BYND - NASDAQ

Hello and welcome to Beyond Meat's 2023 First Quarter Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Paul Shepherd [ph], Vice President, FP&A and Investor Relations. Please go ahead.

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.

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 3 central tenets, upon which we would execute a full force pivot from the growth of 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 streamline 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 3 pillars: one, margin expansion and cost reduction. The company is focused on the deployment of lean management structure and process to drive cost out of our operations. We continue to rationalize our production network, collapsing processes and eliminating steps that generate unnecessary cost 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 imply 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 with 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 4 main actions: One, as we approach summer, we were rolling out 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 for implementation of each of these 4 tactics, broader marketing programs designed to educate consumers amid substantial noise, tactic collaboration with our key retailers, strategic pricing toward a parity goal and select renovation as we head into peak grilling season. In the frozen set in 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 for 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% international foodservice. Both the McPlant Burger and the McPlant Nuggets were 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, I would certainly agree with the very positive press it is 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, 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 but also being offered for a limited time in Portugal. Additionally, in Austria, McDonald's continues to offer limited tide items at 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% 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 that we moved 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 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. More to the same, 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 accesses foods based on specific nutritional criteria as well as taste, simplicity, convenience and transparency. Here again, I'm very proud of all the hard-working team members at Beyond Meat who worked for years to bring such a powerful, purposeful and positive innovation to consumers and families. Whether the certification of Beyond Steak by the American Heart Association, our 5-year research program with Stanford University School of Medicine, the plant-based diet initiative, or our 3-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 price taking has been the norm, putting the consumer 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 interjected 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 OpEx 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.

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 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 impact, 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 5 to 10 years to a uniform 10 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 nonproduction 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 noncash 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.

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Alexia Howard with Bernstein.

Can I ask -- I guess the main question is about the return to cash flow positive in the second half of the year. I know you gave pretty good ideas of where the big levers are. But are you able to sort of prioritize those? Where are the biggest levers that get you back to that in the second half of the year given that pricing is coming down and you've got some of the -- I think you said higher category headwinds than previously expected in some of the prepared remarks.

Sure. Thank you. So we really have 4 levers, as you know, to guide ourselves into a cash flow positive position and 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 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 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.

The next question comes from Adam Samuelson with Goldman Sachs.

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 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.

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 is making. I think the story is one where week-over-week. We're making considerable progress toward storing 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.

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 1 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.

The next question comes from Rob Dickerson with Jefferies.

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?

