Beyond Meat, Inc. (BYND) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Beyond Meat Fourth Quarter 2019 Earnings Conference Call. At this time, all participants lines are in a listen-only mode. After the speaker’s 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, Mr. Lubi Kutua, VP of FP&A and Investor Relations at Beyond Meat. Thank you. Please go ahead, sir.

Thank you. Good afternoon. And welcome to Beyond Meat’s fourth quarter and full year 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 fourth quarter and full year 2019 earnings press release and 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 the 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 today’s press release, the company’s quarterly report on Form 10-Q for the quarter ended September 28, 2019 filed with the Securities and Exchange Commission on November 12, 2019, the company’s annual report on Form 10-K for the year ended December 31, 2019 to be filed with the SEC, and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note that 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 from presented in accordance with GAAP. Please refer to today’s press release for reconciliation of adjusted EBITDA to its most comparable measure prepared in accordance with GAAP. Now, I’d like to turn the call over to Seth Goldman, our Chairman of the Board.

Thank you, Lubi. 2019 was a remarkable year. It’s amazing to think that a little more than two years ago, the Beyond Burger was in just 5,000 grocery stores, but today is carried in almost all of the major U.S. chains. Similarly, two years ago the Beyond Burger within a few hundred restaurant and food service locations, and today you can find out products in thousands of food service outlets around the world, including some of the largest and most recognizable QSR chains in North America. At this time last year, we were excited to have Beyond Meat achieved 2018 annual net revenues of $88 million, which is less than our net revenue for Q4 of 2019 alone. I’ve certainly never seen anything like this in my 20 plus years in the food business. Now that we have completed our first calendar year of financial results as a public company, I am stepping down as the Executive Chair effective today and will continue to serve as Chair of the Board. I intend to continue to support the growth of Beyond Meat as Non-Executive Chair and look forward to working with our Board of Directors and leadership team in pursuit of Beyond Meat’s mission of building great tasting meat from plants. We are focused on empowering consumers globally to make better choices on nutrition and sustainably producing food in a way that is good for our planet and animal populations alike. I am proud to say that Beyond Meat has a strong and experienced team in place, and I am extremely confident in this team’s ability to lead the company and aggressively pursuing the significant growth opportunities ahead. In short, Ethan and team are building a powerful and impactful business for the long-term. As a distance runner, I would say we are off to a strong start. But this is a marathon and we are still an early miles, we’ve got the right talent, the right mind set and I believe we are better prepared to navigate the terrain than any other team. And with that, I’ll turn it over to our lead runner and CEO, Ethan Brown.

