Beyond Meat, Inc. (BYND) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for your patience. You’ve joined Beyond Meat First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference maybe recorded. I would now like to turn the call over to your Host, Katie Turner for opening remarks.

Thank you. Good afternoon and welcome to Beyond Meat first quarter 2019 earnings conference call and webcast. On today’s call are Seth Goldman, Executive Chair; Ethan Brown, Founder, President and Chief Executive Officer; and Mark Nelson, Chief Financial Officer. By now everyone should have access to the earnings press release and Form 8-K issued today after market close. These documents are available on the Investor Section of Beyond Meat's website at www.beyondmeat.com. Before we begin, please note that all of the financial information presented 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 belief and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to the company's prospectus on Form F1 filed with the Securities and Exchange Commission and the company's press release issued today 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 note on today’s call management will refer certain non-GAAP financial measures such as adjusted EBITDA as well as pro forma basic and diluted net loss per common share. While the company believe these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or is a substitute for the financial information presented in accordance with GAAP. Please refer to today’s press release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. Now I would like to turn the call over to Seth Goldman.

Thank you, Katie, and good afternoon, everyone. We appreciate you joining us on our first earnings call as a public company. It was great to have the opportunity to meet many of you during the course of our IPO roadshow in May. Ethan, Mark and I look forward to meeting more of you when we attend investor events this year. Last month Beyond Meat became the first plant-based meat company to successfully complete an initial public offering on a major U.S Stock Exchange. This was an important milestone for Beyond Meat and our sector as a whole, further demonstrating the potential of our plant-based innovations to appeal to a broad range of customers, including those who typically eat animal-based meats, positioning us to compete directly in the $1.4 trillion global meat industry. The capital we raised from the IPO will provide the resources for long-term growth as we build and scale our business in the U.S and expand our operations internationally. I would like to extend special congratulations and thanks to our passionate and dedicated team, who made the IPO and our success possible. Between our management and Board of Directors, we have assembled a leadership team with significant experience in food and science to help fuel Beyond Meat's culture of innovation. Finally, I want to stress that at Beyond Meat we are executing on what we believe is an incredibly robust long-term growth journey. And for that reason we are providing a 2019 annual outlook and long-term financial target, which Mark will review in more detail. Our guidance philosophy is to reflect anticipated growth within our existing business and any confirmed distribution wins achieved to date. We believe this is a prudent approach given the inherent variability and the timing of new distribution wins, particularly in the foodservice channel. We will continue to maintain the operational flexibility needed to make strategic decisions as opportunities present themselves during the year. We look forward to continuing to update you on our progress in the coming quarters. And now, I would like to turn the call over to our Founder and CEO, Ethan Brown.

