Beyond Meat, Inc. (BYND) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to Beyond Meat’s Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Katie Turner. Ma'am, please go ahead.

Thank you. Good afternoon. And welcome to Beyond Meat’s third 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 and Treasurer. By now everyone should have access to the company’s third quarter earnings press release and third quarter investor presentation filed today after market close. These documents are available on the Investor Relations section of Beyond Meat’s website at www.beyondmeat.com. Before we begin, please note that all financial information presented on today’s call is unaudited and during the course of this call, management may make forward-looking statements within the meaning of the Federal Securities Laws. These statements are based on management’s current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to the company’s 10-Q and other filings with the Securities and Exchange Commission 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 to adjusted EBITDA, which is a non-GAAP financial measure. While the company believes this non-GAAP financial measure provides useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer today’s press release for a reconciliation of adjusted EBITDA to its most comparable measure prepared in accordance with GAAP. And now, I’d like to turn the call over to Seth Goldman, Executive Chair.

Thanks, Katie. On today's call I will provide a brief introduction, Ethan review our business highlights for the quarter and then Mark will discuss our Q3 financial results and 2019 outlook in more detail. Finally, Ethan will open up the call for your questions. Today's earning report marks several significant milestones for Beyond Meat. After 10 years of aggressively investing in our science and product innovation, this is the first quarter we have generated net income. It is a wonderful validation from consumers who support our business strategy of building meat directly from plants and choose Beyond Meat for its superior taste and texture, while enjoying the nutritional and environmental benefits of eating our plant-based meat products. It also highlights our ability to generate strong expense leverage as we increasingly scale our operations, both in the U.S. and internationally. As many of you are undoubtedly aware, this week also marks the end of the lock-up period related to our IPO, which will permit the sale of pre-IPO shares by some of our longest-standing supporters. While we recognize short-term reactions to these milestones are often marked by heightened uncertainty, we believe that Beyond Meat is in a stronger position today than at any other time in its history. Our transition to a public company has positioned Beyond Meat well to be able to capitalize on the substantial growth opportunities that lie ahead of us and we sincerely thank our pre-IPO investors for getting us to this point and for their long-term commitment and belief in our company. Before turning the call over to Ethan, I would also like to recognize one of our earliest Board members, Greg Boland, who has resigned from the Board as this close today in an 8-K filing with the SEC. Greg has been a strong and consistent supporter and the venture funds he works with have participated in multiple financing rounds. We thank Greg for his service. With his resignation, the company will reduce the size of our Board from 10 to 9 seats. Going forward, we believe our brand commitment, Eat What You Love, encourages consumers to eat more, not less, of the traditional dishes they enjoy, while feeling great about their health, sustainability and animal welfare benefits associated with consuming plant based protein. We look forward to sharing our continued growth and success with you for many years to come. And with that, I'll turn it over to Ethan.

