Earnings Call
Beyond Meat, Inc. (BYND)
Earnings Call Transcript - BYND Q1 2023
Operator, Operator
Hello and welcome to Beyond Meat's 2023 First Quarter Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Paul Shepherd, Vice President of Financial Planning and Analysis and Investor Relations. Please proceed.
Paul Shepherd, VP, FP&A and Investor Relations
Thank you. Good afternoon and welcome. Joining me on today's call are Ethan Brown, Founder, President and Chief Executive Officer; and Lubi Kutua, Chief Financial Officer and Treasurer. By now, everyone should have access to the company's first quarter 2023 earnings press release filed after the market closed today. 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 today 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 today's earnings release, along with the comments on this call, are made only as of today and will not be updated as actual events unfold. We refer you to the earnings release, the company's quarterly report on Form 10-Q for the quarter ended April 1, 2023, that was filed today and the company's annual report on Form 10-K for the fiscal year ended December 31, 2022 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 reference 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, Paul, and good afternoon, everyone. I'm pleased that our first quarter results demonstrate solid progress amidst our strategy and plan. As you will recall, we outlined three central tenets, upon which we would execute a full-force pivot from the growth of an overall sustainable growth operating model, one that delivers on our goal of being cash flow positive within the second half of this year, 2023. These pillars are: one, we would apply a laser focus to margin expansion and OpEx reduction through the use of lean value streams across our beef, pork and poultry platforms; two, we will place an emphasis on cash flow accretive inventory management with a near-term focus on profit dollars versus maximizing the percent margin; and three, we would prioritize opportunities to support near-term growth and consumer trial and adoption, appropriately balancing and streamlining activities in support of our most valuable long-term opportunities. I will begin the body of my comments by summarizing our Q1 performance in reference to each of these three pillars: one, margin expansion and cost reduction. The company is focused on the deployment of lean management structures and processes to drive cost out of our operations. We continue to rationalize our production network, collapsing processes and eliminating steps that generate unnecessary costs while consolidating and optimizing our co-packing resources. Though we have much heavy lifting left to do, we are seeing tangible progress. For example, even as inflation continues to plague supply chains more generally, we reduced COGS per pound by approximately 15% on a year-over-year basis, primarily on the back of solid improvement in manufacturing and logistic costs, excluding any impact from depreciation. This swift production allowed us to cross over into positive gross margin in Q1 of 2023 from a trough of negative 18% margin as recently as Q3 2022. We will continue to apply intense focus on margin restoration through cost reduction versus raising prices as we pursue our long-standing price parity target with animal protein. At this point, we are achieving these margin gains even as our average price per pound is down 6% on a sequential basis and 9% on a year-over-year basis, reflecting both changes in mix as well as deliberate pricing programs consistent with our path to price parity. More broadly, we are bringing the overall cost of business operations down, taking out approximately $34 million for a total OpEx reduction of 35% year-over-year. Alongside this reduction in operating expenses, our team continues to focus on sweating existing assets, reducing our need for new investments. The combined impact is total cash use of $48.6 million for the quarter, down from $66.8 million in Q4 of 2022 and a steep 74% reduction on a year-over-year basis; two, drawdown of high inventory levels to free up cash. As with our network, the business has raw material and inventory levels in excess of current demand levels. We're working down these inventory levels and generating cash in the process with inventories down $13 million or nearly 6% on a sequential basis. The team continues to implement our plan to draw down inventory across the balance of the year, efficient levels, though as previously noted, the downward curve will not necessarily be linear across the calendar. Three, prioritization of near-term growth opportunities and select long-term strategic partners. We are taking specific action to encourage near-term restoration of growth even as we continue to nurture our most valuable long-term opportunities and partnerships. Here, I've chosen to focus my comments on U.S. retail grocery with regard to near-term actions, given the segment's impact on our growth, though we are using similar approaches in U.S. food service. In U.S. retail grocery, we are focused on restoring growth to our refrigerated offerings where we face our most challenging year-over-year comparisons through four main actions: One, as we approach summer, we are rolling out a better with the odd a broad marketing program or air game that highlights the great taste and health benefits of our products while celebrating our clean and sustainable process. This messaging continues to be a critical point of engagement with the consumer as there remains confusion around what we make our plant-based products from and how we make them; setting the record straight is a key part of bringing consumers back to the category. Two, we are working with our largest retail partners to implement