Thanks, Seth. Good afternoon, everyone. We entered 2019 with record fourth quarter and annual financial results. Looking back at 2019, we exceeded the sales financial and operational expectations we set for the year. Performance reflects rapidly increasing awareness among consumers around the benefits of plant based meats. Our continued investment in closing the gaps between our products and our animal protein equivalents turn of organizations that we scale to new levels of growth and expansion. We achieve net revenues of $298 million in 2019, an increase of 239% compared to 2018. Our products and now available in over 77,000 retail restaurant and food service outlets, and in over 65 countries worldwide, that we’re only scratching the surface in the vast majority of these geographies In U.S. retail, we generated strong velocity growth of 106%, contributing to an 830 basis point increase in market share. According to SPINS data for total U.S. multi-outlet, natural, specialty channels for the 52-week period ended December 29, 2019, while growing 26 times faster, the largest competitive brand in the category during the same period. More recently, with our brands velocity growth of 127% in the 12-week period ended December 29, 2019, Beyond Meat owned the four best-selling skews and all the plant based meat all by a wide margin. And we’re pleased to share that we now have full distribution of the Beyond Burger with Costco across all locations the United States. This record growth and retail occurred and made headlines of incumbents and upstarts entering a category and their products being sold next to ours. In a way complacent, we believe that our focus on rapid and constant improvement towards the highest product quality standards listening to and connecting with the consumer and avoiding GMO and artificial ingredients continues to resonate. We are expanding retail availability globally. For example, we started 2020 by knocking distribution across France in 500 retail grocery stores own by the casino group, so the consumers who are enjoying our products at French quick serve restaurants such as T&Y and Stake in Shakes can now add them to the shopping cart. This retail rollout in France follows successful launch of the Beyond Burger and Beyond Sausage across other European supermarket chains, including the likes of Albert Heijn Metro, [inaudible], Jambo, Del Hayes, Tesco, Ecourtis English, Migros and Co-up [ph]. In Canada, we are now like in the U.S. in full distribution with a Beyond Burger across all Costco stores. And recently, Canada became the first international market to sell our Beyond Meat product line with distribution at all major retailers including Sobeys, Loblaws, Metro, Whole Foods and Walmart. In Food Service, we completed another quarter of outstanding sales and distribution growth, announcing new or expanding relationships with quick serve restaurant partners. According to NPDs data [ph] for the fourth quarter of 2019, Beyond Meat is not only the largest plant based meat brand in U.S. food service, it is also the fastest growing brand with dollar sales up 180% year-over-year. During the quarter, we expanded our partnership with Duncan making the Beyond Sausage Sandwich available more than 9,000 Dunkin stores nationwide. We launched the Beyond Burger Denny’s in the Los Angeles market. We expanded our relationship with Carl’s Jr. to the introduction of three new menu items Beyond BBQ Cheeseburger, the Beyond Sauces Burrito, the Beyond Sausage Egg and Cheese Biscuits. And we announced a new partnership with Hardee’s including the offering for Beyond items on the menu across the chain Our momentum in food service continues in 2020. We now see expansion of our test McDonald’s statistic to restaurants in Southwestern Ontario. A nationwide limited time offer Beyond Meat Bowl at Subway locations across Canada and new limited time test Beyond Fried Chicken at nearly 70 Kentucky Fried Chicken locations in Charlotte, North Carolina and Nashville, Tennessee. We expanded our partnership with Denny’s locations nationwide across the U.S. and Canada and we added the Beyond Sauces to Papa John’s in over 70 locations throughout Spain. Most recently, we announced a new partnership with Starbucks Canada, around the Beyond Meat, Cheddar and Egg Sandwich as a permanent menu item nationwide. We’re grateful and proud to serve each of our customers and believe strongly that our shared success in bodies our commitment to the consumer to eat what you love, where you love it, while achieving health, sustainability and animal welfare games. I’d also like to take a moment to highlight the team’s achievements as it relates to our collaboration with KFC. At our core, we strive to be an innovation engine, using technology to source the core parts of meat directly from plants, avoiding GMO and artificial ingredients. We foster this culture, the Beyond Meat rapid and relentless innovation program, we push to constantly improve our protein platforms, so you can make our products indistinguishable from their animal protein equivalents. For example, we were proud of the strong results from the one day test of KFC in Atlanta, Georgia in August. But we remain focused on introducing a more fibrous architecture of the product to better capsule muscle structure with chicken breast. We’re thankful to KFC for the shared vision, patients and spirit of partnership required to achieve this improvement at production scale. They have a saying and they did from the days of the hurdle around doing things the hard way, you would become to the added complexity, exhausting amounts of [inaudible] and other considerations. We believe that latest launch of Beyond Fried Chicken, which now give us more muscle structure, and the process taken to get there reflects this commitment to superior results. We look forward to continuing along the innovation curve with this and other products across our beef, pork and poultry platform. Unlike other stories of innovation the incumbent that we chase, the animal is largely static. And the speed at which we can catch it is governed only by our willingness to invest our ability to make the right research choices and the pace of our [inaudible]. If I can part one perspective on this call, it is the following, right now and I won’t try to look in this is a time of growth for Beyond Meat. Looking at our past, one could argue this always been the case and they would be right to a point. There’s something different about this moment. It comes clear by the day that a growing number of consumers want what we are doing to work. We are fortunate to be leading the sector with all the benefits and challenges that accompany first mover advantage. The world is also rapidly changing and ways to propel this movement. Movement is increasingly intertwined with our brand. Systemic pork disruption in Asia, high school kids protest me in action they see with regard to greenhouse gas emission reduction, an increasing number of World Class athletes turning to plant based eating to improve recovery and performance, and more and more members of the medical community returning to the ancient hippocratic understanding of food, as medicine, all come to mind. We hope our shareholders are aligned with us and believing in order to build long-term value on a global scale and size. Our focus today should be on aggressive growth, growth and turning customers, geographies and markets, production infrastructure innovation capabilities, product offerings and consumer engagement, even if this comes at the expense of near-term profit and margin expansion. Along these lines, as we gain traction and global markets, it is our intention to add production capacity in key geographies to gain efficiencies, and to participate economically in the communities that we serve. In Europe, we expect to open a new co-packing facility operated by our partners Zandbergen and Netherlands [ph] by the end of this quarter. This more localized production will increase the availability and speed with which we can get Beyond Meat’s products to customers across Europe and the Middle East. Similarly, as we continue to grow in the Canadian market, we opened a co-manufacturing facility in Quebec, and our sourcing protein crops from Canada in addition to Europe and United States. Finally, we continue to focus on Asia with the goal of producing in the region before the end of 2020. And at some level of resolution of the coronavirus crisis, that we are active with important distribution partners in Asia. The magnitude of the opportunity merits significant investment, consistent with a sense of urgency we apply elsewhere in our business. We believe that the core price in Asia provides an unprecedent opening to introduce new production models for meat. I want to now turn to competition and the subject of our ingredients and our process. specifically, many of you may have seen TV, digital and newsprint advertisements funded by incumbent industry groups, the challenge ingredients we use, and the production process we employ for our plant based meats. We neither seek nor want an adversarial relationship with animal protein providers. As I noted previously, we have great passion and respect for agricultural communities, the families that are the backbone there in and we truly believe that what we are doing brings innovation back to the farmer. Like many new technologies, we bring change, the changes rich with opportunity for many, though not all within the agricultural supply chain. As our industry grows, this positive economic impact within rural economies of our work should become clear. I hope one day will overshadow the current and unfortunate zero sum, rent reverse plant based meat storyline. Until then, because of the confusion that can result from industry funded campaigns targeting plant based meats, you will see our brand raise the profile of our ingredients and our process. We are proud of both and believe that far from being a liability or ingredients in our process represent important strengths. As I shared in previous earnings calls, we believe that building needs recommend plants gives us the opportunity to include that which is good about needing our products and exclude or reduce that which consumers may have concern about. We do this without genetically modifying plants or using artificial ingredients. It is our view that all that is needed is within the plant kingdom already. If you’re willing to look and iterate long enough, in the coming months, and for the balance of 2020, you will see us tell our story on ingredients and process with content across digital and print media helping consumers have the information they need to make informed purchasing decisions. Finally, a word on health. We spoke at length about the pace and focus we applied improving our products in our beef, pork, and poultry platforms across flavor, aroma, appearance and texture. We’ve been less local with regard to our efforts to be a leader in the plant based meat sector on health. In addition to continue to research and qualify new all natural plant based inputs and deliver health advantages, we are raising the visibility of our work in this area with two important actions. One, we are joining the partnership for a Healthier America, an organization founded to bring lasting system wide changes that increase healthy choices in the food supply. Two, we are creating an advisory board of leading experts in health and medicine to ensure that we have access to the latest thinking and peer reviewed research on health, nutrition and ingredients. These initiatives will not only inform our research and development will also help the consumer better understand the health benefits of our product lines. In closing, we begin 2020 focus on growth and expansion. We are grateful to be in business with a growing number of leading retail food service and quick serve restaurant partners. We increasing our retail presence across stores, our number of skews and our velocities. We’re investing in research and development to advanced product attributes across our beef, pork and poultry platforms while pursuing longer term science technology that may support step change progress across sensory, nutritional and cost to be active. In the United States, Europe and Canada, we are starting a new production infrastructure with partners are growing our organizational team and talent across sales, marketing, operations, Quality and Innovation. In short, remain focused today on establishing and building blocks necessary to become the global plant based protein company we envision for tomorrow. I’d like to now turn the call over to Mark Nelson, our Chief Financial Officer will walk us through four quarter results in detail.