Thanks, Seth. Good afternoon, everyone. We generated very strong results for Q3 measured both by financial metrics, as well as a series of marketing partnerships that positioned our company well for future growth. Specifically, we recently initiated test with McDonald's, Kentucky Fried Chicken and Subway and announced the national rollout of a Beyond Breakfast Sausage at 9,000 Dunkin’ locations starting next month. Looking forward, we've made significant additions to our team, including senior leadership in operations and marketing, while investing in aggressive international expansion. Q3 net revenue increased 250% to $92 million compared to the prior year period. We grew our points of distribution to greater than 58,000 outlets across retail and food service globally. Further, we generate strong velocity growth of 144%, resulting in a roughly 1,200-basis-point improvement in market share through the end of Q3. For the 12-week period ending October 6, 2019, with only six SKUs in the marketplace, Beyond Meat has become the second largest plant-based meat brand in retail nationwide, outpacing the leading brand in terms of sales growth by a factor merely 20x according to SPINS data for total U.S. multi-outlet, natural and specialty channels. In addition, during that same period, the Beyond Burger was the number one selling plant-based meat item across all SPINS channels and was up 162% in units and 155% in dollars. Gross profit margin expanded over 1,600 basis points to 35.6%, with strong cost and expense leverage leading to the first quarter of positive net income in the company's history. Adjusted EBITDA improved more than $16 million to $11 million, representing a 12% adjusted EBITDA margin. In summary, Q3 financial results outpaced our expectations and as a result of this growth and our outlook for the remainder of the year, we are raising our 2019 full year financial outlook. Returning to the topic of strategic partnerships, we began Q3 with the Beyond Breakfast Sausage test in Dunkin’s Manhattan locations and we’ll be expanding to Dunkin’s more than 9,000 locations nationwide beginning on November 6th. We believe the success of the Beyond Breakfast Sausage sandwich test at Dunkin’s speaks to our brand’s eat what you love promise. From a nutrition perspective, when compared to a leading Pork Sausage Patty on an ounce for ounce basis, our Beyond Breakfast Sausage provides a delicious and satiating breakfast meal, while delivering compelling nutritional wins, including more protein and iron, 44% less saturated fat, 50% less total fat and 37% less sodium. In Q3, we teamed up with Subway, the world's largest restaurant chain by number of locations, to test the Beyond Meatball Marinara Sub. This partnership illustrates the versatility of our product platforms. In this case, our ground beef line and our ability to serve a widening set of market opportunities within our core focus of beef, pork and poultry. We followed the exciting Subway announcement with a test at a Kentucky Fried Chicken location in Atlanta of Beyond Fried Chicken in nuggets and boneless wing form, which sold out in less than five hours. In a measure of the appetite for our brand and the changing American consumer, guests purchased as much Beyond Fried Chicken in those five hours as KFC would typically sell with popcorn chicken in a week on a single store basis. Most recently, McDonald's announced they would be testing Beyond Meat in select locations in Southwestern Ontario, Canada, in the plant, lettuce and tomato or PLT burger. This important step reflects a dream becoming a reality. We've long had our sights on ubiquitous availability for Beyond Meat, and years ago, I set a goal to my own children will be able to go to major fast food chains and order Beyond by the time they could drive. With both beginning high school this year and McDonald’s testing, as Carl's Jr., Hardee’s, Dunkin, A&W, Del Taco and many others already proudly offering the brand I’m getting in by the skin of my teeth. Beyond Meat is now available in 53 countries with new doors opening live for growth. A few key highlights from the quarter include the addition of Beyond Sausage at Tesco and the Beyond Burger at El Corte Inglés in Spain. In Canada, we've gone into the retail channel in Q2, and by the end of Q3, we are now in nearly 4,000 stores including all Sobeys locations. We've also launched the new Meatier Beyond Burger at retail in Australia. Across Asia, an important strategic region for Beyond Meat, we have distribution in Hong Kong, Taiwan, Thailand, Vietnam, South Korea, the Philippines and Singapore. Moving forward, we will continue to grow our sales and operations footprint globally, applying the same aggressive pursuit of growth in international markets as we have here in the United States. As noted a central tenet of our mission is to enable consumers to eat what they love, meat, while enjoying nutritional benefits a plant-based protein. I want to reiterate some key nutritional metrics of our product lines relative to their animal protein equivalents. The Beyond Breakfast Sausage at Dunkin’ is a good place to start where the nutritional wins are worth repeating, more protein, more iron, 44% less saturated fat, 50% less total fat, 37% less sodium and no cholesterol. Turning to Beyond Burger, we offer a slight advantage in total protein along with 32% less saturated fat and no cholesterol, compared to a burger made from AB20 beef. Our sodium content at 16% of daily value with 390 milligrams is less than the amount you would find in half a cup of marinara sauce, one cup of vegetable soup or two flour tortillas as just a few reference points. More generally, when we consider the nutritional benefits of our plant-based meats, it's important to note that cholesterol is not the only component of potential concern we leave out nor saturated fat, the only input we seek to minimize. For example, our products are free of many other elements in animal protein that are subjects of medical study and debate for their role in inflammation and potential carcinogenic and cardiovascular risk, nor do they contain what the USDA refers to as residual contaminants that can be present in certain but by no means all commercial meats. Finally, at Beyond Meat, we have never claimed perfection. We are proud of our products in the market today. We’re committed to a rigorous cycle of rapid and relentless innovation that includes a continual search for simple non-GMO inputs from plants that will enable us to offer better products in both taste and nutrition. We have long been clear that our intention is to build a global protein company, one capable of serving a growing world demand for protein. To realize this vision at a pace commensurate with the market opportunity and the urgency of our mission, we are further investing in best-in-class talent and leadership throughout the organization. In Q3, we welcomed Sanjay Shah to Beyond Meat as our Chief Operating Officer. It was Sanjay’s extensive experience at Amazon, including serving as Vice President of North American Fulfillment, coupled with a strong background in international operations, including in Southeast Asia that sparked and sustained our interest in bringing him to the team. Stuart Kronauge will be joining us as Chief Marketing Officer. She comes to us with over 20 years of marketing and brand building experience at the Coca-Cola Company. Most recently as President, Sparkling brands serving as a driving force behind the resurgence of legacy brands such as Coca-Cola, Coke Zero, Diet Coke, Sprite and Fanta. We have built our company in dialogue with the consumer being inspired by it, and hopefully, in turn inspiring them. They are our greatest advocates and most persistent voices with regard to the health, sustainability and animal welfare benefits of going beyond. Our goal remains to serve connect with and amplify the voice of the consumer in what's become a movement and we look forward to Stuart and team scaling our message and engagement to the global market. Turning to outside the company, I should offer some brief comments on competition. It is important to establish the right context. The market we play in is a $1.4 trillion category, the largest in food. It would be naive to expect that one or two horse race given the size of this opportunity. So the competitive entrants are not a surprise nor a development we are not equipped to handle. Business history including recent business history is replete with examples of companies that reset markets right before the eyes of incumbents. We do not interpret the interests and efforts of large companies to capture our leadership position as evidence that they will do so any more than Amazon descent squelch by traditional retailers who entered e-commerce to unseat them. In fact, we've been preparing for competitive market for years and I look forward to continuing to execute on our strategy. As has been our practice, we intend to continue to invest and innovate at an aggressive pace, while maintaining our commitment to non-GMO and simple plant-based ingredients to leverage our first mover advantage here in the U.S. and abroad, including rapidly expanding customer relationships and production infrastructure to capturing market share and investing in marketing to articulate and amplify our story and value proposition to a broader group of consumers. Moreover, we will continue to apply a singular focus to our singular goal, building meat perfectly from plants and making it widely accessible globally. We spend no time debating budget allocation between competing commercial divisions. We are not beholden to some cost tied to a traditional industry or to entrenched supply chain. Instead, we nurture an aspirational challenger brand born out of consumers’ desire for something new from someone new. In summary, we believe we are well-positioned at Beyond Meat today and in the future with strong brand authenticity and a commitment to enabling consumers eat what they love, the robust innovation pipeline supported by our differentiated approach to R&D and a terrific team to execute against our global growth strategy as we increasingly appeal to a broadening group of consumers. We will continue to invest in our infrastructure, ensure we have sufficient capacity to meet escalating demand and to operate the global protein company. I'd like to now turn the call over to Mark Nelson, our Chief Financial Officer, who will walk us through our third quarter financial results in detail.