a ground game strategy that features digital marketing, in-store activation, and promotional campaigns to reengage the consumer around the important themes of taste and health. Three, we continue to evaluate strategic pricing actions to further test elasticities as we seek to narrow the gap between our products and animal protein. Four, we plan to introduce certain renovations within our refrigerated portfolio. We are intensifying the implementation of these four tactics: broader marketing programs designed to educate consumers amid substantial noise, tactical collaboration with our key retailers, strategic pricing toward a parity goal, and select renovation as we head into peak grilling season. In the frozen segment of U.S. retail, despite its recent launch, the on stake has quickly risen to the number 2 SKU in frozen plant-based meat at a key retail customer, and we continue to expand distribution for the product. More generally, the frozen category continues to be a growth area for our brand with both sequential and year-over-year dollars and units, both up significantly. Specifically, in the frozen category, Beyond Meat grew units 20.3% and dollars 28.8% when comparing Q1 2023 to Q4 2022. Year-over-year, Beyond Meat grew units 31.5% and dollars 36.4% during the same period according to SPINS data for the 12 weeks ending March 26, 2023. Moving on to EU retail, we are expanding our product portfolio in the EU. We localized innovation that draws on the resources and expertise of our global team. In The Netherlands and the UK, we rolled out a new range of plant-based chicken products. In the Netherlands, the Beyond Chicken Burger, Beyond Schnitzel, Beyond Tenders, and Beyond Nuggets can be found at select Albert Heijn and Jumbo stores nationwide. In the UK, the Beyond Chicken Burger, Beyond Fillet, and Beyond Nuggets are available at select Waitrose and Sainsbury stores. These products complement the existing Beyond Meat portfolio in Europe, which includes Beyond Burger, Beyond Sausage, Beyond Mints, and Beyond Meatballs. Turning to our strategic partners and long-term opportunities, we are encouraged by the success of the plant platform in Europe, which is contributing to our year-over-year growth of 100% in international foodservice. Both the McPlant Burger and the McPlant Nuggets are seeing success across McDonald's in Germany, while the latter is also offered as a Happy Meal option in Germany. I've had the pleasure of enjoying the McPlant Nuggets at various McDonald's throughout Germany, and I would certainly agree with the very positive press it's receiving. I'm immensely proud of all the members of our global team who worked so tirelessly to bring this product forward, and I'm grateful for the collaboration and partnership from McDonald's that is making it possible. Moreover, the McPlant burger continues to resonate and succeed with the EU consumer and remains a permanent menu item in the U.K., Ireland, Austria, Germany, and the Netherlands, while also being offered for a limited time in Portugal. Additionally, in Austria, McDonald's continues to offer limited-time items, including the McPlant Steakhouse Burger and the McPlant Fresh burger on a rotating basis. Turning to Yum!, our products remain permanent menu items at HEP restaurants in Canada, the U.K., Singapore, El Salvador, Guatemala, and Sweden. In summary, across all segments of the business, net revenues rose 15% in Q1 2023 over Q4 2022, which in and of itself is less noteworthy given typical seasonality. However, the increase exceeded the same year-ago metric of 8.7%. This relative progress was driven by modest sequential increases in U.S. retail and U.S. foodservice net revenues, with total sequential growth bolstered by a 31% increase in international retail net revenues and a jump in international foodservice net revenues, which saw a 45% growth quarter-over-quarter. Though encouraging on a sequential basis, our focus and expectation is the return of Beyond Meat to year-over-year growth on a quarterly basis as we move past Q2's 2023, more challenging year-ago comparison and into the back half of the year. I would now like to turn from the near-term actions to check in on our enduring longer-term strategy. As I maintained, it is our belief that we will cross over the chasm from early adopters to mainstream consumers by relentlessly focusing on: one, advancing the taste and broader sensory profile of our platforms; two, articulating the health benefits of our products to the consumer in a way that resonates; and three, driving our cost structure to the point where we can match and then underprice animal protein. We will focus on each of these crossover elements, taste, health, and price for much of the balance of my comments today. We continue to advance the taste and sensory profile of our products as well as expand distribution of award-winning offerings. This summer, I am pleased to announce that we will be launching a new generation of our burger platform in foodservice and in the retail frozen section. Both offerings contain strong advances in sensory profile, particularly around the delivery of animalic and serum-like notes with a convincing yet neutral beef flavor. A long time in the making, we are receiving very positive reviews from early customer tests. Moving to health, the second element of our crossover strategy, we continue to develop products that provide important health benefits to the consumer. Beyond Steak is a great example. As was announced yesterday, Beyond Steak has been certified by the American Heart Association's distinguished HeartCheck program, joining the ranks of a select number of foods that meet the American Heart Association's exacting heart-healthy nutrition requirements, including being low in saturated fats, trans