No, I appreciate it. Great question. So you're right. There has been, I think, from like 27.8% to 25.5% or something like that reduction. We continue to really look at this in 3 ways. One, there's the macro issue of the inflationary environment and obviously seeing some moderation there, so that gives us a little bit of hope on that front. But if you look at recent earnings of animal meat providers, they're also seeing that trading down that's occurring. So we believe some of that is still at play for sure. The second is there is a induced level of ambiguity, I think, around the health benefits of our products. And some of that is purposely ceded through interest group campaigns and some of that is just genuine new category, new products, people doing to figure out what's what. And the third brand-specific issues where a tremendous number of entrants came into the category and it became a very crowded and somewhat confusing landscape for the consumer and I don't think we did enough to really stand out during that. Now some of that's taking care of itself as the category shakes out and I think the consumer is left with a much more rational and approachable decision that went in the grocery. So -- but those are the kind of 3 main factors that we felt would contribute to the household penetration numbers that you just shared. Now on the positive side and I'll get into some of the things that we're doing also on the innovation and renovation side. But first, I do want to pause and look a little bit at the frozen category where we saw units up about 32% and dollars up about 36% year-over-year. And that's obviously from a smaller base. But it shows the power of beyond innovation. When we launch a new product, for example, like Yantak that, I think, rose very quickly, as I mentioned in my comments, the number 2 position with very short distribution life in a major retailer. And so I think we'll continue to see real progress on that. And if you look at in terms of responding to the ambiguity around health yesterday's announcement from the American Heart Association, that's not an easy thing to do, right? So we've created a piece of steak that is, by all reviews, delicious. And it's earning the endorsement and the certification from AHA which is very selective, right? So now a product that -- I think it's Curios has the endorsement now something is a center-of-the-plate protein typically associated with kind of very indulgent eating is now something that people can feel really good about consuming it. It's 62% less saturated fat than animal protein than the any protein equivalent. It's a terrific source of protein with files, et cetera. So responding not only through our marketing efforts but through the products we're putting out to this question that's being raised, I think, largely by incumbent players around the health benefits of our products. So as inflation starts to moderate, as the health message becomes clear, we're then set up with both the renovation and innovation that we're bringing to market to really reengage the consumer. So talk a little bit about the renovations. So some of that renovation is targeted directly at the refrigerated case where we've had the most significant issues, right? And so you'll see something later this year coming out which in all of the kind of CLT, the consumer test we do scores well above the current product in the market. Second, we're introducing some really exciting products which I mentioned, a new iteration of the Burger which all the testing that we've done with customers, for example, on the foodservice side, we've gotten really good reviews on the consumer side. People in all the time looking at it and it's true, I think, advance in taste and sensory experience. So that will actually be going into the frozen section and I think will give us a lift. Further down the year, you'll see some innovation in some categories where we've been quieter. And so I'm excited to get that out. And then there's price parity program. So we're not going all the way down to the price of animal protein but we're starting to tease out that elasticity. And as you do that in the stores where we can really control for noise, we are seeing some very good results. Now that's not in any way a broad statement, right? It's -- these are more limited efforts and the data is still pretty rough and early. So I caution against using it for anything other than which it is was just nascent information. But we are seeing some elasticity that's encouraging around those pricing tests. And then finally, as the shakeout continues to occur, we think we'll have a straighter shot to the consumer. So we are building momentum. Now the second quarter is obviously lapping a very, very significant quarter for us last year, I think, at $147 in revenue. So I think it's really more about quarter 3 and 4 with the lower comps. I think we're finally going to get this business back to being a pretty decent margin and seeing growth again in the second half of the year which I'm really excited to do.

The next question comes from Peter Galbo with Bank of America.

Just one quick clarification and then my actual question. Just Lubi, I wanted to understand the change around the depreciation impact to 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.

Yes, sure. So it does continue throughout the year because essentially, as we mentioned, we've done a reassessment of the useful lives of our large equipment and where previously we had a range anywhere from 5 to 10 years across a number of our large manufacturing equipment. We've now moved to a more uniform sort of 10 years which actually moves us more in line with industry standards. And so there will be a benefit and that actually is the reason for us -- the primary reason for us taking up the gross margin guidance for the full year. Now it won't be the benefit won't necessarily be the same throughout the year, particularly when you look at our second and third quarters of the year which tend to be our strongest quarters from a revenue perspective, just due to seasonality. So we would expect depreciation as a percentage of total net revenues to be lower in those. And so we did increase our gross margin guidance for the full year. We said it would be higher than previous guidance by 1 to 2 percentage points and it is primarily driven by that.

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.

Yes, no problem. So I think you're referencing year-over-year, I think, 100% growth in International Foodservice there's obviously some performance in mom-and-pops but also the TGC are really driving that. And while we've had a lot of turbulence in the last several years, I think that the overarching trajectory of the business remains exactly as it has been in the sense of we want to make this transition to plant-based need. All factors are pointing to it. There's been some disruption to that. But as you look at the progress we're making with strategics in Europe and you spend time over there with the European consumer, you begin to see, I think, what I see which is a sort of inevitable transition that's occurring. And so to have a major customer like a McDonald's or a Yum show that kind of progress in a very limited market and do it so profoundly, I think, is really encouraging. So no, there wasn't really load in. It's just progress quarter-after-quarter progress. And it hasn't been a straight line but it's -- but I think the arc of this thing is going to continue to be impressive. On the retail side, it kind of gets back to the issues I talked about. It's a tough retail quarter for animal meat as well, right? So there's just a lot of noise in the system right now. We're making the steps that you should make to do this. We're putting in marketing programs at a high level around taste and health. We're doing tactical store programs. We're concentrating very much on our top retailers and have great relationships working there. If you look at the pricing actions that we're experimenting with and seeing some decent results around that gives us some encouragement. And then we're doing an overdue renovation of some of our key products and putting in products that are terrific. We're both defending our existing products in terms of our core approach and putting the information out there, the consumers need to make informed decisions rather than decisions driven by Propaganda or by confusion, whether it's the Stanford Health study that we've done the swap Meat study, I've talked about a lot in the past but again, it probably bears repeating where consumers had animal protein twice a day for 8 weeks and then switched over to beyond twice a day, 8-week period and then back to animal protein and just in that 8-week period. And if I do nothing else and help the people on this phone call understand this, they saw a drop in bad cholesterol, statistically significant drought. They also saw -- and I think this is even more meaningful. So it's not just LDL-cholesterol dropping, with TMA drops which is the compound in the gut that they're increasingly associating with heart disease. So you see that benefit, right? And then you see organizations like the American Heart Associates, endorsing the product, then you see the partnership with American -- can Society. And there's more to come. We are not doing what others do. We're not putting propaganda out there. We're not criticizing other companies. What we are doing is doing the research, right? We're bringing together the medical community to continue to study these issues. But the inevitability of this, the truth that stands behind our products, the proof points that we have -- that is what's going to bring us back in retail and we have to continue to communicate that. So pricing, new products coming in, clear marketing around health and taste. Those are the things that are going to drive us back to a growth position in the second half of the year. And again, a week after week, we're making progress here. It's gotten to be exciting and fun.