Thank you, Ethan, and good afternoon, everyone. We are very pleased with our third quarter financial results and our continued opportunities for future long-term growth. As Ethan indicated, net revenue in the quarter was $92 million, up 250% compared to the third quarter of last year. As I mentioned in our Q2 call, we expected the third quarter to be our seasonally strongest quarter of the year in terms of net revenues and profit contribution based on the summer grilling season, as well as product innovation launches and new food service distribution expansion. Based on our strength in net revenues for the third quarter and year-to-date, we are increasing our 2019 outlook. We now expect net revenues in the range of $265 million to $275 million, representing year-over-year growth of more than 200% compared to 2018. As a result of this topline strength, we have also raised our annual adjusted EBITDA outlook to be approximately $20 million, up from our prior expectation of being adjusted EBITDA positive for the year. Growth in net revenues for the third quarter of 2019 was driven primarily by an increase in our fresh product platform across retail, restaurant and foodservice channels. This reflects our expansion in the number of retail and foodservice points of distribution, including new strategic customers, new international customers and greater demand from existing customers. From a distribution channel perspective, retail net revenues increased 212%, while restaurants and foodservice net revenues increased 312% versus the third quarter of 2018. The significant increase in our restaurant and foodservice sales volume drove net revenues through this channel to represent 45% of our total net revenues in the quarter. On the product side, gross revenues for our fresh platform increased 265% versus the year ago period, representing 96% of our gross revenues for the third quarter of 2019, compared to 92% of gross revenues in the third quarter of 2018. Gross revenues for our frozen platform increased 75% year-over-year, despite the discontinuation of our frozen chicken strip product line during the first quarter of 2019. We remain focused on expanding distribution across retail and food service channels, and further increasing sales velocity of our fresh products. Gross profit was $32.8 million or 35.6% of net revenues in the third quarter of 2019, compared to $5 million or 19.2% of net revenues in the third quarter of last year. The $27.7 million increase in gross profit and over 1,600-basis-point improvement in gross margin demonstrate the operating leverage and production efficiency gains we were able to achieve on higher net revenues. Over the next several years, we expect that gross profit improvements will be delivered primarily through improved volume leverage, greater internalization of our manufacturing footprint, materials and packaging input cost reductions, tolling fee efficiencies and improved supply chain logistics and distribution costs. In addition to leveraging our cost of goods sold, we were also able to achieve strong operating cost leverage in the quarter. SG&A expenses were 22.8% of net revenues in the third quarter, as compared to 39.4% in Q3 last year. Again, demonstrating strong operating efficiency, which we expect to be a great enabler of strategic flexibility in the future. We achieved net income of $4.1 million or $0.06 per diluted share for Q3, which represented our first quarter of profitability, compared to net loss of $9.3 million in Q3 last year. As of the end of the quarter, our weighted average common shares outstanding diluted were $66 million, reflecting a time-weighted average of all common stock outstanding in addition to $5.6 million potentially dilutive options. The potentially dilutive options are included in the weighted average common shares outstanding because the company recorded net income in the quarter. As of September 28th, we had 60.6 million shares of common stock outstanding, reflecting new shares issuance and preferred shares conversion in conjunction with our May IPO and August secondary, as well as warrant and option exercises. Adjusted EBITDA was $11 million in the third quarter of 2019, compared to an adjusted EBITDA loss of $5.7 million in the third quarter of 2018. The improvement in adjusted EBITDA was primarily the result of our strong revenue growth and resulting gross margin expansion, as well as SG&A leverage in the quarter. Now shifting to our capital structure, the company's cash and cash equivalent balance was $312.5 million and total debt outstanding was $30.5 million as of September 28, 2019. Net cash used in operating activities was $18.3 million for the nine months ended September 28th, compared to $24.4 million for the prior-year period. Capital expenditures totaled $16.9 million for the nine months ended September 28th, compared to $18.3 million for the prior-year period. Net proceeds from our IPO and secondary offerings have been invested in short-term interest-bearing investment-grade securities. There has been no material change from the expected use of net proceeds as described in our registration statement on Form S1. With that, I’ll now turn the call back over to Ethan. Thanks.

Thank you, Mark. In conclusion, we are very pleased with the results for the third quarter and year-to-date in 2019. We believe Beyond Meat has significant momentum and we are well-positioned for future growth and continued success. I’d like to now turn it over to the operator for questions.

[Operator Instructions] Our first question comes from the line of Ken Goldman with JP Morgan. Your question please.

Hi. Good afternoon. A few for me if I can, first, I'm curious why Greg left the Board. If you can add any color there. Second, I wanted to know how your burgers and really all your products are doing in retailers that have added the Impossible Burger? And then I'll have a follow-up to that.

Great. Thank you, Ken. I hope you're doing well. So with respect to Greg and that was a very natural progression for him and he's an early stage venture investor with us since, I think, 2010, 2011 period, and so it was not a surprise and something that was long in the making. On the question regarding the retail environment, we continue to see extremely strong gains in retail, our velocity this quarter over the previous is up 144%, sales are up 250%. So we have not seen any evidence of any diminished interest in our products or diminished sales as a result of any competitive entrants in retail.

Okay. But, obviously, you do see that Impossible has come in into some retailers. And in those retailers were you play and Impossible play, is there any substantial deceleration in your velocity or even in your shelf space there?

Yeah. No. We've seen nothing at all and certainly not in shelf space, no.

Okay. Thanks. And then, my final question would be, obviously, it’s early days in McDonald's. But can you give us any color on how things are going, any reaction from McDonald's, obviously, they talked about it in general the other day. But I'm just curious what they're telling you and what you're seeing in the numbers.

Sure. And so we can't comment specifically on any tests that are going on now. But we feel very optimistic about the long-term relationship there. We've been working with McDonald's for a very long period of time, deeply embedded in this product development effort with them. It's a collaboration between the two companies. So I have every expectation that this test will result in more work with McDonald's, but it'll be up to them to characterize that and share that with the public market.