Thank you, Ethan, and good afternoon, everyone. We are very pleased with our fourth quarter and full year financial results and our continued opportunities for future long-term growth. As Ethan indicated, net revenues in the quarter or $98.5 million, up 212% compared to the fourth quarter of last year. Growth in net revenues for the fourth quarter of 2019 was driven primarily by an increase in volume of products sold from our fresh platform, across retail restaurant and food service channels. This reflects continued expansion in the number of retail and food service points of distribution, including new strategic customers, new international customers, and higher sales velocities at our existing customers. Looking at our distribution channels, retail net revenue increased 199% while restaurant and food service net revenues increased 223% versus the fourth quarter 2018. Sales to international customers excluding Canada represented 26% of our net revenues during the quarter, up 17% in the prior year period. Given the substantial growth and strategic importance of our international business, beginning with our first quarter of [Technical Difficulty] 2020 financial results, we will work out international separately from our current distribution channel reporting structure. On the product side, gross revenues for our fresh platform increased 238% versus the year ago period, representing 97% of our gross revenues in the fourth quarter of 2019 compared to 87% of gross revenues in the fourth quarter of 2018 Gross revenues for our frozen platform decreased 17% year-over-year, primarily due to the discontinuation of our frozen chicken products in first quarter 2019. Continue to prioritize distribution expansion and increase sales velocity of our fresh products across retail food service and international channels. Due to the declining proportion of our frozen product category revenues, which in 2019 represented 5% of gross revenues, we will no longer be reporting a product category breakout commencing in the first quarter of 2020. Gross profit was 33.5 million or 34% of net revenues in the fourth quarter of 2019 compared to 7.9 or 25% of net revenues in the fourth quarter of last year. The 900 basis point year-over-year improvement in gross margin was primarily driven by operating leverage from the increase in volume of product sold, other production efficiency improvements, and a more favorable sales mix of our fresh products relative to Q4 2018. However, Q4 2019 gross margin improvements, were partially offset by temporary disruptions related to capacity expansion projects at two of our co-manufacturing partners, which drove the sequential decline in gross margins as compared to the third quarter of 2019. Over the next several years, we continue to 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 improve supply chain logistics and distribution costs. As we have stated previously, over time, we intend to pass some of these cost savings on to the consumer, as we pursue our goal to achieve price parity with animal protein and at least one of our product categories by 2024. In addition to leveraging our cost of goods sold, we were also able to achieve strong year-over-year operating costs leverage in Q4 2019. Operating expenses were 34.9% of net revenues and the fourth quarter of 2019, as compared to 47.6% in Q4 last year. Net loss was $0.5 million or $0.01 per common share, compared to net loss of $7.5 million, or $1.10 per common share in the fourth quarter of last year. The narrowed year-over-year net loss was primarily the result of the increase in net revenues and gross profit compared to Q4 2018. While the sequential decline in net income relative to Q3 2019 was predominantly the result of higher stock based compensation expense, as we recognized an accumulation of pending awards for brand ambassadors and new employees in Q4 2019 at a higher fair market value per share. Adjusted EBITDA was $9.5 million in the fourth quarter of 2019, compared to an adjusted EBITDA loss of $3.8 million in the fourth quarter of 2018. The improvement in adjusted EBITDA was primarily the result of our strong revenue growth and gross margin expansion, as well as operating expense leverage achieved during the quarter. Now looking at our capital structure, companies cash and cash equivalents balance was $276 million and total debt outstanding was $30.6 million as of December 31, 2019. Net cash used in operating activities was $47 million for the year ended December 31, 2019 compared to $37.7 million for the prior year period. Capital expenditures totaled $23.8 million for 2019, compared to $22.2 million for the prior year. Finally, shifting to our four year outlook for 2020, we expect net revenues to be in the range of $490 million to $510 million representing year-over-year growth of 64% to 71% compared to 2019. We expect gross margin to be in the range of 33% to 35% and adjusted EBITDA as a percent of net revenues to the approximately the equivalent to our 2019 levels. As we anticipate accelerated investments in marketing, R&D, and international expansion initiatives in 2020. Furthermore, as a result of the phasing of these investments, we expect profit delivery to be more heavily weighted towards the latter portions of the year. With that, I’ll turn the call back over to Ethan.