Thank you, Seth. Good afternoon, everyone. It's great to be speaking with all of you on our first earnings call, following our successful IPO. I will briefly review our first quarter financial highlights, provide an overview of Beyond Meat's business model, and discuss the key reasons we believe we are well positioned for long-term growth in the U.S and globally. Mark will then review our financial results in more detail, discuss our guidance and long-term financial targets. After that we will open the call up for your questions. We are pleased to report a strong first quarter. Total net revenue increased 215% to $40.2 million compared to Q1 last year. We also saw positive trends in our key profit metrics. Gross profit margin increased over 1,000 basis points year-over-year and nearly 200 basis points sequentially. Adjusted EBITDA improved 50% from the first quarter of 2018 to a loss of $2.1 million continuing on march toward profitability ahead of our initial plan. Given that many of you are new to our story, I want to take a little more time on this first call to provide an overview of our business model and global growth strategy. At Beyond Meat, our focus is squarely on the center of the plate protein, a segment traditionally is seen very little in step change innovation. We began with a simple question, do you need an animal to produce meat? The common understanding of meat is it has to come from a chicken, cow or pig or some other type of animal. When we think about meat, we define it in terms of its composition. And as it turns out, meat is at a high-level, an assembly of amino acids, lipids, trace minerals and vitamins and water. We’ve developed a scientific and technological understanding as well as infrastructure over the past decade to assemble these core parts into the architecture of meat, drawing directly from plant-based sources. We understand and use the architecture of meat to present these inputs in a way that to the best of our ability today offers the same satisfying taste, texture, aroma and nutritional benefits as animal-based meats. So instead of running plant materials in the form of feed to an animal to build meat, we are bypassing the animal and using plants to build meat directly. We view our work as a progression of advancements, some big, most incremental toward a build of meat from plants is indistinguishable from its animal protein equivalent. Since the first days of the company, we do this in dialogue with the consumer. The voice of the consumer is deeply embedded in our products. We ask our scientists and engineers what can science do, but we ask the consumer what should science do. And here is what they told us. They’ve made it very clear that they don’t want [indiscernible] in their food, that they don't want artificial ingredients, that they feel they have too much soy and wheat in their diets already, they want familiar and short ingredient list. It is this dialogue that led us to trademark the phrase "eat what you love, because we believe that we are enabling consumers and their families to continue to enjoy and even increase their consumption of burgers and sausage by using our plant-based meats and avoiding some of the concerns they may have around animal derived meats. Lastly, in addition to learning from the consumer, our willingness in the last 10 years to enter the market while still iterating the product has given Beyond Meat an important first mover advantage in several key markets. Our work begins at our innovation center, the Manhattan Beach project. The name reflects our shoreline location, but more importantly it's designed to evoke the spirit of the group of men and women who came together at the University of Chicago during the Second World War. Namely to tap into that notion that the assembly of bright scientists, engineers and managers together with the goal of this urgent, global and societal in nature can bring to life was previously residing only in imagination. Here we work to make obsolete, our very own products on the shelf today, while introducing new products across our core categories of beef, pork and poultry. We capture this organizational mindset in a formal process which we call the Beyond Meat rapid and relentless innovation program. Our approaches resonate strongly of consumers and allowed us to achieve tremendous growth, becoming a leading disruptor in the meat category. Over the past two years, we generated total revenue CAGR of over 130% and to broad distribution across more than 30,000 points-of-sale in both retail and foodservice channels. To start 2019, Beyond Meat has made noticeable strides securing a runway for continued growth. We launched two new products, breakfast sausage and ground meat, which are generating significant positive consumer responses. We’ve continued to rollout in foodservice for Beyond Burger 2.0, already in this 2.0 burger platform for retail release later this summer. We've also introduced our products in Del Taco and Carl's Jr. to much fanfare and most recently Tim Hortons began testing our new breakfast sausage in select stores. We've also made progress extending our international reach. What’s so exciting for us about the quick serve restaurant channel is it every time the consumer sees the product on the menu, it's the Beyond Meat brand. We are building our brand alongside these important partners. Operationally, our team continues to push forward to keep a strong demand for our products. We’ve improved the efficiency of our manufacturing process. We’ve tripled our manufacturing capacity from last summer and we secured ample protein supply for not only our existing supplier, by bringing on a new U.S based supplier. As we move forward, our growth strategy [indiscernible] innovating, including improving existing products and launching new ones. Expanding brand awareness, growing our distribution channels and investing in infrastructure and capacity to be able to serve the army's global market demand. In a point that one can only find exciting as we look to the future, with all this activity we're still in the very early innings of growth. Based on recent Nielsen panel data, Beyond Meat has just 2% household penetration in the United States. Just as we this tremendous runway ahead we see uniquely compelling future internationally. Beyond Meat is not only in the United States and Canada, we’ve also begun to respond to significant demand for products across Europe where we recently launched distribution and announced the new manufacturing partnership with Zandbergen World's Finest Meat, a leader in international protein supply chain. In addition, we’ve also secured limited distribution in parts of South Africa, Chile, Australia and Korea among others. While we know there's a lot of room for growth ahead, we also want to be disciplined, that [indiscernible] pursue these opportunities. Our team will look for top tier distributors that can bring the product to the right market in the right way. In 2017 and 2018, we experienced sudden, yet sustained uptick in demand that led to temporary shortages in product supply. Subsequently, we made significant strategic investments in our own internal production capacity to support an accelerated growth trajectory. Our team is not only increasing internal capacity, but also clicking the rate of throughput across our machines. Externally, we continue investing downstream processing partners in the form of co-packers. And finally in terms of our core ingredients of plant protein, which is today predominantly [indiscernible]. We took steps to make sure that we’ve contracts and supply in place to grow at the rate we expect for 2019 and beyond. In summary, we believe Beyond Meat is incredibly wealthy, listen for growth in the U.S and internationally. I would like to now turn the call over to Mark Nelson, our key financial officer, who walk you through our first quarter financials.