Thank you.

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

Hi. Thanks for the question.

Hey, Bob.

Obviously – hi. Obviously, a lot of restaurants more and more announcements of them testing your product. We did see a headline saying that Tim Hortons had decided to, I guess, not go any further with the test for burgers, and I think, there was also a regional reduction in Breakfast Sausage. But just want to know if you could comment on that and is it within your expectations or not?

Yeah. Absolutely. I mean, these things are truly test and we were gratified to see that they're going forward with over 60% of their stores. I think it's about 2,500 over about 4,000 total that elected to keep it in in-market. And I think it's really up to them to make the right decision about which customer base and which demographic they're going to be most successful with. So I didn't make much of that. If you look at the number of tests that have gone successful launch, it's very, very significant, whether it's TGIF or A&W, Del Taco, Carl's Jr. or Hardee's, Dunkin’, BurgerFi, the list goes on and on. You see a tremendous amount of momentum coming out of these tests. You see the tests themselves being very rewarding for the QSRs, whether in terms of just brand recognition and traffic into their stores. And then you see new tests occurring and new announcements occurring post the Tim Hortons’ decision, so Denny’s, Courtyard by Marriott, et cetera. So I view it as inconsequential to overall growth and just part of the process of each QSR determining what's the best rollout for their customer.

Got it. And could you just remind me, Ethan, like how long do these tests typically take and is it common for a restaurant chain to go national right away after a test is over or would they, especially a big one, might they consider like rolling it out regionally step by step? Thanks.

I think, your intuition is right there that if it's a very, very large chain, you will see it occur on a regional basis. Smaller chains will work up more quickly. And then just depending on how aggressive their management is, Dunkin’ is a good example of that going from New York City to national very quickly. So it really reflects back on the individual characteristics of the particular QSR. But I think that initial intuition is right that the larger they are the more regional they're going to be in their rollout, which is good for us, because it allows us to scale at a rate that is good for both sides.

I’m going to ask one more if I could.

Sure.

Burger King has branded the Impossible Whopper after Impossible. Does it matter to you whether your customers brand their Burgers Beyond or use it as a sub heading? Do you push one way or the other?

So we always like to see our brand used as much as possible and we think it's not only good for us but very good for the quick-serve restaurant themselves. If you look at the reaction that we received at Kentucky Fried Chicken in Atlanta that was, I think, an extraordinary testament to not only their execution but to our brand with the number of consumers coming in that day to try the product. So I think it behooves both of us to use the brand as much as possible with McDonald's and PLT. That's a nomenclature that they think works best for their consumer. But if you look at how they're rolling it out whether it's in the press release, whether it's in-store, whether it’s on social, Beyond Meat is all over that and that’s not by accident. They recognize the power of our brand to bring new consumers into their stores, as well as excite their existing consumers.

Makes sense. Thank you very much.

Yeah. Thank you.

Thank you.

Thank you. Our next question comes from Alexia Howard of Bernstein. Your line is open.

Good evening, everyone.

How are you doing?

Hi. Good. Can I first ask about the international business? Are you able to give us numbers on roughly how, what proportion of your sales in 2019 are likely to be outside of the U.S. and Canada? And if you could talk quickly about Europe and how quickly, perhaps, you expect to get a [inaudible] installed over there. That would be my first question and then I have one follow-up.

Sure. So, I will first comment on European production. So we're very fortunate to have a good partner there in Zandbergen and we are aggressively putting infrastructure in place with them to be able to serve the EU market, which we think is a very attractive one for us. More generally, if I could comment internationally, I have a strong conviction that we should be producing in the markets that we are selling in on a regional basis. And so you'll see us continue to make investments globally and bringing production into place in the markets that are most attractive to us. So, we won’t – certainly, won't be stopping with Zandbergen and you’ll see more behavior from us in that regard. If you look at the overall percentage of revenue that’s coming from international, this past quarter, it’s about 18%, we think that trend will continue. It’s up quite a bit. It was up from about 4% in the third quarter of last year. So we want to continue to nurture the international market. Like many, we believe that Asia is a very attractive market for us, and of course, as I mentioned, EU. So, you’ll see us continue to be aggressive there.

Great. And just as a follow up, how quickly as company-wide level is the co-packing capacity increasing. We know that you currently have maybe about $350 million of capacity for your – from your extrusion of that. But if the bottleneck is on the co-packing capacity, how quickly can that scale, particularly as we look out through 2020, both domestically and internationally? Thank you and I'll pass it on.

Sure. Great question. So, as I said in the past, we really think about this in three different buckets and those buckets have had individually provided us with bottlenecks at one point or the other. But I'm feeling very good about each of the three areas currently going into 2020. So these are the co-packers, for example, we have co-packers in Pennsylvania, two here in California, and one in Texas. And in the first half of next year, we’ll be adding a co-packer that I just mentioned, in EU, we will be expanding our presence there. Ohio, Indiana and Québec, we’ll all be bringing on co-packers for us. So you'll see a doubling roughly of our co-packing capacity. In the extrusion area, we continue to bring new lines into existence and you'll see not only between now and the end of the year, I'll add at least two additional lines, but we would be pretty aggressive in that regard in 2020. I think that the bottleneck that has been the most concern historically during this period when we've been going public has been around protein and I'm very pleased to remark today that we've dramatically increased our protein supply and diversified our supplier base for that. So I feel good in each instance that we can more than serve expected demand for 2020.

That's great. Thank you very much and I'll pass it on.

Thank you. Our next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.

Hey, Adam.

