Beyond Meat remained the number one brand in terms of dollar sales across NPD track channels. Despite a deep and disruptive decline in foodservice activity, we still maintained our leadership position in foodservice dollar sales. As a reminder, NPD covers broad-line distribution to U.S. foodservice outlets, but generally excludes major quick serve restaurant chains. We are beginning to see evidence of emerging near-term activity within the quick serve restaurant space, including trials of Beyond Meat products at Pizza Hut in the U.S. and U.K. Additionally, after the quarter, we secured trials with Starbucks in the U.K. and Middle East and initiated tests with McDonald’s in Sweden and Denmark. As we move forward, Beyond Meat is now available in approximately 62,000 global retail outlets and 60,000 global foodservice outlets, representing increases of 68% and 48%, respectively. Our products are available in over 80 countries outside the U.S., up from 65 a year ago. Before turning to Mark for financial summary, I’d like to revisit and expand on the pillars defining our success. Our emphasis on taste, health, and long-term cost structure should be familiar to those who follow our brand. First, taste remains our number one priority. We will continue to iteratively improve the quality of our products toward our Northstar objective of being indistinguishable from animal protein. We are launching a new version of our iconic Beyond Burger platform this spring, with strong enhancements in flavor, juiciness, and nutrition. Not satisfied, we believe we can continue to improve the nutrition of our products, and we are launching two distinct cuts of the new Beyond Burger, one lower in saturated fat than traditional beef. We will accompany this launch with a robust marketing program to emphasize taste and health benefits, especially in light of misinformation around our process and ingredients. The investments we've made in operational capabilities and infrastructure are crucial to our cost down initiatives and achieving our goal to underprice animal protein in at least one product within five years. As we continue to develop integrated production processes and localized supply chains, we expect to reduce costs while maintaining margins. So ultimately, while these expansions are disruptive and incur capital and operational costs, they are strategic moves for our long-term growth. Lastly, I’d like to briefly mention our joint venture with PepsiCo, The PLANeT Partnership. We are thrilled to combine our expertise in plant-based protein with PepsiCo’s tremendous distribution capabilities. We look forward to sharing more about this exciting venture as we approach our first product launch related to this partnership. In summary, we start 2021 with considerable optimism. We will continue to make bold bets on future growth, stepping up our investments across various initiatives. Our ambition aligns with the size of the global opportunity, and I’m excited to see where we go from here. With that, I’ll turn it over to Mark for a thorough update on our Q4 and 2020 financial results.
Mark Nelson, CFO
Thank you, Ethan, and good afternoon, everyone. Undoubtedly, 2020 was a challenging year for Beyond Meat due to the pandemic, as it was for many other companies and indeed the global community. I am nonetheless extremely proud of the intense focus and commitment to our long-term vision that the team displayed throughout the year. We continue to lay vital building blocks for our future growth by proceeding with investments in additional production capacity, research and development efforts, marketing, international expansion, and corporate infrastructure. While these decisions have impacted our profitability and margins in the near-term, they represent clear indications of our commitment to continue leading the accelerating global plant-based meat movement, without which we believe the partnerships announced today would not have been possible. We are humbled to partner with such iconic brands as McDonald’s and Yum! Brands. But our work in continuing to build out our organization for future success is not done. We will continue to invest substantially in our business, maintaining our overarching long-term mindset, and we remain convinced that this approach will ultimately unlock the greatest long-term value for our shareholders. Our ambition is to build Beyond Meat into a global plant-based protein company similar in scale to the largest animal protein companies today, and notwithstanding near-term headwinds from the pandemic, our optimism about achieving that goal remains undiminished. Now turning specifically to our fourth quarter financial results, we achieved net revenues of $101.9 million, an increase of 3.5% compared to the fourth quarter of 2019. Growth in net revenues in the fourth quarter was driven by a 7% increase in volume sold, partially offset by lower net price per pound, which was influenced by our strategic investment and promotional activity, as well as a product mix that favored large pack items in retail. Overall, net price per pound was $5.59 in the fourth