Thank you, Ethan, and good afternoon everyone. It's great to be speaking with you on our first earnings call as a public company. We are very pleased with our first quarter financial results and the significant opportunities for growth ahead. We’ve made meaningful investments to build a revolutionary business. As we expand our development in the U.S and multiple markets internationally. While this approach requires strong investment. In the short-term, it creates the foundation for us to leverage and scale in the medium to long-term. As Ethan indicated, net sales in the quarter were $40.2 million, up $215% compared to the first quarter last year. This strong start gives us confidence in our expectation to exceed total net revenues of $210 million for 2019 representing a growth rate in excess of 140% compared to 2018. Growth in total net revenues for the first quarter of 2019, growth in total net revenues for the first quarter of 2019 was driven primarily by an increase in sales of the Beyond Burger, expansion in the number of retail and foodservice points of distribution, including new strategic customers and greater demand from our existing customers. From a distribution channel perspective, retail channel net revenues increased 111%, while restaurant and foodservice channel net revenues increased 491%, off of a smaller base versus the first quarter of 2018. This significant increase in our restaurant and foodservice volume drove our net revenues through this channel to represent over 50% of our total net revenues in the quarter. On the product side and as a reminder, we had discontinued our frozen chicken strip product line during the first quarter of 2019, which caused our frozen product gross revenues to decline by 5%. However, as beyond meat continues to concentrate more on its fresh platform. This has delivered an increase of 304% in our fresh product gross revenues. Now representing 90% of our total gross revenues for the first quarter of 2019. We will continue to focus on expanding distribution across retail and foodservice channels and increasing sales velocity of our fresh products. This is supported by increased supply of our product through the investments we are making on the manufacturing front that E-than discussed earlier and increased demand across retail and foodservice channels, and increasingly international customers seeking to add plant-based options to their menus. Gross profit in the quarter was $10.8 million or 26.8% of net revenues. In the first quarter of 2019 compared to $2.1 million or 16.1% of net revenues for the first quarter. The 8.7 million increase in gross profit and the more than 1,000 basis point gross margin increase was primarily due to a greater amount of product sold, driving improved production operating leverage efficiencies. The greater proportion of revenues from beyond meat's fresh platform products also contributed to the improvement in gross margin. Going forward over the next several years, we expect gross profit improvement will be delivered primarily through improved volume leverage, through our internal manufacturing footprint, materials and packaging input cost reductions, totaling fee efficiencies and improve supply chain distribution and logistics costs. total operating expenses were $16.1 million or 40% of total net revenues compared to $7.6 million or 60% of total net revenues in Q1 last year. This primarily includes R&D expenses of $4.5 million, a $2.9 million increase compared to Q1 last year or 11.2% of total net revenues and SG&A expense of $11.2 million, an increase of $5.4 million year-over-year or 27.8% of total net revenues. The increase in operating expenses largely reflects higher personnel costs as we continue to expand our internal capabilities as well as higher expenses to support our expanded operations. Adjusted EBITDA was a loss of $2.1 million for the first quarter of 2019 compared to an adjusted EBITDA loss of $4.3 million in the first quarter of 2018. The improvement in adjusted EBITDA was primarily a result of our strong revenue growth and resulting gross margin achieved in the first quarter, in excess of growth in our operating expenses. Looking ahead, we expect adjusted EBITDA to be approximately breakeven for the full-year of 2019. Additionally, while we do not provide quarterly guidance, due to the timing of product innovation launches at retail and new foodservice distribution expansion, we do expect Q2 and Q3 to represent the strongest net revenue and profit contribution quarters of the year, providing approximately 55% of our total annual net revenues with the expectation that Q3 will be greater than Q2. Now shifting to our capital structure. Subsequent to the end of the our first quarter on May 6, 2019 we completed our initial public offering in which Beyond Meat issued 11,068,750 shares of common stock at an IPO price of $25 per share. This resulted in net proceeds of approximately $252.5 million, after deducting underwriter discounts, commissions and estimated offering expenses. Of note, the company's $35.4 million cash balance and total debt outstanding of $30.4 million as of March 30, 2019 does not include the proceeds from our IPO. Capital expenditures totaled $3.8 million for the first quarter of 2019. Using the proceeds from our IPO, we continue to plan to primarily invest in current and additional manufacturing facilities, expand our research and development and sales and marketing capabilities as well as for working capital and general corporate purposes. On May 31, 2019 subsequent to the IPO there were 60,122,797 shares of common stock outstanding. As we look ahead at the plant-based meat industry, we believe we have a unique opportunity at Beyond Meat to achieve strong growth today and for many years to come. Over the long-term, we expect gross margin will approach the mid-30% range. Along with adjusted EBITDA as a percentage of net revenues approaching the mid-teens level. With both of these measures approaching profitability levels in line with other best-in-class consumer packaged goods companies. With that, I will turn the call back over to Ethan.