fats, and sodium. Furthermore, Beyond Steak has received the Good Housekeeping nutritionist-approved emblem, and is the first plant-based meat to earn this recognition from Good Housekeeping’s institute, Nutrition Lab, which assesses foods based on specific nutritional criteria as well as taste, simplicity, convenience, and transparency. Here again, I'm very proud of all the hardworking team members at Beyond Meat who worked for years to bring such a powerful, purposeful, and positive innovation to consumers and families. Whether through the certification of Beyond Steak by the American Heart Association, our five-year research program with Stanford University School of Medicine on the plant-based diet initiative, or our three-year agreement with the American Cancer Society to advance research on plant-based meat in cancer prevention, it should be clear that we are highly focused on helping consumers understand the facts and empirical data underlying the benefits of our plant-based meat. The third element of our crossover strategy remains price. In an economy where aggressive pricing has been the norm, putting consumers under economic pressure at various important parts of everyday life, we remain committed to our strategy of marching toward price parity with animal protein. The last 18 to 24 months have introduced substantial noise into our production system. Yet today we have what is perhaps our clearest line of sight in some time to further cost reduction. Accordingly, as progress allows, we will continue to explore certain time-limited pricing programs to provide insights into consumer behavior as we narrow the gap between our products and their animal protein equivalent. It remains our strong conviction that by providing consumers with delicious plant-based meats with clearly understood health benefits at a price point that is at or below that of animal meats, we can access a meaningful percentage of the $1.4 trillion global meat industry. In closing, as we look back on the second full quarter of our transition towards a sustainable growth operating model with an emphasis on achieving cash flow positive operations in the second half of this year, we are encouraged by early results, even as we have many miles left to travel. We continue to advance by working the plant, driving margin expansion and operational efficiency with the implementation of lean value streams across our beef, pork, and poultry portfolio, managing inventory for cash as we push toward much higher efficiency, steady-state inventory levels, and pursuing a more narrow set of near-term growth initiatives even as we support our most valuable long-term partners and opportunities. I look forward to returning to you next quarter to share progress. With that, I'll turn it over to Lubi to walk us through our first-quarter financial results in greater detail as well as our outlook for the balance of the year.
Lubi Kutua, CFO
Thanks, Ethan. Our first quarter results reflect continued sequential progress and demonstrate the early success our team is having in executing against our operating plan. Though net revenues declined 16% year-over-year to $92.2 million as we continue to navigate the challenging environment, we drove a 15% sequential increase relative to Q4, representing our strongest Q4 to Q1 percentage increase since the first quarter of 2019. We recognize, however, that there is still much work to do as our absolute top-line results and category trends continue to reflect demand weakness amid broader macroeconomic headwinds. Within U.S. plant-based meat, our core subcategory of refrigerated continues to experience significant challenges that inflationary pressures have driven a shift towards lower-priced animal protein among consumers. With this backdrop and as we lap a more difficult comparison from last year that included a strong sell-in of Beyond Meat Jerky and particularly strong Q2 results in our foodservice business, we expect to see a more muted sequential increase in revenues from Q1 to Q2 this year than in recent years past. I'll return to this topic momentarily when I discuss our outlook for the balance of the year. Turning to the drivers of our first quarter net revenue performance, net revenue per pound decreased approximately 9.1% year-over-year and volume of products sold declined 7.3%. The decrease in net revenue per pound was primarily attributable to changes in product sales mix, increased trade discounts and, to a lesser extent, unfavorable foreign exchange rate impacts, partially offset by higher pricing for certain products. Gross profit in the first quarter of 2023 was $6.2 million or 6.7% of net revenues compared to $0.2 million or 0.2% of net revenues in the year-ago period. Of note, gross profit and gross margin included the impact from a change in accounting estimate associated with the estimated useful lives of our large manufacturing equipment. For further context, during the first quarter of 2023, we completed a reassessment of the useful lives of our manufacturing and R&D equipment and determined that an increase in the useful lives of certain large equipment from a range of five to ten years to a uniform ten years was appropriate to reflect more current operating practices and equipment service periods. The resulting change in estimate reduced cost depreciation expense in the quarter by approximately $5.1 million or 5.5 percentage points of gross margin relative to depreciation expense utilizing our previous estimated useful lives. However, when considering the roughly $0.30 year-over-year improvement in gross profit per pound, inclusive of the aforementioned change in accounting estimate, depreciation expense accounted for only $0.02 of the increase. The primary drivers of the year-over-year improvement in gross