quarter of 2020, compared to $5.79 in Q4 2019. In retail, our volume of products sold increased 85% year-over-year, while foodservice net revenues decreased 54% compared to the fourth quarter of 2019. Overall, net revenues from international customers represented 24% of our revenues during the quarter, down from 37% in Q4 2019. Gross profit during the quarter was $25.4 million or 24.9% of net revenues, compared to $33.5 million or 34% of net revenues in the fourth quarter of 2019. Included in cost of goods sold during the quarter was $3.7 million in expenses attributed to COVID-19, specifically inventory write-offs and charges associated with foodservice products deemed unsalable. Although we expected continued pressure in our foodservice business entering the fourth quarter, overall demand was weaker than anticipated likely due to the COVID-19 second wave. Excluding these write-offs and charges, adjusted gross profit was $29.1 million or 28.5% of net revenues, compared to adjusted gross profit of $33.5 million or 34% in Q4 2019. The decrease in adjusted gross margin was primarily driven by lower fixed cost absorption due to lower production volumes in Q3, compounded by the pressure in foodservice demand. Operating expenses totaled $49.9 million or 49% of net revenues in Q4 2020, compared to $34.4 million or 34.9% of net revenues in the same quarter last year. The increase in operating expenses reflects added headcount to support long-term growth and investments in our international expansion efforts. Net loss in Q4 2020 was $25.1 million or $0.40 per common share, compared to a net loss of $0.5 million or $0.01 per common share in Q4 2019. Adjusted net loss, excluding the COVID-19 costs, was $21.4 million or $0.34 per common share. Adjusted EBITDA was a loss of $9.5 million or negative 9.3% of net revenues in Q4 2020, compared to adjusted EBITDA of $9.5 million in Q4 2019. Our cash and cash equivalent balance stood at $159.1 million and total debt outstanding was $25 million as of December 31, 2020. We were out of compliance with our maximum leverage ratio covenant on our revolving credit facility at December 31, but have since paid down our outstanding borrowings to zero. For the 12 months ended December 31, 2020, we reported net cash used in operating activities of $40 million, compared to $47 million for the earlier period. Capital expenditures totaled $57.7 million for the 12 months ended December 31, 2020, compared to $23.8 million for the prior year period. The increase in capital expenditures was driven by our continued investments in production equipment and facilities related to expansions in the EU and China. Lastly, our outlook for 2021 remains cautious due to the ongoing fluctuation in consumer demand levels across our foodservice and retail businesses. Therefore, we believe it is not appropriate to provide specific guidance at this time. We do anticipate recovery in our foodservice business to lag the broader foodservice sector. With that, I’ll now turn the call back over to the operator to open it up for your questions.
Operator, Operator
Thank you. Our first question comes from Alexia Howard with Bernstein. Your line is open.
Alexia Howard, Analyst
Thank you. Good evening, everyone.
Mark Nelson, CFO
Hi, Alexia.
Ethan Brown, CEO
Hi there. How are you doing?
Alexia Howard, Analyst
Good. Thank you for the remarks there. I think the question that I really want to ask is about the pricing dynamics. Since the end of the fourth quarter, we’ve seen your major competitor reduce pricing another 15% on the foodservice side of the business, and then they announced a 20% reduction on the retail side earlier this month. I know you can’t point to exactly what that’s going to do going forward. But how are you reacting to that in terms of your own pricing strategy amidst these competitive dynamics and how do you think that will play out from here? Thank you, and I’ll pass it on.
Ethan Brown, CEO
Sure. Thank you. The short answer is, we’re not reacting. If you look at our price structure today, we remain competitive with those reductions, both on the ground beef side of things and on our burger products. Our focus is not on that particular competitor, but rather on the three-year goal we've set: to be able to underprice animal protein in at least one category. We believe we can achieve this particularly with beef. We had some issues this year around absorption due to lower throughput driven by COVID. However, we are making great strides toward that goal, which will be our focus on pricing moving forward. We will drive trial with our pricing strategies, often offering deeper discounts less frequently. Given our strong repeat rate of 55.3%, we see a good return on these strategies. Furthermore, we stay away from high-priced ingredients which gives us the ability to continue reducing costs, allowing us to stay competitive.
Alexia Howard, Analyst
Super helpful. Thanks so much, and I’ll pass it on.
Mark Nelson, CFO
Thanks for the question.
Operator, Operator
Thank you. Our next question comes from Bryan Spillane with Bank of America. Your line is open.