Thank you, Mark. In closing, we are very pleased with the results for the fourth quarter, and for 2019. We’re more excited than ever about the opportunities before us and the work we’re doing today to lay the foundation for future growth. I would now like to turn it over the operator for questions.

[Operator Instructions] Our first question comes from Ken Goldman with JP Morgan. Your line is now open.

Hi, thank you, two for me if I can first Seth, it’s never a good sign I’d say when a founder senior leader sort of pulls back on his or her responsibilities. I’m sure you have your reasons, but could you fill us in a little bit on what your thought process is? Why now? And you know why it’s not necessarily a bad indicator for those of us on the outside looking in?

Hi, Ken. So what was your second question? What we’ll get Seth back in the second part.

Yes. Sure. I stunned him.

Yes, no. [Inaudible]

I didn’t realize he was leaving the company that quickly. So the question Ethan, is you, I think both this quarter and the third quarter, your U.S. and Canada retail locations were sort of flat at 28,000. First is that correct and second is that a little bit of a downside surprise that nothing grew or is it just a timing situation?

Yes. Definitely not downside, if you look at, you’re right, a number. And if you look at the direction of the company, and we’re growing extremely fast within retail from a velocity perspective, 127% over the -- 12-week period ending December 29, 2019, four of the top selling products in retail, in the plant based meat category ours, and we only six skews. That’s the main message is that we have very small number of skews in each of our retail locations. And so instead of trying to grow the footprint, we are more focused on product introduction into those existing retail outlets. And we’ll be doing that this year. If you look at the pace at which we grow internationally within retail with addition - for example of the French retailer, many throughout Europe, we’re seeing more growth there. But it is purposeful we’re trying to maximize those relationships as well as growing food service internationally.

Hi. This is Seth. Can I was on mute. But this decision I feel, very comfortable with me and Ethan, I’ve been collaborating for so long. And this is just a matter of me having such confidence in the team, which frankly 18 months ago, we didn’t have the level the caliber of leadership we have to support Ethan and so now we do and I’m absolutely going to continue to be engaged. I am continuing to be out there every month as I have been, and just excited to see it continue to grow and flourish.

Thank you.

Thank you. Our next question comes from Adam Samuelson with Goldman Sachs. Your line is now.

Yes. Thank you. Good afternoon, everyone.

Yes.

Hi. I was hoping to maybe dissect the 2020 outlook a little bit and specifically on the revenue growth expectations, one just to clarify, it is still prior practice that you’re only including in guidance products in the market with customers that you have today, or is there some expectation of channel expansion and distribute point expansion especially internationally that was embedded in there?

Yes. So we continue to adhere to that practice. We don’t build in expected customers would build only those which we have one. So if you consider for example, what’s in the forecast would be things like Starbucks, Canada, Dunkin, Subway, Canada, Costco, the French retailer, I mentioned things like that what would be out would be things like China as a region, KFC, McDonald’s, etc. So we try to take a very conservative approach to what’s included in the guidance.

Okay. So and that’s very helpful. So in that kind of breakdown then just maybe frame kind of the expectation for domestic versus international growth, just on the velocity point, maybe in the last three to six months any view on differences in velocity by retailer where there is more competing brands on the shelf? Are those guys also expanding the category bringing people to the aisle Are you seeing your market share your velocity change when new products are put head to head to you?

Yes. I know it’s been the fourth quarter was a really important moment for us in that regard. And in the sense that the headlines were full of comments coming into the category and beyond that it was going to get crushed. And you know, we’ve got to start discounting all of our products. And in fact, that much about 11% of the beat that you guys saw was due to the fact that we actually discounted, less than we had modeled than anticipated. So it was sort of the inverse, instead of having to discount to compete, we continue to keep our pricing where we need to be and continue to outperform the other brands in the market. You know, if you think about in the refrigerated plant based meat set in retail, we’re outselling or close competition by a factor of two. And that’s again with just six skews. So we feel really good about our ability to compete, we’ve always expected this competition. And it just comes down to who has the best product, who has a brand that resonates consumers have the right ingredients, who is willing to innovate at a pace that we do.

Okay. I’ll…

International, you had a question? You had a question about international?

Revenue growth, domestic international is how your how you dissect that as you think about 2020?

Yes. So we do expect about the same percentage of international sales that we had in 2019 and 2020. And again, we think that’s just part of being conservative. We are going to pursue a lot of activities internationally this year, including putting, and I’ll touch on this later, more production in the EU production in Asia. So but we wanted to not get ahead of ourselves, and so we left that present about the same.

Okay. That’s very helpful. Thank you.

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

Hi. Thanks and good afternoon. I have a question about the R&D efforts and particularly at KFC, you said that you’ve developed a better chicken product, is that -are you done or there going to be continuous iterations to make it better? And then kind of the same kind of question for your burger products, you know, Ethan I know you say you’re, you’re always striving to make it closer and closer to me. But does that mean that I should expect the number 25, 50% increase in R&D spending to make that happen and what are all the R&D resources doing specifically to make it better?