profit per pound were reduced manufacturing and logistics cost per pound, which contributed a combined benefit of approximately $0.84. However, these factors were partially offset by lower net revenue and increased inventory reserves per pound. Turning to OpEx, operating expenses in the first quarter of 2023 were $63.9 million, down approximately 35% year-over-year and reflecting our ongoing focus on rightsizing our expense base. The year-over-year decrease in OpEx was primarily driven by lower marketing expenses, including advertising, reduced non-production headcount expenses, lower production trial expenses, and decreased outbound freight costs included in our selling expenses. Of note, SG&A expenses in the first quarter of 2023 included $3.9 million in non-cash expenses related to losses on sales of certain fixed assets. Moving further down the P&L, we saw a $4.1 million increase in net interest income and foreign currency transaction gains compared to the year ago period, partially offset by a $2.6 million increase in loss from our unconsolidated joint venture, primarily reflecting limited economic activity at TPP in the year-ago period. Overall, net loss was, therefore, $59 million in the first quarter of 2023 or a net loss per common share of $0.92 compared to $100.5 million or a net loss per common share of $1.58 in the year-ago period. Adjusted EBITDA was a loss of $45.8 million or minus 49.6% of net revenues in the first quarter of 2023 compared to an adjusted EBITDA loss of $78.9 million or minus 72.1% of net revenues in the year-ago period. Now turning to our balance sheet and cash flow highlights. Our cash and cash equivalents balance, including restricted cash, was $273.6 million and total debt outstanding was approximately $1.1 billion as of April 1, 2023. Inventory fell to $222.4 million, a reduction of $13.3 million compared to the previous quarter. As you may have seen, we filed a universal shelf registration statement earlier today, which will be used to bolster our balance sheet. Under such a registration statement, we are establishing a $200 million at-the-market facility for our common stock. Turning to cash flows, net cash used in operating activities in the first quarter of 2023 was $42.2 million or a $123 million decrease compared to the year-ago period. Capital expenditures totaled $5.3 million in Q1 of 2023 compared to $21.5 million in the year-ago period. Cash flows from investing activities also included $3.3 million related to investments in our joint venture, partially offset by $2.3 million in proceeds from the sale of fixed assets. Let me now provide some commentary about our 2023 outlook. Our guidance remains largely unchanged from the targets we provided on our last earnings call. For the full year 2023, we continue to expect net revenues to be in the range of $375 million to $415 million, representing a decrease of approximately 10% to 1% compared to the full year 2022. For the second quarter, we expect net revenues to increase roughly 15% sequentially relative to Q1 of this year. This Q2 outlook takes into consideration tough year-ago comparisons as mentioned earlier, some presumed impact from temporary supply chain issues at third-party warehousing facilities, and incrementally higher category headwinds relative to our previous expectations. Overall, for the full year, we expect revenue contributions for the first and second halves to be relatively evenly distributed with a slightly higher weighting towards the first half. This implies an acceleration in revenue growth in the second half of 2023, which we expect to be driven by continued distribution expansion of recently launched products in the U.S., including Beyond Steak, Beyond Chicken Nuggets, Beyond Popcorn Chicken, and Beyond Chicken Fillet, distribution expansion and contribution from new products in international markets, and the cycling of weaker year-ago comparisons. With respect to gross margin, as a result of the change in accounting estimate for depreciation, gross margin is now expected to be 1 to 2 percentage points above our prior guidance of low double digits for the full year. Gross margin is still expected to increase sequentially through the remainder of the year. We continue to expect total operating expenses to be approximately $250 million for the full year 2023, weighted slightly more heavily towards the front half of the year and our previous CapEx estimate of $30 million to $35 million for the full year remains unchanged. We continue to target the achievement of positive free cash flow within the second half of 2023. Finally, let me provide a quick update on TPP. In the first quarter of 2023, we continued the process of restructuring certain contracts and operating activities related to Beyond Meat Turkey and we intend to assume distribution responsibilities for Beyond Meat Turkey starting in the fourth quarter of 2023, a move which we believe will support our overall objectives for gross margin expansion. TPP will remain as the vehicle to evaluate a range of plant-based products for potential future business development. With that, I'll conclude my remarks and turn the call back over to the operator to open it up for your questions. Thank you.
Operator, Operator
Thank you very much. We will now start the question-and-answer session. Today's first question comes from Alexia Howard with Bernstein.
Alexia Howard, Analyst
Can I ask about the return to cash flow positive in the second half of the year? I appreciate your insights on the significant factors involved. Could you prioritize those? Which factors are the most important in getting back to that point in the second half of the year, especially considering pricing is decreasing and there are higher category headwinds than you previously anticipated?