Bryan Spillane, Analyst
Hey. Good afternoon, everyone.
Ethan Brown, CEO
Hi, Bryan.
Bryan Spillane, Analyst
Just a question on modeling for 2021; can you give us a sense of where you stand now in the U.S. retail channel and internationally in terms of pipeline fill? I know you had added some new customers, but are we at a position where we’re shipping consumption or will there be more pipeline fill with new products or new customers? And some more color on foodservice; at what point or what will be the triggers to start seeing that business normalize?
Ethan Brown, CEO
That’s a good question. In the U.S. retail channel, we are seeing the dynamics we anticipated earlier in the year. Retail is up 76% year-over-year in Q4, with a notable contribution from the club business. This is driving wider distribution. Our Beyond Burger product is also performing well, with consistent growth in retail. For foodservice, while recovery is slow, we start to see stabilization. We are seeing some nascent evidence of re-emergent activity, with trials of Beyond Meat products at Pizza Hut in the U.S. and U.K. We're currently optimistic about our growth moving forward.
Bryan Spillane, Analyst
Thank you.
Operator, Operator
Thank you. Our next question comes from Robert Moskow with Credit Suisse. Your line is open.
Ethan Brown, CEO
Hi, Rob.
Robert Moskow, Analyst
Hi. How are you doing? Thanks for the question.
Ethan Brown, CEO
Good.
Robert Moskow, Analyst
When I look at the range of estimates for 2021 sales, it varies from $520 million to $720 million, depending on the speed of the foodservice recovery and your partnerships. Given your internal range, should we be closer to the low-end initially while foodservice normalizes? Does that make sense?
Ethan Brown, CEO
I want to refrain from providing exact guidance. The complexity of running the business during COVID makes precision challenging. Retail has performed significantly well, up 108% for the year while foodservice was down 54%. We are, however, starting to see stability in foodservice, which is encouraging. We are also cautious about providing future estimates due to the ongoing pandemic impact.
Robert Moskow, Analyst
Okay. Well, enormous is a good starting point.
Ethan Brown, CEO
Just don’t quantify that.
Robert Moskow, Analyst
Yeah. But maybe one micro follow-up; your retail sales in the U.S. are up 76% year-over-year. Do you believe this reflects true consumption rates, or could the numbers be impacted by distribution gains?
Ethan Brown, CEO
I believe they do reflect the underlying strength of the brand. The metrics we typically look at, such as household penetration, buyer rates, purchase frequency, and repeat rates, are all trending positively. Our retail business is solid and continuing to strengthen.
Robert Moskow, Analyst
Okay. All right. Thank you.
Operator, Operator
Thank you. Our next question comes from Adam Samuelson with Goldman Sachs. Your line is open.
Adam Samuelson, Analyst
Yes. Thanks. Good evening, everyone.
Ethan Brown, CEO
Hi there.
Mark Nelson, CFO
Hi, Adam.
Adam Samuelson, Analyst
I want to circle back to the McDonald’s and Yum! partnerships. I wanted clarification; why is there a preferred supplier contract with McDonald’s but not with Yum!? I’m curious how we should think about exclusivity with them.
Ethan Brown, CEO
We’re excited to work with both partners. The differentiation in language reflects the nature of our partnership with each organization. With McDonald's, we will be their preferred global supplier, while with Yum! we are working closely on collaborations. Both partnerships will enable us to innovate in the plant-based space as we work to provide the best products.
Adam Samuelson, Analyst
That’s really helpful color. If I could just follow-up. You talked about the goal of being competitive with beef at the least in one product over time. How far are you from achieving that on a sustainable basis?
Ethan Brown, CEO
We feel good about our three-year horizon, leveraging our understanding of proteins and fats. We're focusing on building efficiency in our production model and expect ample room for improvement in future margins. The strategy is sound, and we are making progress towards achieving favorable price points for our products.
Adam Samuelson, Analyst
Okay. I appreciate that color. I’ll pass it on. Thank you.
Ethan Brown, CEO
Yeah.
Operator, Operator
Thank you. Our next question comes from Ken Goldman with JPMorgan. Your line is open.
Ken Goldman, Analyst
Hi. Thank you so much. I wanted to add …
Ethan Brown, CEO
Hi, Ken.