Right. Great set of questions with KFC as we always will be making that product as all of our products better. You know, I mentioned in the comments that KFC was a great partner in that regard, giving us the patience and no room to do that. And it’s important to get that muscle structure right. But in Innovation, we do have these three platforms beef, pork and poultry, we continue to drive across four parameters, their flavor, aroma, [inaudible] and texture to try to optimize those so that the gap between our products and animal protein diminishes every year. So there’s a lot of fundamental work going on to accomplish that in the disciplines you’d expect. We have over 100 folks now in our in our research development center, all working on these issues. We also have applied research going on so like a team into the more complicated this put it into camps essentially, we have a fundamental research teams with applied research and applied research divided into groups of focus on specific us QRS. We want to serve them the best that we possibly can. And so we have dedicated groups to be able to run down path those of them around different skews they would like from us and products they’d like from us. So over time, we also have this more disruptive platform, whether it’s steak and bacon, or the fresh chicken breast that I mentioned. And so if you think about that the organizations really around that fundamental research, applied research and then something we refer to as the longer term.

Okay. Can I ask a follow-up Ethan?

Sure.

You mentioned in your prepared remarks that you’re going to take more steps from a marketing standpoint to respond to the - I guess the criticism about your product and other plant based meat substitutes? Can you tell me are you hearing anything from consumers or your brand ambassadors any concerns that are similar to what we’re seeing in these, you know, rather bias attacks?

Well, I know, thank you for the question. Not really, I think that so many of our consumers are also advocates for doing and so they’ve taken the time to get to know our products and get to know our gradients in our ethos around, no GMOs, nothing artificial. It’s the efforts to expand the addressable market that we have. And to cut down on some of this noise it’s being generated is why we’re investing so much in explaining the health of our products explaining the process. And I really get back to the process and whether or not people will be more comfortable with our process or the process that we are often competing against, which is just no miracles. And so we’re going to do a lot this year to educate the consumer on exactly how our products are made. And I think the results of that will be very strong. On the health side, as I mentioned, one of the things that I’m really excited about is this Medical Advisory Board. We want to have people around us that have access to and are driving the latest peer reviewed literature on and research on the link between nutrition and disease so that we can continue to make our products healthier and healthier. It’s part of our mantra of constant improvement and we just been less vocal about it. But this year, you’ll hear us be much more much more vocal about it.

Okay. Thank you.

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

Hi. Good afternoon, everyone.

Hi, Bryan

So I guess I had two questions I wanted to ask. One was just as you looked at the growth this year, and you’ve had especially more traffic in restaurants, maybe getting a better sense of who’s actually buying the product maybe versus what you originally expected? I don’t know two or three years ago, is the consumer who is consuming the product. Is that profile different, younger is it just a different consumer. And then just tied to that, any sense right now for how much is of the sale to the growth is still trial versus repeat purchases?

Great questions. I’ll just start with the repeat question. So in retail, we continue to have very strong repeat numbers for packaged food at 45.8%, I think was the most recent number we got. And if you look at the consumer trends in terms of who is coming into the brand, it does shake out, as we expected over the last several years with people who are 40, and over being driven by health, and then secondary consideration around environment and animal welfare and things of that nature. I think what is surprising to us is the youth movement around this brand, and the youth movement around plant based meat in general. And that is really being driven by sustainability, and by animal welfare. And I think it’s picking up on the same vein that you see, as I mentioned in my comments of, you know, high school children and college age students, really getting active around inaction on climate and becoming active around some of the issues that nobody’s it are new. I mean, if you look at Die For a Small Planet or Silent Spring all these books were written over 50 years ago now, or I think that’s 1971 actually, but the ideas have been there. But it’s that process of the public becoming more and more aware of it. And that is now galvanized entire generation around the work that we’re doing and others are doing to help address climate. So that does surprise me the strength and the passion of that movement among the younger crowd.

All right. Thanks and then just one quick follow up on it certainly capacity. Can you give us a sense of how much capacity you have available for 2020 relative to your revenue.

Yes. For sure. So, you know, as we begin the year we have roughly I’d say $700 million or so in gross revenue capacity, but we will scale that to over a billion by the end of the year. We’re sourcing now, protein from several different providers. So we’re happy about that, as well as in people often overlook the fact that we do use other proteins. So we have suppliers for sunflower seed protein, mung bean protein, brown rice protein, for example. We’re really investing in internal production. We have several yearend targets, as I mentioned around West Coast production, our extrusion capacity in the EU and then, of course, these in production, which we’ve signed up to for to put in place by the end of the year, pending the coronavirus settling a little bit And we’re also adding more co-packers to our network. We have about six now. Should we have six now and we’ll be adding five additional ones this year. So we are making the investments and that’s really what I was talking about. This is our moment. This is our time for growth. We want to make sure that we’re investing not only in R&D to keep you know pushing forward and getting closer and closer to that animal protein equivalent to do the fundamental work necessary to make sure that there’s nothing that’s going to disrupt us and then continue to grow that production footprint. So we’re able to serve demand increases and of course, the marketing efforts to get out there and really clarify some of the things that are being used negatively to slow ourselves.

Thanks Ethan. Appreciate the color.

Thank you.

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

Hi. Good afternoon. Thanks, Ethan, Mark, and congrats on good results for 2019. So actually, following up on the question from Bryan, and with the capacity available, could you update us on your CapEx needs for 2020? Do you think there’s going to be roughly in that $40 million range you’ve mentioned which would be almost doubled in what you’ve essentially spent in 2019. And if you could give us a breakdown of the CapEx allocation in between international and domestic to get a sense of or will you really focus on capital expenditure and then have a quick follow up?