The next question comes from Ben Theurer with Barclays.

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?

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 and select European markets as well as globally. And 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. And 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 they get to the price to the point where it's at parity, we're below that of animal protein. And 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 to be able to deliver products, restoring to at least some positive margin while we're also putting price pressure on it is impressive. And it shows, I think, that they're just scratching the surface. And 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 overtime.

The next question comes from Peter Saleh with BTIG.

Ethan, I want to come back to that conversation around International Foodservice real quick. You guys seem to be finding some success over in Europe with your product. I was hoping you could give us -- and I know you don't want to provide too much detail but maybe just give us a sense on how much of the success that you're seeing there is trial versus repeat purchases. Any sort of details you can provide around the characteristics of the customer who's buying it there? Are they older or younger? Are they lower income, higher income? Anything that can just help us kind of identify what might work here in the U.S. that's already resonating over in Europe?

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. And so on the -- 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 a such strong health credentials. In Europe, it's really about the environment, right? And so consumers that are maybe less focused on the category for health are going to come into it because of climate and 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. And so 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 there 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. And the way they embrace the product is very different from someone who's in their 50s, right? There are far fewer kind of 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 pocket here in the U.S. that maybe are more dialed into some of the urgency of the environmental crisis that we face.

The next question comes from Andrew Strelzik with BMO Capital Markets.

This is Matt Lindon [ph] 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 moves to price parity, while also protecting near-term margin growth as we execute the turnaround strategy.

Sure. That's a great question. I think first and foremost, it's really around we are emphasizing total profit dollars versus percent margin. And so getting some of these bigger programs going, whether in Europe or here in the U.S. with some of the grocers and things of that nature and just putting more volume through our system really helps us, right? And so not being map focused on percent but rather on profit dollars is the way to think about it and how we're tackling that question. I think the second piece that gets back to this disruption that's occurred to the business over the last couple of years. We went from, I think, 8 now to 3 co-packers and doing that while also lowering costs is really hard. There's just so many variables that are moving. And so I'm really excited to see what our team is going to do now that they kind of have some pathways that are more stable. We start getting around some of the leaning out that we've been doing in a more stable environment. So I don't think we're in a position, for example, with a more stable -- like a more stable company would be where we kind of already squeezed a lot of the juice out of this and we don't have much more room to go. We have a tremendous amount of little hanging fruit to grab from here. And so we can do this where we're taking a 9% reduction in average pricing over the course of a year and achieve these margin targets. If you adopt the lean methodology that we're adopting, you eliminate waste at every step you can, you drive profit across product families and you create a nice entrepreneurial environment within your company between product families before and poultry, you can get there and that's what we're doing. And I think the teams haven't fun doing it.

The next question is from Michael Lavery with Piper Sandler.

Two possibly related questions. Can you just touch on -- you mentioned your inventory came down a little bit. What's the outlook there in terms of just overall? And is there any spoilage risk or write-offs that you might have to wrestle with? And maybe related, maybe not but can you also just talk about the decision to bring jerky from the partnership in-house and just some of the thinking there and how that unfolds.