Ken Goldman, Analyst
I know you’re understandably reluctant to provide a whole lot of color for the year. But you are almost two-thirds done with the first quarter. Is there anything we should be thinking about in terms of how the quarter is going?
Ethan Brown, CEO
While I feel good about where we are, I caution that we are in an investment phase. The revenue results we generated reflect that we are focused on long-term success rather than short-term metrics. Economic conditions may affect our performance, but we are positioned well for the future.
Ken Goldman, Analyst
Understood. Just a quick follow-up? Your thoughts on Beyond Meat showing up on QSR menus have not changed.
Ethan Brown, CEO
Correct, we're continuing to engage in partnerships that will integrate Beyond Meat products into major QSR menus creatively.
Ken Goldman, Analyst
Thank you.
Operator, Operator
Thank you. Our next question comes from Ben Theurer with Barclays. Your line is open.
Ben Theurer, Analyst
Hey. Good evening, Ethan, Mark. Thanks for taking my questions.
Mark Nelson, CFO
Hi, Ben.
Ben Theurer, Analyst
Could you elaborate on your direct-to-consumer strategy rolled out a few months ago? What feedback are you receiving, and what are your plans for expansion?
Ethan Brown, CEO
We believe our D2C model has potential but it is secondary to our focus on major partnerships like Yum! and McDonald's. This channel allows us to gain insights, but our primary efforts are aligned with strategic partners.
Ben Theurer, Analyst
Okay. Following up on the announcements in China, how do you assess the current performance, especially regarding Yum! and Starbucks?
Ethan Brown, CEO
We are heavily invested in China, and our facility in Jiaxing is set to begin full production. We're introducing products tailored to local tastes, which is vital to our growth strategy in this key market.
Ben Theurer, Analyst
Great. Thank you very much, Ethan.
Operator, Operator
Thank you. Our next question comes from Rupesh Parikh with Oppenheimer. Your line is open.
Erica Eiler, Analyst
Good afternoon. This is actually Erica Eiler on for Rupesh. Can I ask for an update on liquidity and cash burn?
Mark Nelson, CFO
Sure, Erica. We have a solid cash balance of $159 million, with $25 million in debt. We’ve actively managed our cash burn and are currently in a strong position, maintaining a cautious approach towards capital expenditures.
Erica Eiler, Analyst
Great. Thank you.
Mark Nelson, CFO
Sure.
Operator, Operator
Thank you. Our next question comes from Michael Lavery with Piper Sandler. Your line is open.
Michael Lavery, Analyst
Thank you. Good afternoon.
Ethan Brown, CEO
Good afternoon.
Mark Nelson, CFO
Hi, Michael.
Michael Lavery, Analyst
Can you talk about the expected spending and how it may normalize versus the fourth quarter run rates? Should we expect improvements or further declines?
Mark Nelson, CFO
We expect gross margins to trend towards our long-term targets over time. Operating expenses may remain high as we continue to invest in marketing and R&D initiatives, alongside capital expenditures that align with our growth strategy.
Michael Lavery, Analyst
That's helpful. Thank you.
Ethan Brown, CEO
Yeah.
Operator, Operator
Thank you. Our next question comes from Rob Dickerson with Jefferies. Your line is open.
Rob Dickerson, Analyst
Great. Thanks so much. Ethan, just broadly, how do you think about potential partnerships in lines beyond at your core products, given the competitive landscape with so many fundings in the sector?
Ethan Brown, CEO
We welcome competition. It keeps us focused and on our toes. Our unique position, understanding proteins and fats enables us to leverage new opportunities. We are confident in our strategies for growth and innovation in plant-based products.
Rob Dickerson, Analyst
Very helpful. Thank you.
Ethan Brown, CEO
Yeah.
Operator, Operator
Thank you. And that’s all the questions we have for today. I’d like to turn the call back over to Mr. Ethan Brown for any closing remarks.
Ethan Brown, CEO
Great. Thank you. Today was an exciting day for us with long-awaited partnerships with visionary leaders. We are investing heavily to ensure future success for our shareholders. We believe we are uniquely positioned at this time in history and are committed to our long-term growth strategy. We remain dedicated to bringing healthier, sustainable products to market. Thank you for your support.
Operator, Operator
Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone have a great day.