Yes. Thank you. Good afternoon, everyone. First question for me actually maybe just continuing on the capacity front and even you just alluded to significantly expanding the protein availability and sourcing into next year. As we roll it all together, I think, last quarter we had been at about a $400 million annualized run rate on the revenue side from a capacity perspective, thinking into next year kind of where would we sit today, I mean, you were almost at that level on a quarterly basis in 3Q, so just trying to get a sense of how much headroom you've built into the plan and as we move into 2020?

Yeah. So using that reference point of $400 million gross in 2019, I feel pretty comfortable in sharing that we're about 3x that number for 2020 in available protein, so in a good position.

Okay. That’s very helpful. And then, on the sales side, I appreciate the color you gave on the sales velocity front. Is there any color – incremental color you could give on maybe more mature points of distribution versus newer ones? Are you seeing kind of the distribution in some of the more established retailers and geographies like Kroger in Southern California or Albertsons versus the newer ones and how the sell velocity is trending between kind of newer and more established retailers from the standpoint on the service side?

Yeah. So, on the retail side, we don't have these aggregated numbers for you today. I could try to give you some additional color in follow-up. But overall, it's very strong velocity of 144% growth in velocity. Our sales growth, if you look at us relative to the leading brand in the market by – in the meat alternative sector, again, I don’t really reference that much. But we’re – our sales growth is about 20x that brand. Our market share has gone up about 1,200 basis points year-over-year according to SPINS. So we've been very successful in continuing to drive the interest from the consumer in our brand. We've also put additional SKUs to work for us in those stores, and in my view, that is really just the sort of tip of the iceberg for us. We have a very, very small SKU set for the level of brand attention we get and I look forward to growing that SKU set over the next year to drive some incremental sales in each of those locations.

Okay. That’s helpful. And I guess, I have one quick follow up. You think you have disclosed this in the Q, but do you have the tonnage growth that you experienced in the quarter?

In terms of the overall weight…

Yeah. I can address that. So, we – our third quarter pounds, 16,016 million versus Q3 ‘18, 4,338 million.

Great. I really appreciate the color.

Sure.

Sure. Great.

Thank you. Our next question comes from Kevin Grundy of Jefferies. Your line is open.

Hey, Kevin.

Hey. How is it going guys and congrats on another great quarter. Ethan, a question for you and I apologize if I missed this. Repeat purchase rates. Can you provide an update there and maybe separate between foodservice and retail to the extent you have it, and then I have a follow up.

Yes. I can share it on the retail side, but unfortunately, it’s not on the number, we have for the brand across each of the SKUs. We’re at about a 45% repeat rate. So it's something that we're going to update in the coming quarter, but we don't have new information today.

Okay. The follow-up question is around price gaps and how much priority list for you Ethan in terms of the company’s ability to close that price gap versus traditional beef, over what period of time you think you can do it? And then how much – what is the assumption that's included and this is a question for Mark, in the company's mid-teens EBITDA margin? How -- what is embedded in there with respect to the company's ability to close some of that price gap? And then I can pass it on. Thank you.

Sure. No. Great question. And it is one where I had a lot of passion for it. It's – I think – you've heard me say this in the past that the Beyond Meat is continue to be successful by providing a very best product to consumers around taste and around nutritional value. Those are two of the three pillars that we really need to execute against. And the third is around price, right? The day that we can get to the point where we can drop our pricing below that of animal protein in certain segments, I think, it is going to be a really important day for us as we think about that $1.4 trillion industry that we're going after. And so it's something that I drive every day toward here. Some of the hires you've seen me making in the last quarter have been expressively around that idea, including, it would bring Sanjay in to help us on the operations side. We're setting up a center for city planning and commercialization. One of the key goals of that is around our cost structure and getting the cost structure to the point where we can support underpricing animal protein. It won't be in every category for sure and we will offer differentiated product lines just like the meat industry does itself today with Angus and then with some other offerings throughout their beef value chain. But it is something that's really important for us to do. I haven't given a public timeline other than within five years and that was probably about six months ago. So I’ll stick with it within four and a half years. But everything about what we're doing and everything about what I think is really important to this company, you'll see us do that earlier and I can't get a particular date, but you can be very confident it’s something that gets a lot of attention here.

That's helpful. Can you guys comment on what the assumption is with respect to the mid-teens EBITDA margin target?

Yeah. And I’ll just kind of talking about the topline first. Our dollars per pound, our net selling price per pound over a year-over-year went from $6.06 down to $5.74 a pound. So we retain pretty strong price – pricing power year-over-year. Where our margin expansion really came from year-over-year was a significant drop in our cost of goods sold per pound. So we dropped the COGS by 25% going from $4.89 a pound down to $3.69. And that -- that's the really the driver that will allow us to continue to take cost out and allow us to drop pricing while maintaining that mid-to-high-30s gross profit target. And then that drops through really to the EBITDA line. We think the volume growth will increasingly be able to drop and defer to EBITDA and like you saw in the third quarter, getting to a 12% EBITDA margin really is a lot of momentum towards getting to that goal. So, it’s mid- to long-term. We’ll start to deliver some price in retail to achieve our longer term goal of getting to parity with animal protein, but we’ll continue to take cost out as well alongside that and the goal is in that same time line to get to the mid- to high-30s and also get to EBITDA in the teens.

Okay. Very good. Thank you both.

Sure.

Thank you. Our next question comes from John Baumgartner of Wells Fargo. Your line is open.

Good afternoon. Thanks for the questions. I guess, first off, I wanted to follow-up on Rob's question on the foodservice side. On the one hand, you have the pullback in Tim Horton’s. On the other hand, Dunkin's going the other way expanding nationally. So I'm curious about what your learnings or takeaways are hearing back from these operators in terms of product appeal. I mean are there any distinctions emerging on the basis of geographies or socioeconomic consumer groups or any other aspect you've been able to glean and if so, how are those learnings informing how you choose to expand distribution from here?