Thank you, Mark. In conclusion we are off to a great start in 2019. We delivered a very strong and balanced first quarter, and believe we have significant momentum for the journey ahead. With this, I would like to turn it over to the Operator for questions.

Thank you, sir. [Operator Instructions] Our first question comes from the line of Ken Goldman of J.P. Morgan. Your line is open.

Hi. Thanks so much. I wanted to ask about the guidance for revenue exceeding $210 million. Obviously, you're leaving yourself not even a range, but just a big number that we can plug in there. So can you walk us through a little bit what can go right that can get this number much above $210 million and alternatively, I don’t want to say what can go wrong, but certainly what things that might go right that don’t happen necessarily that bring you back down to that $210 million levels. I just want to get a little bit of the sense of the puts and takes potentially?

Sure. Thank you, Ken and good to hear your voice. We wanted to state kind of the philosophy about guidance again around, we are being very conservative view this as a floor. I believe that it's important to note that we really don't count in our forecast on boarding of customers until we're in post trial distribution. So If you look at the last 12 months, for example, we’ve entered into test initially with QSRs and then once that test completed and we’ve the initial distribution set up with them in a broader sense than we add them into our forecast. So one of things that gives me great excitement about our future is that we are entering into additional tasks, which we can't disclose here, but as those occur we move past the trial phase and into a national distribution arranged with them, those will be additive to our numbers. But we think it's inherent within the stage or in today were so much volatilities we take on new customers and that mean upward volatility in that regard. That we don't count the customer's prior to that point of [indiscernible] distribution.

Okay. Thank you for that. And then my follow-up is you clearly, tech media reports are right has a lot of competition coming over the next several months from the line of producers with -- I think it's fair to say very deep pockets. So I’m just curious can you us walk through what you’re doing in advance of these entries to popular your band and your distribution that you have right now and will be took to protect your growth you’re expecting.