Yes. Sure. So let me take the first one -- the second one first. So yes, bringing Jerky in-house, we love to work with Pepsi. We think we're going to be able to utilize that vehicle down the road. But in this particular case, again, like once you start to really focus on this goal of cash flow positive, J&J operating model towards more sustainable growth. It made more sense for us to have that in-house. -- did some good things. I think we reached the size of the plant-based Turkey market in 1 year, I think six folds a good product. We like it but let's get the margin right. And so that's why we're bringing a house and that will help take that drag off of our overall margin. Your question about the levels of inventory and are we looking at any scores, we have a very active program there. We have a specific program to make sure that we're putting all of that to use. We can't control for everything, so we obviously continue to our reserves. But the goal there is to monetize any excess ingredients we have as well as keep a very tight control on any aging inventory to avoid write-offs. So being very proactive about that, looking ahead several quarters to make sure that we don't get caught in a situation we don't like but you never know. But feel really good about that and have some good people in the company focused on that. So if you take those things where you're looking at inventory levels very proactively, both finished goods as well as with and ingredients and making sure that you're managing toward a good outcome there. You look at increasing volumes and the kind of fixed overhead absorption you get as you do that, this collaboration we have throughout the supply chain to get lower overall cost, we grow the business; we're increasing throughput on our equipment. And then, just trying to eliminate waste again at every turn within our system -- trying to move as much as we can away from batch and to continue to slow. All of these things are helping us drive the type of margin improvement that I think you've seen over the last couple of quarters and I think you'll see in the next few quarters going forward. What was the first question?

The sort of inventory outlook which you sort of addressed but I'll just add to that, Michael -- that Ethan mentioned that the trajectory of total inventory balances will not necessarily look like a straight line down, right, in part due to some of these pre-existing contracts that we have in place. And so, we do expect that the inventory levels will move around somewhat. However, we've said before that part of us being able to achieve this cash flow positive objective of ours in the back half of this year is dependent on us significantly reducing our total inventory levels, right? We've said we said, quite frankly, that our inventory levels are too high and we're very focused on lowering that. And I think our team has done a great job. And we absolutely do still believe that we will end this year with substantially lower inventory levels than where we came into the year-end but that won't necessarily look like just a straight line down.

Today's last question comes from John Baumgartner with Mizuho Securities.

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 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.

Yes, that's a great question. So a bunch of ways to unpack it. And again, I think some really good stuff in there. So first and foremost, our strategy and our goal, right, our goal rather, is not to be a high-priced niche item, right? But it is to be a major player in the $1.4 trillion global protein market. And so we're going to go after that every way we can, right? And so there's certainly -- and of course, people have been taking price right in less. So there's a lot of suggestions we should do that as well. It's not interested because we really want to make sure that we're getting to the mainstream consumer and having the impact that we want and can generate the really outsized return for folks that we think is possible if we're successful at doing that. The frozen case is interesting. It would be not very interesting if it were just the frozen meat all case of 10 years ago to kind of refer to as the penalty box. But if you have the data, look -- for example, how our Cookout Classic product does relative to -- I think it's a bubble burger as a percentage of sales and it's a pretty interesting ratio. And so the -- what's interesting about that is 2 things. One, it's in the frozen section 2, that's -- our click-out classic is one where the price point is closer to animal protein than in the fresh section. And so if you were to you shouldn't do this but like just to dream a minute, if you would extrapolate that ratio, you could see how powerful this can be once we get the proposition right. And so in the fresh section, I think that's where consumers obviously shop for animal protein and for mainstream, protein percent of their plate. I think we do have to be successful there. It is going to take longer than it looked like 2 or 3 years ago. But you never know what's going to turn it, right? So is it as we get to the right pricing, we're certainly seeing, in some cases, an uplift there. Is it when we do the next iteration and bring more consumers in because the taste profile is closer? Is it these breakthroughs like the American Heart Association endorsement of one of our products? All of those things start to come together. And the next thing you know, it's something that is, again, coming off the shelves in the fresh section. So I don't think we'd give up on it but we clearly take advantage of the traction that we're seeing in frozen.

This concludes our question-and-answer session. I would now like to turn the call back to Ethan Brown for closing remarks.

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 team feels good and we look forward to reporting in the next quarter.

Thanks, everybody.