It's a great question. Thank you. So we have gone with a lot of learnings some of these tests, and I think, less so around demographic appeal, we do feel that our products, particularly because of the health aspect tends to do well independent of that particular region. If a consumer is looking to make a healthier choice in-store or at the QSR, they're going to do that regardless of whether they're standing in a cornfield in Iowa or on Madison Avenue. And so we have seen some pretty consistent results. I do think that the learning that's been the most strong for me, it's really around the execution by the partner. And so if you look at – if you come out here and look at Carl's Jr. or Del Taco or Dunkin back in New York as examples, it is very clear in the store that they're selling the omni, right? And it's very clear in their social and it's very clear in some official advertising. Those tests seem to have very strongest results, when their partner is leaning in in a messaging and advertising and communication perspective. And so the ones where that's maybe less clear, you can expect maybe a little less robust pickup. But it’s about messaging and getting the consumer understand that this is where they can get the product. When that's executed really well, it does great and when it's maybe a little bit less pronounced, it's a little bit of a slower build, it will be my biggest learning.

Thanks for that. And just a follow-up, I wanted to also ask about the gross to net revenue number. That discount rate was stable in Q3 year-on-year, but it's up sequentially throughout 2019. I'm curious how much of that increase is a function of just retail becoming a larger part of the mix and how do you envision that growth to net spread changing from here, given the number of new entrants coming into the refrigerated space at retail?

Well, that's exactly right. The higher proportion of retail in the quarter is where we see most of that trade discount. And year-over-year, it's pretty stable, it's still 9.7% in the third quarter last year, 9.8% this year. But that's a pretty low trade rate – spending rate that we have. So we do anticipate we'll be doing more promotion through trade and discounts going into the future. But we've been fortunate with the demand that we've seen. We haven't had to do a lot of promotions so far.

Great. Thank you for your time.

Thank you.

Thank you. Our next question comes from Brian Holland of D.A. Davidson. Please go ahead.

Hi, Brian.

Thanks. Good evening, gentlemen. The first question, I wanted to follow up on Rob's earlier question about the co-branding on the foodservice side. I'm curious how you sort of define the McDonald's test. Is that a co-brand – is there signage in the stores and how else – is McDonald's sort of promoting the McDonald's brand, I think, you mentioned social media.

Yeah. So it is very clear that Beyond Meat is the product inside the PLT [ph]. They think about that sandwich like they do the Big Mac in a sense. It's an overall architecture and they wanted to name that the PLT. But it's extremely clear that it's with Beyond Meat and that Beyond Meat is the brand. We haven't seen every in-store execution, so I can't answer specifically to each store. But everything that they've shared with us in terms of the social, and obviously, the press release and some of the point-of-sale materials indicates that they're leaning very much into the partnership with our brand and we expect that going forward.

Okay. Thank you. I appreciate that color. Then, on the retailer side, what are you hearing from customers with respect to or seeing with respect to shelf space allotment amidst kind of the recent or ongoing shelf resets? Are your plant-based competitors getting similar placement to the Beyond Meat brand alongside the animal protein and where is that shelf space coming from, is that animal protein products donating the shelf space?

Yeah. Good word. So, they do – you do see certain retailers, I think, Safeway, for example, recently they're starting to create an overall architecture for the category with plant-based meats. And I asked them simply where that's coming from and my assumption there is that it is coming from animal protein offerings. We have only heard the same thing that we've always heard from retailers, which is to what other SKUs can we offer and interest in us getting into a deeper diversity of SKUs with need to the categories of beef, pork and poultry. We have not had any pressure yet from other entrants into the market and we continue to feel very comfortable about our relationship with the retailers and our position on shelf.

Just to add, this is Seth. We have absolutely not seen our shelf space shrink. We've seen that the overall shelf expand, and so certainly, our place benefit, not at our expense.

Okay. Got it. Thank you. Last one for me, I appreciate the color about the repeat rates. I know you'll update those again. So I look forward to that, certainly, the number, pretty solid at this rate for the brand based on my experience looking at such metrics. I am curious about purchase frequency repeat rate is a function of that. But I'm just curious if you're seeing among kind of your earliest adopters whether they're sticking with the brand, has their frequency of purchase going up once we get past trial? I appreciate that's kind of a tough question, we're so early days here, but just curious if there's anything you can share to that end?

I think it's a great question. We don't have that data though. But it's something we can look into. We do see there's a tremendous amount of loyalty to this brand and so we are seeing consumers, for example, when the Beyond Beef came out, they flocked to that and seem to appreciate the new offerings, but I don't have specific data.

Yeah. Fair enough. Thank you gentlemen.

Yes.

Thank you. Our next question comes from John Anderson of William Blair. Your question please.

Good afternoon, everybody. Thanks for the question.

Hi, Jon.

Hey. I wanted to ask about chicken, given the success of the test at KFC, which you mentioned in the prepared comments. How do you think – how should we think about the role of chicken? What -- how are you thinking about the potential for broader commercialization of that part of the platform in food service and retail?

No. Thanks, Jon. Good question. And I'm very excited about it. I mean poultry was the first real internal innovation that we ever did and we had I think a very strong product there. We weren't able to innovate around that over the years and so we decided to pull it in exchange for opening up more production capacity for the Beyond Burger at the time. But poultry is an important category for us and one that we're doing a lot of development work. And the kind of holy grail in that space is the fresh chicken breast offering and we have work in that direction, no timeline on it. But you'll see us do some of these other offerings like we did with Kentucky Fried Chicken with a boneless wing or nugget sooner rather than later. As it can – it's amazing what's happening with the consumer, when the consumer pulls away most quickly from red meat and then processed meat things like pork and sausage form et cetera. But as they get into decision making framework around what proteins to consume or what not, poultry is increasingly coming into view as well and we're benefiting from that with the launch of KFC or the test at KFC, et cetera. So you'll see us get active in that and return to some of the platforms that we had in the past.