Sure. So I relied heavily over the last decade on the concept of competition to motivate and to resource our innovation center, which is the heart beat of what we do. We know that others are out to tackle this challenge, and we know that our group of science and engineers, managers want to be part of this generation, at a leadership level that can separate beef from animals and restructure the protein market. So, first and foremost, it's a very large market. So in some sense, [indiscernible] is coming in validates the direction that we’re headed. But as you look at what we do versus what some of the larger more established food companies, will do. We have a singular focus and we had that focus for a decade. I have no distraction with an incumbent business. No concerns about offsetting my existing supply chain. I’m benignly focused on driving this business forward through innovation to build a product that is a perfect build or plant of meat directly from plants. So we will continue to drive the taste and [indiscernible] experience that consumers have come to love from our brand. [Indiscernible] drive the growth of the brand. And I think it's important to note that this brand is not has been built by us, it's been built by consumers. We didn’t have venture money first. What we had was revenue coming in from customers were the whole foods or at hospitals, universities, and we listened intently to what the consumer had to say. So there's an ownership among consumers in this brand and brand loyalty, and that only grow by the day. If you look at our investor base, some of the highest and most high profile names in sports and entertainment are involved with us. I think that’s very hard to replicate an authentic level. We’ve also made a right choice on ingredients. As you look at some of the competitive entrants into the field most recently, you’ve seen I think some missteps that allowed us to continue to lead markets whether as we enter into Europe or here in the United States. This is hard to do. And if we haven't taken shortcuts, we’ve awarded demos, we have downplayed soy and emphasized other ingredients because we knew what the consumer wants. And so as you see some of these larger companies come in they’re going to be disemboweled what ingredients are using. As they become more disciplined [indiscernible] ingredients, they’re going to learn this is very, very hard to build products with the level of ingredient integrity that we have. We also have a significant head start. I'm very focused on grabbing as much land as I can as we are in this leadership position. So I’ve a very aggressive stance not only on Europe, but elsewhere here in the United States. We don’t pause for a second. We understand that our competitors wanted to come in, but we will use our continued resource then on innovation as well as marketing to build both the product platform and brand platform that allows to be competitive. And we were obviously asked this question quite a bit on our roadshow and I returned that with a question around why is Amazon able to do what they do vis-à-vis [ph] Barnes & Noble's in the early days, Tesla vis-à-vis some of the incumbent auto Netflix etcetera, Beats, Sony. So they’re intangibles and there's focus and there's drive and there's a community of buyers that propel you beyond some of the normal competitive threats. We will continue to nurture those and stand in the direction to allow us to capture more and more market share.

Thank you very much.

Thank you. Our next question comes from the line of [indiscernible] of Bank of America. Your question please.

Hey, good afternoon everyone.

Hey, Brian.

Great. Thanks for calling in.

Yes, sure. So I guess, question I had was if you could give us sense in terms of the revenue base, I guess, so far this year, any sense of what the difference between like trial and repeat is. So repeat purchases both I guess, with the consumer level, so in retail and then also on as you’re sort of building that restaurant business just what the reorder rates are right. So just trying to get a sense for how you’re feeling about or how things are trying to get in terms of repeat level?

Sure. So we don't have as much data as we'd like in this category. We do have some. And our repeat rates are actually quite high relative to some of the animal-based meats that are in the category that were being evaluated as well as some of the plant-based alternatives. [Indiscernible] our panel data with that a 40% to 50% repeat rate for the Beyond Burger in certain markets. But this is an area that we’re going to continue to invest in from a marketing research prospective to make sure that we are continuing to retain the consumers. But that number, over 40% is actually very, very high for this category for CPG products in general where we are.

Great. Thank you.

Thank you. Our next question comes from Adam Samuelson of Goldman Sachs. Your question please.

Yes, thanks. Good afternoon, everyone. So, I guess, my first question was just on the capacity side and Ethan, Mark, any way you can help frame just the bottlenecks or the constraints that you use in the supply chain today and really avoiding some of the issues that you had in the last couple of years, whether it's around especially internal extrusion capacity or raw material supply and how we think about that there is a feeling just from a capacity side that we should be mindful of this [indiscernible] its 2020.