Yes. Ben, it’s Mark. So, we I think that’s a good number. I think we’re talking about the same proportion of CapEx spending to revenue that we saw in 2019. So that would put us close to that 40. Think that may scale as we look at opportunities potentially acquire additional assets. But the breakdown as far as what’s in international, I believe, we’ve talked about that extrusion footprint, driving about 20% of that capital, we don’t have an exact deployment because we’re still putting assets down trying to understand what the best configuration is. But I’d say that’s a pretty good capital number for us overall.

Thank you, and then the my follow-up was on the international peace I mean, clearly the taste profiles within Europe, within Asia, there’s certain differences to taste profiles in the U.S. and Canada. So how much of R&D do you think it’s actually needed to get closer to some of the more regional taste profiles in those markets in Europe that are even within Europe significant differences, but then also going over to China over Asian countries at some stage. How much do you think do you need to invest in R&D to get to get the product right for those markets in order to be successful?

That’s a great question. And so we do look at that in two different buckets. The first is we’re trying to create that blank canvas that is in the pork or poultry that can be then utilized by folks in whatever color application they want. And so to some degree, it’s really about just being as true as we possibly can to the taste, texture appearance and aroma of the animal protein that we’re targeting. But you’re right there is when it comes to preparation into value added meals and things like that a flavor profile that people come to expect reasonably. And we do work extensively on that we also have flavor houses that are very well versed in serving different cultures. So I wouldn’t say it’s a massive investment on our part, it does come up quite a bit as we talked to, as an example of QSR that has footprints in more than one region of the world. But there’s, from my perspective, I haven’t seen it have a big budgetary impact.

Okay. Perfect. Thank you very much.

Thanks.

Thank you. Our next question comes from Rob Dickerson with Jefferies. Your line is now open.

Great, thank you so much. I just had a question on the price parity goal. But I think you said 2024 and I think it’s one skill I know now you’ll excuse maybe I’d have more [inaudible]. But regardless of all that, it’s just kind of more general thought process of how you do that, and I just I asked the question just kind of relative to how traditional meat companies operate in a level of profitability that they’re willing to operate, and how that product might be a bit more commoditized. Obviously, the near they need more value added product. So it was just how do you bridge the gap from price point relatively cost production scale, and then margin profile to get to that price point. That’s it.

Thank you. So I’m sitting in that good question. I’m sitting across the table from margin mark himself. And so I promised him that I’m not going to reach this goal at the expense of his margin. But in all seriousness, it really starts with direct material and direct labor and I can go through that in a little bit. So if you look at our efforts to grow the protein supply chain, a lot of that is focused on cost, right is how do we get more competition? How do we get different providers and that have access to protein in the markets that we’re producing. So I think you will see a cost structure shift downward in the protein supply. And when it comes to things like flavor, we are have very extensive dialogues with some of the ingredient houses we work with, and explain this goal, lay it out and try to join hands on getting that reduction that we need, and then on the production side, and so I guess, before I leave that point of materials, there’s no material obstacle to under pricing animal protein. So where I came from, I was in a sector where we had issues of precious metals and energy and the cloudy markets move in the wrong direction. Right and that’s not happening here. It’s in fact the other way. So I don’t see material obstacle under pricing. Then you start to look at labor costs and handling costs and logistics costs, we have still a lot of low hanging fruit without a doubt, if you look at the way our production is set up, it was set up for speed to market, not necessarily for optimized efficiency. And so we do have a lot of design work occurring around continuous lines that would allow us to take out a lot of that handling logistics costs that we currently have in today. So between those two, I’m very comfortable with the target we set. And in fact, I think we’re being conservative, I believe we can achieve that in a couple different couple different areas, so very much looking forward to it because I think if you ask the consumer think about three, four years from now we get the product to the point where it’s indistinguishable from animal protein from a set century experience. It’s a space that provides that a romantic texture etc. Has nutrition that either meets or exceeds that of animal protein, and then it’s lower cost than animal protein. There are very few consumers. I think that’s a no, I just don’t want that. Right. And so it’s really important to me that we get there. And we’re setting up the organization to do that.

Fair point. Thank you so much.

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

Good evening, everyone.

Hi Alexia.

So I have questions. First of all, I know when we met last summer, there was some discussion about how over the next couple of years, you might like to bring some of that co-packing capacity in house, so that you’re actually doing the whole end production. And that that will have a beneficial impact on margin that might distort the asset light model that you’ve got just by focusing on the extrusion stage of the process. I know that you’ve had some trouble with co-packers in the past, but has your thinking changed on that because obviously, it’s great deeds and throw down these extrusions and fairly cheap to put in. And obviously it takes work to do the co-packing arrangements. But have your thinking changed, we still be factoring that in around about 2022 or so. And then I have a follow up.

Sure. Good question and I don’t think it has changed we do intend to increase the amount of internal production that we do with we will strike a balance between in-house and the more dual model we have right now. But we are looking at facilities both on the East and West coast in the U.S. here that would allow us to go from, protein all the way through to package good. And that is around that cost model and the reason that we’re pursuing that. So I think the model remains the same, what is actually executing and you’ll see some of that in house production and continuous line work occur before 2022.

Okay. Very helpful. Thank you. And then I’m sorry if I missed this, but did you actually quantify so how much your marketing spending is expected to increase this year?

