Beyond Meat, Inc. (BYND) Earnings Call Transcript & Summary

Good afternoon, everybody. Welcome. My name is Jon Andersen, and I'm the research analyst at William Blair that covers Beyond Meat. I want to welcome you to our conference and more specific, our webinar with Beyond Meat's CEO, Ethan Brown. For today's meeting, we're going to use a question-and-answer format that I will be facilitating. For our investor clients who are listening in, I would encourage you to submit questions to me, and I will attempt to include them in the discussion as we move through it. Before we begin, I'm required to inform you that a complete list of research disclosures and potential conflicts of interest can be found on our website at williamblair.com. So with that, I want to welcome Ethan and kind of dig right in to the Q&A. Great to have you.

Ethan, I wanted to start with the retail side of the business, which has really been influenced to some extent by what you're doing from -- obviously an innovation perspective, but also the latest -- kind of the issues surrounding the pandemic. So I'm hoping you could talk a little bit about your plans for the summer grilling season. I know that you're kind of looking at this summer as a unique opportunity to lean into the category and have some distinct plans in order to try and execute on that. So maybe you could kind of begin by sharing some of the color around that decision-making process and what exactly to expect as we move through the next few months.

Sure. And it's a great question. So we always start around the premise -- so we're an innovation-driven company, and we view our innovation as taking protein and other materials directly from plants. Instead of running that through an animal, we run it through a system of heating, cooling and pressure. That provides the consumer with the architecture and sensory experience of animal protein. And so it's very much a part of our culture to continue to drive innovation across 3 platforms: beef, pork and poultry. But there's another component to innovation that I think is less obvious to some, and that's around how do we reduce the cost of not only our processes or the direct materials we're using so that we can underprice animal protein. And about a year and 6 months ago, I set a goal to be able to underprice animal protein within at least one category within 5 years. So we're now looking at about 3.5 years to get that done. And I feel very good about that. We're continuing to drive the integration of our production processes to strip out some costs as well as we're continuing to see a maturation of the supply chain. When we started the business, we were really drawing on resources that were coming from other industries. So the pea protein that we began using in the 2010 period really was an afterthought around the starch markets, right? It was a company that had decided to start leveraging the fact that as they separated starch from peas, they had this derivative stream of protein. And we're going to sell it in to different segments, including ours. But as we start to grow the market, people begin to and businesses begin to get into industries that are important for us in terms of our supply chain. So you will see us be able to continue to drive our cost structure down. In this summer, we decided to kind of hold our breath and lean in. And because of the very rapid increase in beef pricing on the wholesale and then subsequently retail markets, we said this would be a good opportunity for us to invest a little bit in pricing. So we had some very good margin in the first quarter, we're about 38%. If you'll take some of that, invest it into pricing, come up with a new structure in terms of our product offering. And we shifted into the production of value packs. So we're now providing a consumer with a 10-pack product that will go in the frozen section, and that allows us to almost half the retail pricing in some instances of our products on a per-pound basis. So I'm very excited. And it's not going to underprice beef even at these historic highs, but it will get within striking range. And that's what's important because we want to see how the consumer reacts to that this summer.

How widely available do you expect the value packs to be? Will it be selective distribution? Will it be broad within retail? And I think you mentioned that it will be available in the frozen section as opposed to your twin packs, which are largely in the meat case. How will you make kind of consumers aware to look for it there and make them aware and kind of promote that trial?

Sure. So I think the first part of that answer would be we sat on a lot of marketing powder throughout the COVID crisis. I didn't want to be marketed to as a consumer. I didn't want to receive pushiness from companies. Everyone is just trying to get through a very, very serious unfolding tragedy. And so we did sit on marketing, and we decided to instead be part of a solution and give away products to people that we're in need and the frontline responders, et cetera. But we have a very large campaign that we will be launching in the second half of the year at some point around our ingredients and our process. And part of that will be this summer, educating the consumer about where they can find their products, the fact that there's this new value pack available. It's in the frozen section, but it's in the frozen meat section. So it will be something that we're going to educate consumers around. We've seen incredible uptick in interest among retailers for this product. We got a lot of preorders. So we're very hopeful that as it gets in the market and consumers see this new pricing structure that they will begin to put more and more Beyond Meat on their plate. And that brings up a point I did want to share. We're benefiting -- I talked about it a little bit in the first quarter. We're benefiting from these dual trends, which are unusual in retail for CPG companies. We're getting not only more households that are buying our products, but each household on average is now buying more of our products. And so not only the household penetration is going up, but the buyer rate is going up. And so the confluence of those 2 trends speaks very well for our ability to continue to grow in retail. Keep in mind, we only have 8 SKUs total in retail. Most retailers don't have all those 8 SKUs. They have 4. And we're leading -- in terms of the top 4 plant-based meat product offerings in the market in retail, each one of those is a Beyond Meat product. So we just have to continue to innovate, continue to delight the consumer, work on our pricing to get to the point where we can begin to get dangerous around the price of animal protein.