Sure. Great question. So, I look a lot at this question, it preoccupies me quite a bit. We did go through that experience in '17, '18 and in the end it was [indiscernible] or fortunate rather that we did it that period because as we now step into a much larger arena, as we qualified some of the really progressive and leading, but smaller chains and been able to adequately and then robustly serve them we are now entering to a phase where we’re going to be dealing with much larger and even international customers down the road. So we needed to have this sorted out in place and I'm very thankful to say that we were able to do that. So I will break it into three different parts. And first [indiscernible] quick overview and we feel very strongly that we have solid capacity that is in excess of our 2019 and '20 forecast and that’s I can't read the exact amount, there's an excess but as I spoke about on our roadshow, I feel we have considerable head room. But if you look at our production process, we have contracts in place now for protein, that are in excess of a forecast and it's not just the existing proteins that we use that I'm focused on. So we have a contract with our long-term or historical provider, but we are also just on boarded a new one and we’re looking at qualifying additional ones. But I'm also and should continue to diversify the proteins that we use. As I’ve said [indiscernible] a great source of protein, but they're not particularly neat in any way that would allow us to utilize a broad range of feedstock's for our protein supply. So I’m very aggressive and thinking about that not only because I want to diversify supply chain for reasons of cost and driving down in stability etcetera. But I believe that’s what the consumer wants. The consumer wants to have additional sources of protein in their diet and I wanted to buy that. Secondly, we really expanded the core internal production that we have, as you know last year we opened a new facility, really built that out both from a footprint perspective and equipment perspective that allowed us nail to significantly increase the amount of raw materials that are flowing out of our system and into our co-packing network. Lastly, on the co-packing side, and that we’ve been able to bring on additional cofactors. So our manufacturing network has now increased from what was a short time ago, just two to five. And as our brand grows in profile we are able to bring on then only additional copackers, but really high quality copackers of the type that you want to grow your business with some very [indiscernible]. So short answer, robust capacity in place to handle the 2019 and '20 forecast. You will see some isolated incidents where maybe a bit lower than otherwise very strong fill rate. And it has to do with things like product transition as we transition the Beyond Burger 1.0 to the Beyond Burger 2.0, it's by the way I’m thrilled to get out to the retail market. It's an amazing product, I’m really excited about it. As we develop new formulations for specific markets, for example when you go into Canada, there is somewhat different requirements there to ingredients [indiscernible] added into the product. So as we do those smaller changes for the specific markets there may be a slightly lower fill rate, but overall very strong capacity as we look forward to the near-term growth.

Okay, great. And then just quick follow-up just a point of clarification on what [indiscernible] in the guidance. We need to find post trial distribution. So is to safe to say that with the Tim Horton's win, Tim [indiscernible] expectation for revenue from Tim Horton is in the guidance.

So the -- so that is not in post -- that we have added it, Yes, because it's just coming out of file and so we will be -- that without additive to the overall 210 number.

Okay. That’s very helpful. Thank you.

Thank you. Our next question comes from the line of Robert Moskow of Credit Suisse. Your line is open.

Hi. And thank you for making me feel like an internet analyst for hot second, I appreciate it. So I think one of the questions I get a lot on its very similar to the capacity question is that you have a big restaurant chain McDonald's that suddenly could represent a huge number for you. And you've been very clear about what capacity you have for the next couple of years. But if that -- if those numbers are not in your guidance right now, if the McDonald's launches not in your number right now, I mean how quickly can you ramp up to satisfy something like that? I guess, why I’m asking is, you have a capacity plan that you’ve been very clear with. Can you accelerate that in the event that you have a major customer that's not in the guidance right now.

Yes. So Rob I must start with the questions yield. I’m assuming you guys [indiscernible] ask the McDonald's question. So how do you win that?

Very simple. Very simple.

So we -- as you’ve seen from the onboarding of whether its ANW or [indiscernible] recently and probably better would be around Del Taco etcetera. We want to try to do these things in a way that is structured and bringing on presence of their business in relation to the ability to scale our supply chain. And so none of these conversations that we're having with large QSRs are occurring in isolation. We are in dialogue with them every step of the way. In terms of scenario planning, number of units for store regions that we can bring on etcetera and I don't see any material obstacle and I don't see any manufacturing obstacle to be able to in the appropriate amount of time with the right structure take on many of the largest QSRs out there. And I mean all at once, but I mean there's if I don’t see anyone out there that would break our system provided we are able to do it in a way that is -- it has the cadence of responsibility and it gives us the opportunity to plan to grow into their most broadest points of distribution. So it's an ongoing discussion with many of the QSRs and I feel very comfortable that we're providing them with complete transparency into our supply chain and we’re not seeing anyone raise objection to our loan about that from their side.

Got it. Very good. Thank you.

Thank you. Our next question comes from the line of Kevin Grundy of Jefferies. Please go ahead.

Thanks. Good afternoon, everyone and congratulations on the IPO and strong start to the year.