Ethan Brown, CEO
Sure. Thank you. So we really have four levers, as you know, to guide ourselves into a cash flow positive position: net revenue, margin, OpEx, and, of course, freeing up cash from inventory. And so it's just a question of optimizing the combination of those factors. We are obviously going to lean very heavily into freeing up cash on inventory. We have a significant amount of inventory relative to the current demand environment, so we're going to use that as a source of cash. We're also very much focused on gross margin improvement. And if you look at what we were able to accomplish, swinging into positive this quarter relative to where we were, let’s say, in the third quarter at negative 18%, you can see that some of the kind of systemic shocks that our business went through are starting to subside, and we're starting to, quarter-over-quarter, get back into a much stronger position with a business that is more appropriate for the current market. So we feel confident that we'll continue to get cash out of inventory and, in fact, accelerate that to get to that cash flow positive goal in the second half of this year. Now continuing on a cash flow positive trajectory; we're also confident in that regard, but I want to caution that there’ll be some quarters where we're adding cash and some quarters where we're not as we overall continue to orient the business in that direction. But I think the main piece of information that I want people to take away is that we've organized the business around that principle. Right? Our decision-making is governed by achieving and then sustaining over time, cash flow cost of operations. So if we get into a situation where some of the levers aren't working as well as we thought, we'll also attack the problem through operating expense.
Operator, Operator
The next question comes from Adam Samuelson with Goldman Sachs.
Adam Samuelson, Analyst
Yes. Thank you. Good evening, everyone. So I guess 2 questions. I mean, Lubi, I think in the prepared remarks, you alluded to a $200 million at-the-market equity facility. I just would like to hear you elaborate on kind of the decision to pursue that route for financing, kind of the intention that are the aim of actually raising that much capital and kind of over what time frame do you think you could possibly do that? And then maybe coming back to the point on cash flow this year, just to maybe put a finer point on cash flow positive operations in the second half of the year. Is that specifically saying in one specific quarter or is the cumulatively in the second half in total, you actually expect cash flow positive operations? I just want to be clear on kind of how we’re measuring and talk about that goal.
Ethan Brown, CEO
Yes. So I'll tackle the first one and then we can elaborate on the timing of the cash flow positive. So on the ATM, it's something that we wanted to put out there. We are, again, very confident in the progression of the business we're making. I think the story is one where week-over-week, we're making considerable progress toward restoring growth and creating a sustainable business model. So it's in no way a signal that we're needing the cash immediately. So as a result, we're just going to use it opportunistically. We'll use it as we think the conditions are appropriate. But it's really to bolster our cash reserves and put it out there because I think there was a lingering question about what we're going to do. And so this provides an answer. But we are going to be very judicious and thoughtful about when and how we use it.
Lubi Kutua, CFO
Yes. Thanks, Ethan. And so Adam, on your question regarding the guidance around cash flow positive. What we've said is we're targeting being cash flow positive within the second half. And so that can either mean both quarters, Q2 and Q3 or one quarter. Now we're doing everything that we can around some of the levers that Ethan mentioned already to drive stronger gross margin performance and making sure that we manage operating expenses within a very tight sort of range. Right? And so we would, of course, love to be able to hit that mark in both the third quarter and the fourth quarter. But what we've said was within. So we think we should be able to do it within the second half. And again, just to remind you, the way we've defined that cash flow positive objective is it is free cash flow, so operating cash flow from operations less CapEx.
Operator, Operator
The next question comes from Rob Dickerson with Jefferies.
Rob Dickerson, Analyst
Great. Ethan, you’ve been kind of a fairly broad question just around household penetration. Clearly, household penetration dropped as elevated through COVID and then some headwinds, obviously, now and it's pulled back some. And it just kind of looks like given you're the largest player, right, that the category itself has compressed, but driven more by you, right, let's say, than others. And if you look at that, you think through that, and then we think through kind of the forthcoming innovation pipeline that you're speaking to in the back half. Would you say that there have been kind of like decent material product development changes that are inherent within that innovation that gives you now kind of a better, kind of higher conviction feel on consumer reaction to the innovation relative to clearly the drop in household penetration we've seen over the past 12 months?