Interesting. Do you expect the -- is the value pack more of a household penetration driver initially? It sounds like with the much better pricing, it would be a way to perhaps bring new users into the franchise. And I think you're still sub-4%, when it comes to household penetration for the brand. That's question 1. And then question -- the follow-on to that is, what are the implications from a margin standpoint? I think I understand that you have some excess capacity on the food service side of the business that may be able to be redirected to produce value pack product. Is that the case? And does that help you maintain a fairly hearty margin on that product?

Great. So it is all about -- on the first side of that, it's really all about driving trial. So this summer, one of the most important things that Beyond Meat can do as a brand is get the product into people's mouths because they start to believe in it and they start to understand the noise out there about processed ingredients really isn't true. If you look at the back of the package, it's a clean label. We're proud of it. And the products speak for themselves. So let's get into the consumer's household, let's allow them to enjoy eating really great-tasting plant-based meat that delivers nutritional benefits to them. And so it's -- I'm willing to invest in that this summer. And we're going to be going on promotion quite a bit, being very aggressive. Again, we had a nice margin. We're going to invest a little bit of that margin into growing the customer base. I think it's the right time. And then see how it goes from there. On the margin side, this will compress on that particular product our margins a little bit. But that's, I think, okay, right? We need to lean in during this period of historic pricing in beef. And so we are willing to trade a little margin to get broader distribution. It's a long-term game for us. We're not making any changes in our long-term margin projections. We'll achieve this lower pricing based on cost of goods sold and direct material and direct labor as well as leveraging overhead. But you will see this summer us have some more aggressive behavior on margin.

Great. That's helpful. A couple of questions from investors on the retail business. First one is, are you planning on selling products directly to consumers via e-commerce? And where does that stand?

We are -- but I wouldn't put too much emphasis on it. It's -- we had this in the beginning when COVID really started to disrupt the economy. We started to look at how we reroute and repurpose. So rerouting was around how do we -- we know we have a certain percentage of stomach share. We have a certain number of consumers. How do we continue to get our products to those consumers? And so we looked at everything from working with Grubhub and other deliveries to increasing our presence in retail, doing this value pack. We also looked at other direct-to-consumer opportunities. And so we did put together a program there. It will be launching soon. But I wouldn't say that we're betting the farm on it. We'll see how it goes.

Okay. And will that be a direct from your own website?

Yes. There's -- and there'll still be fulfillers of the orders that are outside of company. We have gone ahead and outsourced that. But...

Great. Great. A question on competition, competitive intensity. There are more players in the market today than there were a year -- a little over a year ago when you went public. Could you talk about what you're seeing there? More specifically at retail, Impossible is entering the market. I think the distribution is still quite limited. But also some of the larger meat packers, traditional animal meat packers have launched sub-brands. How intense has that gotten? How intense is the competition for shelf space? And have you seen any material impact on your growth trajectory as maybe you've gone head-to-head with some brands that weren't there going back a year or so?

Yes. We haven't seen any negative impacts on our growth. I think the competition falls into a variety of different categories. I do think, and I've said this before, that Impossible Foods and Beyond Meat are going after different consumers. We're very clear to our consumers. There's nothing -- there's no genetic modification in our products. And Impossible has obviously taken a different approach with their use of the steam iron, not bad or good, just different. And so I think it does appeal to a slightly different consumer base. If you look at companies that are coming in that are the larger incumbents or that are coming in from adjacent categories, I think it all gets back to the focus that they have to execute across a variety of products. And their P&L is much more complicated than ours. We have a singular focus at Beyond Meat. It's around building meat directly from plants. We don't have to worry about a confectionery business or a poultry business. And I think if you look at some of the approaches that have been taken on or which happened in Europe with one of our major competitors or some of the launches they've had come out of the meat industry. Great. So I think where we stopped because I was just talking about there's an opportunity sometimes in the industry to get out far enough ahead of incumbents that it's much harder for them to chase you. And so obviously, you have a lot of vested interest in understanding that phenomenon. And if you look at things like Amazon, you look at Tesla, et cetera, those give -- they leave clues on how to do that. And I think we've reached that point where we're moving so quickly. If you look at how we set up the Manhattan Beach Project, we started a research center here in Los Angeles, we have well over 100 very talented scientists and technicians working every day on building meat direct from plants. That singular point of focus. And we're just moving so quickly with regard to the pace of innovation across beef, pork and poultry. Our program reflects that. It's called Beyond Meat Rapid and Relentless Innovation Program. And the key to that is not only trying to collapse the gaps between animal protein and our products so that we're indistinguishable to the human sensory system but also to continue to replace the products we have on the shelf. Nobody wants to replace the products that say Beyond Meat on the shelf more than Beyond Meat itself. We have a desire to continue improving and delighting the consumer. And so if you're chasing us by trying to replicate the current product on the shelf, you're going to be chasing a ghost because we have moved on in our own facilities and research centers to a better product, and we are eager to continue to get those out into the marketplace.