Great. Great. I just wanted to revisit one more thing. So, you mentioned protein and that kind of the commitment or your ability to secure additional supply with additional sources. I think you mentioned, you had visibility into kind of three times the level of plant-based protein for 2020. Is there any reason why you would secure more than your kind of forecasting for your business in 2020, and I guess, first, is the three times the level – the right number, and then, give us any reason why you would buy more than you anticipate selling?

Sure. I mean, I think, it has to do with, if you look at our recent history, I just want to make sure that we have enough on-hand. But it also has a shelf life to it which allows for us to use it over several years if needed to. And so there's just some conservatism in what we're doing based on a recent past of not having enough. But as we go forward, hopefully, we'll be able to get into the cadence that the supply contracts we have more probably match where our sales expectations are for the year.

Fair point. One last housekeeping maybe for Mark, on the points of distribution, I think, more than 58,000 this quarter. Any ability to kind of give us a retail and a foodservice figure to that update [ph]?

In terms of just the split?

Yeah. The split between the two channels.

So we’re – so, yeah. So we’re about – this quarter we went up – we are at -- actually about 45% now in foodservice due to some increase in retail activity. But it was last quarter was about 50/50, it’s about 45/55 now.

Yeah. So that…

Great.

…58,000 breakdown, retail 28,000, foodservice 23,000, international 7,000, which excludes Canada in that international number.

Thanks so much and congrats on a great quarter.

Thank you very much.

Thank you.

Thank you.

Thank you. Our next question comes from Bryan Spillane of Bank of America. Your line is open.

Hey, Bryan.

Hey. Good afternoon.

Thank you.

So just a couple of follow ups, first, the tonnage growth, which is up a lot, a ton, I guess, is a bad ton.

Yeah.

Can you give us a sense for how much of it is like been pull-through, so just consumption versus how much of it is just is filling the points of distribution? Any sort of way to color that would be helpful.

It’s harder to think of it that way. I believe some of our newer points of distribution may not have the same volume. We think about some of our kind of more longer term, say, retail customers like Whole Foods. Their volume is not only up, it's up per store and so we're selling more through existing points of distribution, but then we have all sorts of new distribution coming on as well. And within that, you have the overlay of more SKUs being sold at retail as well. So some of the where we had a couple, we now have three or four SKUs at some of these retail points of distribution. So it's – I don't know the precise answer, but I think, there’s growth definitely in both, certainly, in our existing year-over-year comparison, but also driven a lot by the new customers as well.

Okay. And then as you went through the summer season, just service level, how did that stack up versus your expectation?

It was better, certainly better than last year, not perfect though. But I think that is quite a bit stronger than last year. We filled as opposed to seeing empty shelves. I think in last summer we had more full deliveries. Retailers weren't seeing the outages, which is really helpful. And also there’s a very high service level requirement in the QSR space that we're excited to be able to achieve. So I'd say it was quite a bit better than last year.

But not in a position where you had customers on allocation or anything like that?

No.

No.

Okay. And then just the last one, there was a couple of questions around the margins, and I guess, as I was listening to the prepared remarks and you talked a bit, Ethan, about international expansion. You’ve also begun to hire some people, bring some more people into the company. Just how linear should we think about margins, because if you're expanding into new markets, then you're, I don’t know, bringing more capabilities and more people into the organization. Will the margin expansion necessarily be linear or would there be some reinvestment or some revenues next year that are maybe not at scale, because you're building up markets and still building some capabilities?

Yeah. I mean, I believe you're right. We probably won't see a linear growth. I mean, the year-over-year increase in margin was really driven on the cost side. We've – thinking forward we think about some of the price that we may deliver in trade promotion, some of this mix shift into the QSR space, which could also drive margins tighter. But we still have a lot of opportunity, I think, to take cost out. We look at what we did and it was a lot of just volume – straight volume leverage. We really haven't started to work on material costs, packaging, there's quite a few things that we can continue to drive costs down on. But I don't know that it would be a linear thing, I think, we'll step function. And another big initiative we are looking at is in the contract manufacturing space, looking at how we can balance that with some internal capacities well. That'll do a lot to take down the tolling fee costs in the [inaudible]. So there may be some steps as we deliver price, but then, as we achieve additional cost savings to match it.

Okay. Great. Thanks for taking the questions.

Thank you.

Thank you. Our next question comes from Benjamin Theurer of Barclays. Your line is open.

Hey, Benjamin.

Hi. Yeah. Good afternoon. Yeah. Good afternoon. And thank you so much for taking my question. I wanted to follow up on the international piece. So, clearly, you’ve – hello? Can you hear me?

Yes.

Hey.

Yeah.

Hello?

Hi. Yeah.

You can hear me right?

Yes.

Yeah.

Yeah.

Okay. My question is more on the international side. So, clearly, you have your two products maybe the sausage and the burger, and the ground beef basically. But within Europe, I mean, clearly, there are different taste settings, you go to France, you go to Switzerland, you go to Germany, you go to Spain. So with all the co-manufacturing, is there something you've also thought about more like a regional type of product, plant-based sausages that owe more within the taste of the different nations that are clearly different…

Yeah.

Not only within, for example, France or within Spain or within Germany, but more broadly speaking to adapt your production to what the actual consumer in Europe is looking for and how are you thinking about that rollout?