We did not give a number, no.

Okay. Thank you very much. I’ll pass it on.

Okay. Thank you.

Thank you. Our next question comes from Rupesh Parikh with Oppenheimer. Your line is now open.

Good afternoon. Thanks for taking my questions. I was hoping to ask some more about what you guys are seeing in a competitive backdrop and some of your international markets versus what you’re seeing in the U.S.?

Right. So good question in the EU, we are seeing a lot of entrants into the market. We’ve been able to try a lot of those products and we still feel pretty comfortable at where we are. But certainly that market is more fragmented with a lot of different players. So you would expect that and that is occurring in Asia. There’s two things going on really one is there is kind of the historical legacy plant based needs that came out of work with Buddhist temples and things of that that are known there and I think accepted. And then there’s some start-ups that I think are reacting to not only the poor crisis they’re having there. But the success of companies like ours, and they’re forming companies to go after that market in Asia. But there is not yet a competitor that we feel has been able to do what we’re doing at the scale that we’re doing with the quality we’re doing and the quality that we were able to achieve rather. And so we stay very hungry and focused on making sure that we’re leading the market and in all the statistics I shared with you today we are. We plan to keep it that way.

Okay. Great. And if I guess one, just one more follow up. So, obviously, a lot of headlines out there I just regarding all your food service wins and maybe one loss out there as well. Just curious, what would you say is your overall feedback from your customers on the food service item? Any positive or negative surprises thus far?

I think it’s just really positive. You know the list we’re very proud of it. You know, I’ll get back to that statistic of the 650,000 outlets in the U.S. were in less than 4%. But if you think about the names that we’re working with in a more general sense from McDonald’s to KFC to Hardee’s Denny’s, Subway, Starbucks, Del Taco, Dunkin, ANW, TGI Fridays, so many, it’s hard to list them all. And the key there is to serve not only the management there in terms of their expectations about movement, but really the franchisees, right that’s where I think the really important work occurs, are we increasing foot traffic? Are we increasing sales? Have we need a product that adds complexity to the back house or makes it simpler for them or as a rough exchange? All the things really matter, one of the things going to start to matter more is pricing. And so again, you see me coming back to this notion of plant based meat should not be more expensive than animal protein, we have to leave the market on that. We have to leave the market and help these QSR to differentiate on health, and things of that nature. So I think if anything, it’s a very pleasant surprise or no surprise, the right word, but it’s encouraging sign that so many of these QSR partners are leaning in, not to check the box, but they believe in what we’re doing. And I think their franchisees are excited about what we’re doing. So I had the opportunity to work with many of those as we do these launches. And I think I’m getting a glimpse into something that’s quite special, that this that consumer that market, those customers seem to be leaning in this the way that I’ve never seen before. I’m working on this for a long time.

Great. Thank you.

Thank you. Our next question comes from John Anderson with William Blair. Your line is now open.

Yeah. Hi. Thanks for the questions.

Hi John.

Hi. I was wondering if you could talk a little bit about service levels just the operational side of the business and how you’re servicing customers. And I know that, you know, given the rapid growth, that’s an ongoing challenge and effort. So can you talk a little bit about that in terms of overall service level?

Sure. Thank you for the question. So our - although we don’t get into [inaudible] specifically, we really have risen now to what’s more considered best-in-class, at least in that range, in terms of our fill rates, and the two years ago or so we were really quite poor in that area. So I’m very pleased with the change that we’ve seen and it’s such a good team now in operations. Stephanie has been with us for a long time, she continues to be great for bringing Sanjay Shah, who has been exceptional coming out of the really hyper growth environment at Amazon and then at Tesla. So we are trying to surround ourselves with people that that not only understand high growth, but also supplement that with people who are really versed in food manufacturing. You have to combine those two kind of perspectives because you ought they often don’t exist in the same organization. And we’re putting those together here. So I feel really comfortable where we are on an operations basis from where we were a year ago.

Great. That’s helpful. Mark, I think you talked about the second half of the year perhaps being a little bit stronger from a sales or margin perspective. Could you just kind of discuss that a little bit more taking us through the year? Is there anything we should be aware of quarter-to-quarter either in terms of sales or margin results as you look at 2020?

Yes. So we continue to think the back half will be stronger, we’ve mapped out about 60-40 split on revenues of 40% in the first half 60% of percent of the volume coming in the back half. I believe you shouldn’t see too much shift in margin throughout the quarters. But because of the increase spending in R&D and marketing, we’re going to be investing more aggressively up front. So you’ll see that profit contribution probably be even stronger towards the later quarters. But once again, that revenue targeting around 492 to 510, as we look to be approximately 500, it does only incorporate the things that we know, those things that have launched, we can quantify, and we can see them, and map them out by quarter. So, as the forecast sits right now, that’s kind of the picture that we see.

Great. Really helpful. If I could squeeze just one more in. The temporary issue that you mentioned with a couple of co-packers is that behind you now or is there any kind of lingering impact from that? Thanks.

Yes. That is larger behind us. As we went to start up, you saw some yield loss as you typically do, when you when you start production, we think that may have been a couple hundred basis points impact on gross margins in the quarter, the other elements in the quarter, and we had a much stronger stock based compensation expense. And that’s really had been the accumulation of awards as we had gone through the lockup period and granted the majority of those grants in the fourth quarter. So combination of those two had kind of binary impact on the EPS in the quarter. No expect our stock comp to stabilize as we move forward into 2020. And certainly, there will be blitzing in gross margin here. And then but those kind of capacity expansion projects are behind us at those comments.