Ethan Brown, CEO
No, thank you. That's a great question. You're correct that we've seen a decline in household penetration from about 27.8% to 25.5%. We're analyzing this situation from three perspectives. First, there’s the overarching challenge posed by inflation, and while we're observing some signs of moderation, we find this somewhat encouraging. Additionally, animal meat providers are experiencing similar trading down trends, confirming that this factor is still influencing our results. Second, there's some confusion surrounding the health benefits of our products. This uncertainty stems both from intentional campaigns by interest groups and from the fact that as a new category with new products, consumers are still figuring things out. Lastly, there are brand-specific challenges. With a surge of new entrants, the market has become crowded and somewhat perplexing for consumers, and we could have done more to differentiate ourselves during this time. Fortunately, as the category stabilizes, consumers are finding it easier to make rational choices at the grocery store. On a positive note, we’ve observed significant growth in the frozen category, with units up 32% and dollars up 36% year-over-year, albeit from a smaller base. This highlights the strength of our innovations. For instance, the launch of our Yantak product quickly climbed to the number two position at a major retailer in just a short time. We also recently gained the endorsement from the American Heart Association for a new steak product, which is a remarkable achievement. This product offers 62% less saturated fat compared to animal proteins while being a fantastic source of protein and fiber. We are actively addressing the questions around the health benefits of our products, especially those raised by traditional competitors. As inflation appears to ease and our health message clarifies, our upcoming renovations and innovations will better connect with consumers. Specifically, we’re targeting the refrigerated section where we've had most of our challenges. We plan to introduce a product later this year that has scored significantly higher than our current offerings in consumer testing. Moreover, we’re excited about launching a new iteration of our burger, which has received positive feedback in trials, especially in foodservice settings. This new product will be featured in the frozen section, which we expect will boost sales. Additionally, we have a price parity program in the works. Instead of lowering our prices to match animal proteins completely, we're exploring the price elasticity, and the early results from these more controlled tests are promising. As the market continues to settle down, we believe we will be better positioned to connect with consumers. While the second quarter is challenging compared to a very strong previous year, I am optimistic about the third and fourth quarters. With lower comparisons, I expect to see our business return to solid margins and growth in the latter half of the year, which excites me.
Operator, Operator
The next question comes from Peter Galbo with Bank of America.
Peter Galbo, Analyst
Just one quick clarification and then my actual question. Just Lubi, I wanted to understand the change around the depreciation impact on the gross margin. Is that something that continues then throughout the rest of the year? Was it kind of pulled into just 1Q? And so that's really the only flow through kind of to the higher gross margin would be my first question.
Lubi Kutua, CFO
Yes, it continues throughout the year. We reassessed the useful lives of our large equipment. Previously, we had a range of five to ten years for our manufacturing equipment, and we've now standardized that to ten years, aligning more closely with industry standards. This change is primarily why we raised our full-year gross margin guidance. However, the benefit will not be consistent throughout the year, especially in the second and third quarters, which are typically our strongest revenue periods due to seasonality. We expect depreciation as a percentage of total net revenues to be lower during those quarters. We have increased our gross margin guidance for the full year, indicating it will be 1 to 2 percentage points higher than previous expectations, mainly driven by this change.
Peter Galbo, Analyst
Okay, that's helpful. And then maybe, Ethan, just if we could go back on the quarter, just some of the sales trends, I've got a few questions. Just one on U.S. retail obviously underperformed a lot of the scan data. Just trying to understand the gap there. And then in International Foodservice, where I think there was a pretty large positive delta, I know you mentioned some of the factors around the plant and some of the others, but just whether there's any kind of load-in factor there to be conscious of on the first quarter would be helpful.
Ethan Brown, CEO
Yes, no problem. You mentioned the year-over-year growth in International Foodservice, which is 100%. There's certainly some activity in smaller businesses, but the TGC is a significant contributor. Despite the challenges we've faced in recent years, the overall direction of the business remains focused on transitioning towards plant-based needs. While there have been disruptions, the progress we're making with strategic partners in Europe, coupled with insights from European consumers, indicates a natural transition underway. Having major clients like McDonald's or Yum show substantial progress in a limited market is very encouraging. There hasn't been any artificial load-in; it's simply consistent progress quarter after quarter. The journey hasn't been linear, but I believe the trajectory will continue to impress. On the retail front, we are dealing with a difficult quarter for animal meat as well, so there's a lot of noise in the system. We're taking the necessary steps, implementing high-level marketing programs focused on taste and health. We're also carrying out tactical store initiatives and nurturing great relationships with our top retailers. Our pricing strategies are yielding some positive results, which is reassuring. Additionally, we're refreshing some of our key products and introducing excellent new options. We are defending our existing offerings through clear information that empowers consumers to make informed decisions, rather than being swayed by misleading narratives. For example, our studies, including the one involving animal protein and Beyond Meat consumption, demonstrated a statistically significant reduction in bad cholesterol. This is meaningful, as it also showed drops in TMA, a gut compound linked to heart disease. Moreover, endorsements from organizations like the American Heart Association and collaboration with the American Cancer Society further bolster our credibility. We are focused on research and working with the medical community to study these issues, rather than engaging in propagandist tactics or criticizing competitors. The truth and proof behind our products will drive our retail recovery. Our emphasis on pricing, new product launches, and clear marketing centered on health and taste will propel us back to growth in the latter half of the year. We’re continuously making progress week after week, making this an exciting journey.
Operator, Operator
The next question comes from Ben Theurer with Barclays.