Great. One more on the retail side. The consumption data that we see through IRI/SPINS has shown latest 4-week -- continuing to see triple-digit growth for the brand and healthy share gains. I wonder if you could talk a little bit about the performance that you've seen. Has it been kind of in line with your expectations? And also the balance between shipment activity and sell-through, if you're seeing kind of a gap there or a consistency that kind of you're comfortable with at this point.

Are you saying on the retail or food service side?

On the retail side.

Yes. So on the retail side, I think the general trend would be as someone would expect in a sense that as there was a set of panic buying that occurred in the latter half of March, kind of the week of March 22, around that time period, where we saw a significant spike. And I think we shared that on our earnings call. And the consumer has obviously relied more on groceries to keep their families fed, and we have benefited from that. Has that benefit offset the food service decline? As we shared in the first quarter call, not fully, right? But it is something that is carrying us through in a way that other companies aren't able to benefit from that have more limited exposure into retail. And so I think you continue to see the consumer embracing the product in retail. And with this pricing that we're coming out with this summer, we're hoping to leverage that even further. The QSRs will come back in terms of the overall business, not just us. What I viewed and experiencing is that this is not about scrapping any plans to launch. It's about delaying, right? And so there has been some delay. But I think it's really instructive for people to look at past experiences with pandemics, whether it's '50s -- we had one in 1957, one in 1968. The world went back to normal. After crisis, you see that, right? And even whether it's 9/11, people got back on planes. So the world will resume its activity, right? And we just need to continue to be the best partner we can be to the QSRs that are struggling right now so that when it's time to get back in the marketplace together, they know that we were here with them. So we did a lot of measures to reach out and let them know that we're there to support, offered lower pricing and things of that nature if they needed it and did a lot of promotions, gave out product with them for free in the communities that they were serving. So I'm very optimistic about the food service sector coming back.

Let's stick with that then, on food service. Is there any update that you can provide us on McDonald's? You recently completed an initial test with McDonald's. And I'm also wondering if the recent kind of surge in meat product pricing has any positive implications for a deal with McDonald's, or frankly, your food service business in aggregate?

Right. Those are great questions. So with McDonald's, we continue to not be able to share the plans there, and it would not benefit as much to do that. But we had a very positive test with them, and I can leave it at that. And so I remain very optimistic about our business in food service. On pricing, it really depends how quickly the beef industry can get through this. And so you saw a spike. I think it was $6.10 on the wholesale market, I don't know, 4, 5 weeks ago. And that has now moderated. So you're starting to see those prices come down somewhat. So I think the long-term cost structure between the 2 industries will benefit us in food service. Whether or not it's going to create a short-term bump for us, I'm not sure.

Okay. Another question from the investor client base. When will we see a chicken alternative that will blow people's mind?

Great. I love that. And I love the language. That's exactly what we strive for. How do you delight the consumer? You got to have that obsession about the consumer, and we certainly have it here. We're working very hard on that. We have great partners in that research and development, including some of the world's largest QSRs in that area, helping us to dial in taste experience, et cetera. So I can't give a particular time line for it. But what I will say is that we had our chicken product very early in the company's history. I think we launched it first in 2011, 2012. And it was really good. I mean The New York Times, Mark Bittman, did us a great turn. He had a Sunday review, the front page of it, had a glowing article about it. But it wasn't -- you also said there's some issues here, and they have to keep working on it. But it wasn't, in my view, good enough to go mainstream. And so ultimately, we ended up taking that product off the market, upsetting a lot of consumers in doing so. But we said, look, our brand is really about continuing to improve, and we want to take this in-house to make improvements. So you'll be seeing us come out in the near term with a nice improved product in the chicken space.

Can you talk a little bit about the recently announced agreement with Yum!, Yum! Brands? I'm wondering if we should be thinking about this as a -- is this kind of a big bang right out of the shoot? Is this a very small kind of test, LTO, and how Yum! typically approaches these types of things where it might be more of a phased implementation by product or by geography?