Thanks so much, and congratulations on an incredible year.

Thank you very much. Appreciate it.

Thank you.

Thank you. Our next question comes from Steve Strycula with UBS. Your line is now open.

Hi. Good afternoon. So, my first question would be on the revenue guidance, the midpoint takes you to $500 million, which is definitely impressive growth and $200 million incremental revenue versus what we have in 2019. So a question mark would be how off of $200 million of incremental revenue do the gross margins not go up on a year-over-year basis and material way? Specifically, can you kind of quantify how much it goes back into reinvestment or international margins just much lower? That’d be helped them and have a quick follow up.

Sure. So the margin range 33 to 35. As we look into 2020, once again and visibility of our mix and how we’ve kind of modelled the forecast some of the offsetting impacts we expect. And we’re going to be investing in promotion and trade, we know that and we want to continue to be prominent and be the leader. As we go into retail, there’s additional investment in the international space. So will be certainly as we drive into the international area will be spending more looking at optimal pricing in that area. And then we always look at mix to the extent that QSR is stronger as that starts to come in, does that have an impact in our overall margin. If you know go out with that kind of growth, we certainly are looking at things that will help to offset that. We have tremendous programs as far as cost savings looking at internalization of manufacturing material impaction cost savings, but just the timing of those and as those start to impact margins and an offset some of the investment we’re doing. So that’s what we see right now in the forecast. And certainly as we progress through the year will update as we go along.

Thanks. And then, Ethan, I was going to ask you a Maryland basketball question, but I’ll say that. But I caught the main three pointer that was what mattered most. But I’ll ask you about --

Watching it. Go ahead.

I’ll ask about the food service business. Wanted to understand as you build out that business, quite quickly and as you kind of work to improve or insource some of these middle parts of the supply chain. Do you get any pushback from the food service companies in terms of multi-sourcing since they own the formulations for some of these products in some cases? I mean, if it’s branded beyond clearly, they are not going to source it from someone else, but in cases where it’s not, how should investors think about large suppliers wanting to diversify their production and make sure that everything’s filled on time? Thanks.

Yes, great question. And the right there is a tension there. And I think how we’ve addressed that with large QRS is we really have worked in concert with their operations team. So the [inaudible] They’ve been in our facilities with us. We’ve asked them what they need in terms of redundancy and in terms of feeling good about that particular issue. We’re now for example, somebody other QSR is qualifying or rather, calibrating a relationship with some of their co-packers to groups that they’ve worked with for decades on end, are going to be producing some of our products on the co-packing side. So it’s really about beginning the relationship with the dialogue and listening to them and what that concern is and then how we can help mitigate that without giving up our formula or without requiring them to try to do something that’s going to rival us at someday. So we’ve been - I think fortunate in avoiding that issue so far.

All right. Thanks so much.

Thank you. In the interest of time, our final question comes from Michael Lavery with Piper Sandler. Your line is now open.

Good evening. Thank you. Just back on the pricing strategy, I understand the interest to make it more broadly appealing and to bring the price down and give that back to consumers. But if you have consumers already willing to pay a premium now. Is there any way you might consider a tiered strategy where you would have a premium price point and something a little bit more of a value price point below that?

Yes. That’s a great question. And there’s something I think about all the time, you will see that and so if you look at the way the animal protein market is today, you see degrees of that with Angus [ph] and things of that nature. So we’ll continue to push the envelope on our products in terms of the ingredient claims and some bit of maybe an organic version not committing to that at all, but we will find ways to continue to deliver high levels of innovation that may cost more while supplementing that with products that are more accessible from a price point. So yes, I think it’s a really good strategy and what we will consider.

Okay. Great. Thanks. And just a follow up repeat level you gave a retail number if I heard you correctly, but in any sense how it compares on the food service side? I know some of those launches are so new, it may be harder to have data, but is it a similar repeat usage rate. How does that play out so far?

Yes. They indications they do share the data with us, we obviously wouldn’t be able to share that. And I don’t ask you for that. But as a general observation, we think that there is it’s gone well beyond just trial and their consumers that are buying more and more of it. And I think the best indication that’s public about that is the fact that some of the QSR has been working with for a while or adding new beyond items to their menu. So Del Taco would be a good example Carl’s Jr. would be an example of that. NW launching first with the burger and then going with sausage. So we’ll be doing a good job serving them and they continue to expand their menu obstacle beyond and I think that’s speaks to the fact that they’re getting more and more consumers coming back with repeat purchase.

Okay. Thank you very much.

Thank you.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would not like to turn the call back over to Ethan Brown for any closing remarks.

Thank you very much and thank you for joining today. I think the main message that I really did want to impart is around growth. The opportunity before us I think is unprecedented the consumer is ready for what we’re doing. We’re in a position to execute against that consumer expectation and desire for our products. You’ll see us make a lot of investment this year in our production capacity in our international growth in our marketing and of course continuing to research and push forward the idea that you can build a piece of meat directly from plants that is indistinguishable from animal protein. We will keep working with these QSR partners and hopefully bringing new products to market that folks can enjoy. We really do believe in the notion that we’re here creating products that will enable the consumer to do what they love and where they love it. So we look forward to continue to talk in upcoming quarters. Thank you.

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