Benjamin Theurer, Analyst
Just wanted to follow up on the International Foodservice piece which clearly was one of the better growth stories in the quarter? And if we kind of look into what you've printed just in 1Q '23, it's kind of the level that we just had before the Pandemic back in the first quarter of 2020. So I want to understand if you can help us maybe put that into context where we are 1Q '23 versus the 1Q 2020 as it relates to outlets in Europe, the volume itself, and how much some of these partnerships you've highlighted have helped you to basically back at those levels and what we should expect for that particular line item International Foodservice as it relates to the cadence for the rest of the year?
Ethan Brown, CEO
Good question. Thank you for the question. So one of the rules that I've always tried to follow is to let our partners kind of speak for their progress. I will say we're just, as I mentioned in my remarks, really proud to be working with McDonald's in Europe and really proud to be working with Yum in select European markets as well as globally. To see some of the traction we're making where you see the McNuggets come out, you see the good results there. And then you see the plant nugget come out and see good results there in the press. I can't share their results to share not mine. But if you look at the press reaction and the consumer reaction in Germany, we're seeing some things we really like. So to see, after the years and years of investment, to see that start to pay off is something that's very gratifying for us. What we need to do is continue to work with our supply chain, continue to work with our partners to provide these products at a price point that the everyday consumer can afford. And again, I've always maintained this is around to get the taste right, get the health message super clear, and get to the price to the point where it's at parity or below that of animal protein. In each one of those cases, as I mentioned in my prepared remarks, we're doing that, right? We're making it taste more and more like animal protein. We're getting clearer on the health and it for the consumer, and we're driving price reduction. I think I said in the prepared remarks, year-over-year, we're down 9% on average price. That's a mix and some of the pricing programs. But I really want to call out the operations team on this for being able to deliver products, restoring at least some positive margin while we're also putting price pressure on it is impressive. It shows, I think, that they're just scratching the surface. As we continue to optimize our network and continue to gain scale globally, that will be easier and easier. So the success of the strategics in Europe, I think is, again, sort of the tip of the iceberg. It's been a successful test, and we expect those to roll out. I can't speak for any one of them, but we do expect those to roll out into other markets over time.
Operator, Operator
The next question comes from Peter Saleh with BTIG.
Peter Saleh, Analyst
Ethan, I want to revisit the discussion about International Foodservice briefly. It seems you are having some success in Europe with your product. Could you give us an idea of how much of that success comes from trial purchases versus repeat purchases? Any insights on the characteristics of the customers buying it there, such as their age or income level? This information could help us understand what might work in the U.S. that is already performing well in Europe.
Ethan Brown, CEO
Yes. So I can't really dive too much into the repeat data and things of that nature. But I will say that I think the fact that we're contemplating expansion with various partners is a good thing. The thing that is so strong in Europe, which I think these need to be developed here in the U.S., is while we're hammering on healthier and the true and amazing benefits that we think we can deliver with a piece of steak, for example, that again, has such strong health credentials. In Europe, it's really about the environment, right? Consumers that are maybe less focused on the category for health are going to come into it because of climate. There’s so much proactive and progressive behavior there around climate that you have situations where major fast-food organizations are battling it out on plant-based offerings. It's really encouraging. I don't know that, that kind of environmental context is going to develop overnight here in the U.S. It seems to be more health-driven. But certainly here in the U.S., we try to lean into those categories or other consumer segments where we see very strong interest in the environment and climate. So younger people here in the U.S., college-age students here in the U.S., those folks actually care about climate, and we're working very closely with them. The way they embrace the product is very different from someone who's in their 50s, right? There are far fewer traditional roadblocks or ways of thinking that might get in the way of it. So we do take the lessons from the European consumer and try to find pockets here in the U.S. that maybe are more dialed into some of the urgency of the environmental crisis that we face.
Operator, Operator
The next question comes from Andrew Strelzik with BMO Capital Markets.
Unidentified Analyst, Analyst
This is Matt Lindon on for Andrew. I wanted to touch on pricing quickly. When we think about some of the challenges to consumer adoption and plant-based often comes up as the premium price point relative to animal-based proteins. Understanding price parity is a long-term goal, I wanted to ask how you think about balancing that move to price parity while also protecting near-term margin growth as we execute the turnaround strategy.
Ethan Brown, CEO
That's a great question. Our focus is on total profit dollars rather than percent margins. By launching bigger programs in Europe and the U.S. with grocers, we're increasing volume in our system, which benefits us. Our strategy involves prioritizing profit dollars and addressing this challenge effectively. Another aspect is the disruption we've faced in our business over the past few years. We've reduced our number of co-packers from eight to three, and lowering costs during this transition is quite challenging due to numerous factors at play. However, I'm excited to see what our team will achieve now that we have more stable pathways. As we continue to streamline our operations in this more stable environment, I believe we have substantial opportunities ahead. We are in a position to implement a 9% reduction in average pricing over the year while still meeting our margin goals. By embracing a lean methodology, we can minimize waste at every possible step, enhance profitability across our product lines, and foster a dynamic entrepreneurial atmosphere among our beef, pork, and poultry divisions. That's our approach, and the teams are enjoying the process.