Right. So I want to be careful not to speak for them, but I can give you our experience. It was a terrific launch. Everything I've seen from the media in China with Pizza Hut and Taco Bell and KFC. I just -- you got to pinch yourself when you say all 3 of those brands at once. And I was really excited and humbled to be able to be serving them. I mean that's -- it's kind of a dream come true for a company like mine. So we were elated to do it. Yes, I think the tests are going well. What they're going to do with that is something that they're better poised to answer. But I will say we're investing in that part of the world. If you look at Candy, Jon, who we just hired, she was, I think, the Chief Marketing Officer for one of the Yum! Brands, Pizza Hut, most recently, very high up in the Yum! organization at Yum! China. We hired here after we had this deal. The 2 aren't related. But we're going to make significant investment in China in terms of people and resources to be of service to that economy and that consumer. It's a different consumer in the United States in terms of pallet and social media approach and things of that nature. And I want to get it right. I don't want to do it from afar. I wanted to be over there. I was planning to go over in March. And the first moment that I'm able to travel in terms of the regulations or the restrictions lifting rather, I'll be there. It's a really exciting market for us.

Could you talk a little bit about China margins, around that subject? The size of the opportunity in China relative to North America, as you think about it, also the consumer, is there a greater affinity in China for plant-based meat products because of their history with tofu and other types of plant-based ingredients and products? I'm wondering if that might allow you to kind of accelerate the uptake there.

Yes. Good questions. So I think the market size, it's obviously enormous. And the trends that are global around affluence and animal protein hold there as well. As affluence increases, there's more interest in eating more animal protein-rich diet. And so as more meat concession comes online, we hope to benefit from that by providing a plant-based meat. I think about it a lot like the mobile phone and landline relationship. If you can get into economies early enough where the incumbent infrastructure is not built or not expanded rather, I think that's a major as I can remember being in the media and other places in the '90s, late '90s, and going down the road and you'd see no telephone poles doesn't mean they weren't communicating, right? They were using cellular. And so they just skipped that process. And so to what extent can we be super aggressive in Asia to help usher in a new era of meat production, and that's really the goal. In terms of the affinity, it's a great question. I mean the Buddhist temples for a long time have stimulated the manufacture of what they -- for plant-based meats. The first meat that I ever worked with, plant-based meat, that was imported from Taiwan. So the products, they have a history of it. And I think you marry that with our very focused effort on pricing as well as quality. And it gets back to this trinity of benefits that I've spoken about before. You have to get this product to a point where it's indistinguishable from animal protein, provides a sensory experience that so many of us love. Then you get the nutrition right where you're providing nutritional benefits of animal protein, of which there are in terms of complete protein, iron, et cetera. And then you strip out the stuff that is not relevant for us. It actually damages our body. And I think the thing that's important to remember about meat as a substance, the animal's muscle is not necessarily there for us to eat. It's there for the animal to do work, right? And that's the purpose of that muscle. And so there's a lot of things in it that you don't necessarily want to bombard your body with on a daily basis. So our goal is to take those things out and provide the benefits from a nutritional perspective of meat to the consumer. So you get taste right. You get nutrition right. So you're providing superior and nutritional value proposition. And then you drop price below animal protein. We can do that in Asia. We can do that here in the United States. It becomes unclear to me what the consumer -- what level of or -- I begin to think it's a minority of consumer that says, "You know what, I'm still not going to do that taste rate as better nutrition is cheaper." If we can hit those goals, I think Asia and the United States and Europe are going to be very, very attracted to us.

On the food service side of the house. Would you -- based on what you're seeing at present, we've been in an environment here in this States where restaurants have been either -- certain restaurants have been closed. Others have been operating with reduced operations, whether it be takeout or delivery, drive-through. Do you expect June -- the June quarter -- is this the trough quarter in food service, and as we move into the back half of the year, we start to see sequential improvement as the economy reopens? I'm trying to get a sense for the cadence as you think about that going forward.

Yes. I think -- I think so. I mean I don't have particular insight on that subject. What I think we need to guard against is a recurrence of this in the fall. And it's probably the thing that would disrupt that more optimistic perspective. And so if COVID can be contained as people go back indoors more and go back into work, I do think you'll see a significant reopening of the food service industry. And then I think things will get back to the point where they were largely. I don't know at what time, but history does suggest that we'll get through this and get back to business.