Thank you.

I wanted to pivot to margins, if I could. So can you talk about your level of confidence and visibility for this year, the comment was you expect to breakeven. Then I think the longer term at least looking now to '21, I think it's sort of an 8% EBITDA margin than longer term, low to mid teens. Can you talk about your level of confidence or visibility on hitting those numbers and then getting back to the competitive dynamics, is there any concern that the cost of growth potentially moves up here as we look forward here in the coming months and certainly over the next several years such that that may not be reflected in your outlook. So any comments there that would be helpful. Thanks.

Sure, Kevin. So, yes, I can talk about the margins, I will talk about the first quarter first, we had really good performance. Gross margin improved significantly, piece of that was the mix shift into the fresh product line, but it was also when you see pound data come out in the queue next week, but we're seeing really strong leverage across our internal manufacturing and we're also seeing just really the beginning of the efficiencies on material cost inputs and the rest of our supply chain, frozen chain that we utilize. So we feel very strongly about that margin picture for towards the end of the year in the high 20s. The margin that we achieved in Q1 really demonstrates our ability to go and continue to push and leverage our network. And then, as we get to EBITDA as we move down the P&L, the bottom line, very strong performance on the proxy that we use for cash flow, this adjusted EBITDA measure really leads us to believe that we are within this striking distance of getting the breakeven EBITDA. We will continue to invest in the real critical areas of marketing and R&D. And so as we grow and scale we will still put spending dollars against both of those categories, but driving this into the mid to high single-digit EBITDA level is something that we feel confident about. I think Ethan can talk more about kind of the longer-term balance between wanting to lower prices to get consumer pricing levels, but still driving for these internal efficiencies on our cost model as well.

Yes and in terms of the overall price of growth, we do continue to see an expansion in absolute dollars of our marketing spend even though the increase in revenue [indiscernible] on a percentage basis. We also continue to see expansion in absolute dollars of our innovation, which is the driver of growth. So those two levers are available to us and we are going to work those pretty hard. But as I've spoken out publicly we do have a 5-year initiative in place which is still in the science technology phase and it's an internal target that we’ve kept out of any projections and out of any modeling because of the -- its still in nascent form, but to and at least one category with one product and my focus is on beef in this regard to be able to under price animal protein in at least one product line. And that’s very important to do. We are talking about a $1.4 trillion industry. I think you get a lot of room to play with products that are terrific and higher cost, but as you start to look at the three pillars of growth really and success for us, it's one is taste and sensory, are we delivering to consumers taste and sensory experience of meat that they love, and we're getting closer on that. And that’s something that we are continue to work very hard on. Are we delivering the positive nutrition of meat which there is -- are many different points. And I think we are getting very good on that for the last [indiscernible] price, right? This needs to be affordable and ultimately if you look at the model we have right, we’ve taken out this very large bottleneck in the animal and we’re pulling pieces basically the core parts of meat directly from plants. And so we should be able to over time offer pricing that someday is under that of animal protein. So we have those levers of innovation, marketing and ultimately over much longer period of time continuing to adjust our pricing downward to improvements in COGS to capture more market share.

Okay. Very good. Thank you. Good luck.

Thank you so much.

Thank you.

Thank you. Next question comes from the line of Alexia Howard of Bernstein. Your line is open.

Good afternoon, everyone. Can I just ask about the strategy around marketing investment. It's interesting to me that you’re planning to reach breakeven on EBITDA as quickly as you’re saying. Is there a limit or do you feel that you will be pretty saturated on the marketing spending, especially as [indiscernible] pointed out new entrants enter the market later in the year. Just wondering how are you thinking about digital versus TV versus how [indiscernible] spend to really retain that leadership hedge? Thank you.