Operator, Operator
The next question is from Michael Lavery with Piper Sandler.
Michael Lavery, Analyst
I have two possibly related questions. Could you provide some insight on your inventory, which has decreased a bit? What is the overall outlook for that? Are there any risks of spoilage or write-offs that you may need to address? Additionally, can you discuss the reasoning behind bringing jerky production in-house from the partnership and how that decision is developing?
Ethan Brown, CEO
Yes, let me address the second question first. We are excited to bring Jerky in-house and continue our collaboration with Pepsi, as we see it as a valuable opportunity for future growth. However, in order to achieve our goal of being cash flow positive and adopting a more sustainable growth model, we concluded that managing it in-house was the best strategy. We have made significant progress, reaching a notable market size in the plant-based turkey segment in just a year, and while we believe we have a strong product, we need to ensure that the margins are optimized. This move will alleviate some pressure on our overall margin. Regarding inventory levels, we have an active management program in place. Our aim is to utilize all excess ingredients while closely monitoring any aging inventory to prevent write-offs. We remain proactive in this area, planning several quarters ahead to avoid unfavorable situations. I'm confident in our team's capabilities to handle this effectively. We are diligently managing both finished goods and ingredient inventory to achieve positive outcomes. As we increase volumes, we benefit from improved fixed overhead absorption, and our collaborative efforts across the supply chain help reduce costs. We're focused on minimizing waste and shifting away from batch processing to enhance efficiency. All of these initiatives have contributed to the margin improvements we've seen over the past few quarters and will continue to drive positive results moving forward.
Lubi Kutua, CFO
The inventory outlook you mentioned is worth expanding on. Ethan noted that the total inventory balances will not decline in a linear fashion due to some pre-existing contracts we have. We anticipate some fluctuations in inventory levels. However, we have previously stated that achieving our cash flow positive goal relies heavily on significantly reducing overall inventory levels. Frankly, our inventory levels are too high, and we are committed to decreasing them. I believe our team has performed well in this regard. We are confident that we will finish this year with considerably lower inventory levels compared to the beginning of the year, although the decline may not be a straightforward line down.
Operator, Operator
Today's last question comes from John Baumgartner with Mizuho Securities.
John Baumgartner, Analyst
Ethan, just back to your commentary on temperature state. Does categories performance in frozen, I think would suggest that pricing and even the product itself may not be that central of an issue. There's other premium categories in the store doing okay right now as well. But I think what you do have in refrigerated is this really big entrenched competition from animal meat that culturally could be a lot harder and more expensive just to lodge over time. So I guess how do you think about refrigerated going forward, independent of price points? Is there a strategic pivot here to get more involved in the frozen case? Is the runway to this lodge the animal meat eater much longer than you would have thought 3 or 4 years when you sort of started out. I look like just your high-level impressions there.
Ethan Brown, CEO
That's a great question. There are several ways to approach this. First and foremost, our primary objective is not to become a high-priced niche product but to be a significant player in the $1.4 trillion global protein market. We are committed to pursuing that goal in every way possible. While some suggest raising prices, we aim to reach mainstream consumers and make a meaningful impact, which we believe can lead to substantial returns if we succeed. The frozen category is intriguing; it's not simply about the frozen meat market of ten years ago. For instance, comparing our Cookout Classic product's sales ratio to a bubble burger reveals interesting insights. Notably, our Cookout Classic is priced closer to animal protein in the frozen section. If we extrapolate that ratio, it shows the potential once we refine our proposition. In the fresh section, which is where consumers typically shop for animal protein, achieving success is crucial, though it may take longer than anticipated two or three years ago. However, it could change with the right pricing, improvements in our product that attract more consumers, or breakthroughs like endorsements from reputable organizations such as the American Heart Association. All these factors could lead to increased sales in the fresh section. Therefore, we remain committed to this area while leveraging the momentum we’ve gained in frozen products.
Operator, Operator
This concludes our question-and-answer session. I would now like to turn the call back over to Ethan Brown for closing remarks.
Ethan Brown, CEO
Thanks. So as I said, I think this is a business that is turning a corner. This next quarter, the quarter we're in, is a high comp but we're looking forward to really the second half of the year getting back to growth, getting better growth with a reasonable margin and instituting some of these changes we’re making. The team feels good, and we look forward to reporting in the next quarter.
Lubi Kutua, CFO
Thanks, everybody.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.