So putting kind of all the demand side aspects of the business we talked about, I want to shift gears to supply and in particular, sourcing. I think you have, correct me if I'm wrong, diversified your sourcing of key ingredients such as pea protein. I think when you went public a little over a year ago, you had a couple of key sources, maybe 3. I think you've expanded that now to include a fourth, perhaps a fifth supplier. What kind of capacity do you have now to support sales if you meet your objectives? And have you seen more competition on the supply side as more perhaps capacity has come online? And has that helped you from a pricing perspective in being able to procure some of these key ingredients at lower costs?

Yes. I think it's a really good question on the things that we focus on a lot. You do see more competition coming in the supply chain, which is great for us. But it's in fits and starts. So have we seen a uniform depression of pricing across our supply chain? Not yet. But you see the elements necessary for that to occur coming into place. You've seen those small companies getting involved. And protein separation is a big area, right? If you look at the United States and you look at slaughter houses, for example, they are more consolidated today, but they're still fairly distributed throughout the country. When you look at milling houses, right, same thing. There's not like one, right? There's many. And so we need to create the infrastructure in our industry so that the separation facilities are closer to farmers. We need to scale the technology down in size and the cost, so that farmers can take their crop into these protein separation facilities, and we can then take the protein out. That's happening but it's happening, again, kind of in an uneven way. But you see smaller companies coming in these larger companies. DuPont announced an initiative. I think ADM is getting more aggressive. So yes, there absolutely will be pricing. And it gets back to the fundamental value proposition of our business. But you're taking the main bottleneck in protein production out of the process, which is the animal. And more and more suppliers are coming in to provide plant-based protein separated from the plant. You can start to see that we do have a good run at reducing costs. And that's why I was very comfortable saying that goal, which is now about 3.5 years away.

Terrific. There are 2 more things I want to cover quickly. We have a couple of minutes here, I think. Europe, we haven't talked about Europe. Where do things stand with the factory in the Netherlands in terms of being up and running and then able to kind of cater to the European market? And what are your growth objectives in Europe at this point?

So I feel really good on our infrastructure in Europe. I can't give you exact detail on opening, but it's -- we've got some promising stuff going on there. The market is enormous. It's -- I think it's better -- well, it is better developed than in the United States and certain economies in the EU. And so for us, I don't want to be a broken record, but it gets back to pricing in the sense that we have been shipping product over there, which is ridiculous, and it's how you have to do it to start. You want to see the market, make sure that your value proposition is resonating, and it certainly is. And then you go into production over there. So the most exciting thing to me about that production is we source some of our protein from Europe already, right? So to be able to see -- to cut out all that logistics, right, and begin to do an end-to-end production process over there will allow us to get more aggressive pricing throughout the EU, which -- and it will do a second thing. It gives us a beachhead to continue to develop products that meet the consumers' expectations from a European pallet perspective. You really want to be in the communities where you're producing. And that's really important to me. So that's why we're investing so much energy into Asia and into EU. These are not going to be secondary markets for us. They're important, and we're putting priority on them.

I think it would be good to close. Another question from the audience. How is Beyond Meat addressing diversity and inclusion within the company? A good way to finish up today.

I've obviously -- along with our employees and our company and our broader family, have been very troubled by what's going on. And it's not gone unnoticed in the past. We're not going to do anything that's a stunt. Like I saw this company close their stores the other day. That's great. But what tangible actions are we going to take? And so I sent a company address around about a week ago, outlining those actions, and they're going to be meaningful. We're investing in the African-American community. So much of our story has been told through athletes and celebrities, and we have the opportunity to work with that family of ambassadors and advocates to drive change in this area. And so we are -- I won't steal the thunder from future announcements, but we are going to be investing in those communities that are underserved in terms of nutrition, and underserved in terms of overall food availability, in terms of high-quality food. And we're starting to do that. We're going to do some education around health in some of the underserved communities and things of that nature. On the diversity side. Yes, this is not an issue that's new for me. I've been very focused on it throughout my career. And so I think on our executive team, we have -- both at the VP level and above, we do have good diversity, and we'll continue to get better. I was on the phone yesterday with someone about setting certain metrics. Stem is an interesting area. We need to have more diversity in stem. And so I think Beyond Meat can take a real leadership role in that. But this is not something that we'll take lightly. We have -- so much of what we're doing is around how do you create a contribution to the solutions for heart disease, diabetes and cancer. And those disease epidemics in the United States hit minority populations in a disproportionate way. And we need to get around that. We need to get our hands around that and fix that. And Beyond Meat can play a role on that.

Thank you so much, Ethan. I really appreciate your participation today. We all do. And look forward to having you for the balance of the day in one-on-one meetings. Really appreciate it. Good luck.

Thanks for the partnership, guys. Appreciate it. Thanks. Great questions.