Yeah. That's a great question, Ben. Thank you. And so, I hope that what's coming through in my comments and in introductory comments and in my answer to these questions is that, I am very focused on building this into an international brand. And if you look at the folks we've hired in the last quarter including Sanjay and Stuart, these are folks that have helped to build international brands and supported those in the markets that they're serving. And so, you will not see us do this lightly. They’ll not be an export model, only in the regions producing and selling with our own staff and management. I think the opportunity is that big and it deserves that much care and attention. So we're actively pursuing that in EU and you’ll hear from us later about our plans for Asia. But the opportunity, for example, to produce and sell pork dumplings, for example, in Asia is significant and not one that's lost on us. Different flavor profiles throughout Europe also not lost on us. So you'll see us get to know these markets well and serve the consumers in those markets with products they will appreciate. What we've done here in the United States is to build this brand with the consumer and I have every expectation we'll do that internationally.

Okay. Just to follow-up on that, I mean, you always talk about the size of the U.S. market in comparison to the global market. But at least from a ceiling perspective, I guess, in Europe, most of the per capita meat consumption really over sausages and whatsoever, which is somehow I agree that there’s a more – that an easier product could be replicated than maybe steaks and whatsoever and that clearly you actually have a bigger opportunity outside the U.S. than maybe in the U.S. with your products.

Well, I think, the first part of your comment around was an easy extension for us is one that I do focus on. And for example sausage, and I've said this publicly, I feel is easier to do, of course, than steak or even certain ground products on the beef side, because there’s such a reliance on flavor systems and spices. And so to the extent that we can get very meaningful penetration in Europe and in Asia by extending our existing product lines with different flavor profiles and slightly different mouth feel that fits the consumer's interests, you'll see us do that. We won't lose sight of these longer term initiatives around steak and bacon, et cetera. But we're not going to pursue those at the expense of tailoring our products to the local palate.

Okay. Perfect. Thank you very much...

Thank you.

…and congrats on the results.

Yeah. Thanks.

Thank you. Our next question comes from Ken Goldman of JP Morgan. Your line is open.

Ken.

I'm back for more.

Come in.

Oh, man.

I am not done yet. Ethan, I just wanted to ask one last question, because you did highlight Amazon as an example of a disruptive that fended off competition. So I’m going to…

It’s a fair…

…put you on the spot here, right?

Sure. Yeah.

Totally fair, right, Amazon is a great company.

Yeah.

But…

Yeah.

…there's a lot of Polaroids and blockbusters and betamaxes…

Yeah.

…out there too, right?

Yeah. Yeah.

And obviously, I am buying your stock. I think you're more Amazon than blockbuster…

Yeah.

… but since you raised it as a subject, I kind of wanted to just ask…

Yeah.

… how deep have you gone into this analysis, right? Have you looked at some of the disruptors…

Yeah.

…that didn't succeed, what mistakes did they made, what are you doing to avoid that, I guess, is where I wanted to…

Yeah.

…maybe just push back a little bit.

Yeah. No. No. It's a very fair point here. And Ken, I am obsessed with this question, right? I mean, it's something it just fascinating, and you mentioned, Polaroid, so you're giving me the opportunity to bring up Edward Land. Edwin Land, I really do think it's important that you learn from history and learn what companies have done to stick around and beat the competition. The – they're going to have to wrestle this from our hands. Like, there is – every intent here is to remain the leader and we think we have what it takes. If you look at – and you ask us sort of principles of how to stave off competitive pressure from incumbent, it really begins with innovation, right? You have to be really begins with innovation, right? And so, we bring that intensity and that focus and there's a disregard for the products we have on the shelf today and that's something that I think is unique to our company in many ways. We want so desperately to replace those with new products that are better and so every year we seek to do that. And so, if you're incumbent President who wants to come in and maybe replicate what we're doing, I said this in the past, you'll be chasing a ghost, because we are moving so quickly. We shy away from any notion of what we've done is good enough and when you're know deciding whether or not to allocate capital between baby food and a plant-based meat product if you're a large company, you're going to potentially stop good enough. We will never stop good enough and that needs to be understood. Brand we built our brand with the consumer when we built it with some very famous consumers and users that are lending their name and their voice to our brand, whether its many professional athletes who use or the celebrities that work with us, those are investors and they are users of our products in a way that's very unique to our company. We will continue to support that and grow that, The authenticity around it is a values driven band. We do not have baggage associated with the very industry that we're trying to disrupt. We've a first mover advantage that we continue to exploit and use and nimbleness and quickness that it is very hard for incumbents to copy. And so it's that singular focus. There's an appetite for risk within our company and a willingness to take chances, I think that others are not able to take. Those are not something that we just dreamed up that that comes from a long study and understanding of companies that have been successful. I am no longer allowed to use Tesla, but I'll say it today because of, I got a little flack when I use it last time on Investor Conference. But I asked that question of incumbents in that space. Why are you allowing Tesla to do this? And I’d ask probably the analysts, why are you allowing or why did Tesla have the impact it's had on the automotive industry when General Motors and Ford and everybody else could see it coming and have yet to provide a credible threat to them. And that may happen, right? And I'm not tying my horse to their outcome, my cart rather to the outcome. But I am saying that there's a playbook here and we're exploring every angle that we can. Is that fair enough?

It is that. Well, you mentioned horses and carts, I won't mention buggy whips, so we'll leave that alone. Thank you guys very much.

Thank you Ken very much. Appreciate it.

Thank you. At this time, I'd like to turn the call back over to Ethan Brown for any closing remarks. Sir?

Well, unless Ken has more questions, I'd just like to thank everybody for calling in. We've had a great quarter. We're really excited for the end of the year coming with some of the additional work we're doing. 2020 looks very good for us. We keep building this brand, keep investing in the team, keep investing in the consumer. We love the consumer. We love the consumer who loves our products and we're going to continue to grow with them. Appreciate you guys covering the company and our stock, and look forward to working together next quarter. Thanks very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.