Sure. So I think we do see that increase in marketing dollars occurring in '20 and '21 and we continue to look at that. I believe that you win with the best product possible, and I've always believed that. Marketing is absolutely critical to getting our message out and we will continue to spend and increase our spending to do that, but what would it carry this brand is an absolute devotion to enabling consumers to continue with a love, which is great tasting meat. And so we will continue to focus an enormous amount of energy on that. In terms of getting the message out, we've built into this business even in the investor basement and the cap table marketing engine, right? There are very, very significant celebrity voices associated with our brand. We have the ability to tap into those. They have vested interest in helping us. So we will do some conventional marketing for sure. You saw the [indiscernible] we ran with Carl's Jr., we did make a contribution toward that. Carl's Jr. handled most of the expense there, but we did contribute. And so as we continue to expand, you will see us take on some more of that. But thus far we haven't seen the need to knew some of the more expensive marketing that's out there in the traditional marketing stream. Should it become necessary, we will do it and we factor that into some of the higher expense in marketing in '20 and '21.

Great. Thank you very much. I will pass it on.

Thank you. Our next question comes from the line of Clay Williams of William Blair. Your line is open.

Hi. Clay Williams on for John Anderson. Can you provide some more color around the partnership with Vanderburgh, their production capabilities and capacity?

Sure. So sine Seth you were just there and we can [indiscernible] facilities if you want to steal that one.

Sure. I would be happy to. Yes, we have had -- we have several distribution partners in Europe and we’ve been especially pleased with the commitment and support we’ve gotten from Vanderburgh and they proactively have proposed to handle the production for us. And so [indiscernible] are investing in a major production facility. And with the capability for distribution of covering all of Europe and we expect that the production should be able to do that as well. So it's a great first step. We have certainly seen growth in Europe happening more quickly than we anticipated. And so from our point of view, as Ethan said, we want to be aggressive with production. Obviously, it will make more sense for both sustainability and cost reasons to have a production setup in the continent. And so we're excited about that.

Okay. Thank you. And for my follow-up, can you have breakdown of the reserve guidance of $210 million between foodservice and retail?

Yes, so we can give a generalized sense of revenue mix and currently it's basically a 50-50 in the -- in '20 and 2019. We do think that foodservice continues to grow as a percentage of overall revenue given the binary, but very large nature of some of the large QSR accounts that are out there. So that will be balanced and of course with additional international movement on our end as well. So right now it's about 50-50.

All right. Thank you. I will pass it on.

Thank you. Our next question comes from the line of Chase West from Consumer Edge Research. Your line is open.

Good afternoon. Thank you for the question. Most of my had been answered. I did want to follow-up on the international opportunity. Longer-term are you able to quantify kind of how much of the growth is the drive going forward? Is it something you [indiscernible] it is now on for the guidance or maybe for thinking three years out could be mid teens or higher? Thank you.

So currently it represents an important, but still pretty small percentage of our overall revenue. I think about it more in terms of the overall potential and I think mostly about, obviously Europe and Asia. Those markets are very significant for our products. Europe has a very well-developed market for plant-based proteins and obviously a healthy one for animal protein. Asia has a desperate need for this. So I’m going to be very aggressive in going into those markets and our team will be as well. We don't disclose exact percentage as we hope to achieve, but it is really a race between. United States has incredible opportunity, our neighbors in Canada as well. And then getting into Europe and getting to Asia is absolutely a strong part of our strategy.

Great. Thank you for the questions.

Thank you. At this time, I would like to turn the call back to management for closing remarks.

Thank you everybody for joining. And I also want to thank you for the ability to get to know some of you along the way. But most importantly, I want to thank our investors and the people who have joined us since we have the IPO. It's been enormously gratifying to be able to continue to lead this business and continue to be a leader in the space of offering a new form of meat to the consumer. One of the things that we look to are innovators of the past that allow us to focus our energies here and I wanted to share both with the opportunity in mind, the mission in mind as well as competitors in mind. A wall that [indiscernible] quote that’s very prominent on the wall of our innovation center and its by Edwin Land who was obviously a prolific inventor in the first part of the 20th century. And he wrote, let us not make more of something, there is too much out. Let us find out what is desperately needed, although people may not know it. Let us find out what will beautify the world, although people may not know it. They must learn and learn and teach yourselves and support each other in doing that until we lose ourselves in those past. I wanted to thank you investors for allowing us to do this and for allowing us to be able to tackle such an important global problem. Thank you very much.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.