FrozenFoodsBiz BUZZ

Beyond Meat Sales Sizzle, Shares Fizzle – So it’s Time to ‘Beef Up’ Production to Meet Demand

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By John Saulnier, Editorial Director

With third quarter net revenues soaring by 250% to $92 million for plant-based alternative meat maker Beyond Meat, Inc., the El Segundo, California-headquartered company is looking to, dare we say, “beef up” production in North America and beyond to meet demand.

A partner in the Netherlands, Zandbergen World’s Finest Meat, is building a faux meat factory in Zouterwould scheduled for completion during the first quarter of next year to directly supply Beyond Meat customers in Europe. But as the market continues to grow, driven by consumers seeking foods they believe are healthier and more environmentally friendly than beef, gearing up for even more output is in order for prudent producers.

It has been forecast by Simon Powell of the Jefferies banking and financial services group that meat substitutes could eat into 9% of the estimated $2.7 trillion global meat market by 2040. Presently the budding plant-based protein segment accounts for less than 1% of sales volume.

Stock Takes Dive

The rosy scenario for a blossoming future did anything but boost Beyond Meat stock (BYND) on October 29, when more than one-fifth of its value fell through the trading floor. On that day of lockup expiration for approximately 75% of the May 2 IPO float that generated astounding market value of $3.77 billion as opening prices skyrocketed from $46 to $243 on the Nasdaq Exchange, Beyond Meat shares plummeted by more than 22% to $81.99. Analysts, who cut price targets considering the segment’s increasingly competitive landscape, attributed much of the downturn to profit taking from shareholders not permitted to sell during the long lockup period.

Coincidentally, the selloff occurred one day after the bipartisan Real MEAT Act supported by the National Cattlemen’s Beef Association (NCBA) was introduced in the US House of Representatives to codify the definition of beef for food labeling purposes.

According to NCBA President and Tennessee cattle rancher Jennifer Houston, consumers are being misled by fake meat products and “need to be protected from deceptive marketing practices.” At the same time, she added, “cattle producers need to be able to compete on a fair, level playing field.”

Beyond Meat Beat Goes On

Since its founding in 2009, Beyond Meat’s SKUs of beefless burgers, faux fried chicken, fake meatballs, vegetarian sausages, skewers and other plant-based protein products have stampeded across North America and sailed across both Atlantic and Pacific Oceans to serve customers at approximately 58,000 retail and foodservice outlets worldwide. Among the distributors are leading QSR chains and supermarket operators.

“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 the most attractive to us,” said President and CEO Ethan Brown during a Q3 earnings call with financial analysts and investors on October 28. “So we 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%. And we think that trend will continue.”

He added: “It’s up quite a bit. It was up to 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… So you’ll see us continue to be aggressive there.”

In the USA, in addition to increased output from its flagship factory in California, the company is ramping up production at two co-packing plants elsewhere in the state, plus two facilities in Pennsylvania and one in Texas. During the first half of 2020 additional co-packing units in Ohio, Indiana and Quebec will be engaged as further contributors to the ever expanding supply line.

Beyond Meat Executive Chairman Seth Goldman (third from left) joins Zandbergen World’s Finest Meat  teammates outside the new plant being built in the Netherlands to produce plant-based meat substitutes. They are (left to right): Charlotte Zandbergen, chief marketing officer; Adriaan Figee, chief commercial officer; Ton Zandbergen, founder and president; Joris Zandbergen, chief executive officer; Barbara Zandbergen, human resource director; and Willem Spigt, sales manager.

Battleground Europe

At the moment the focus is sharpening among suppliers of faux meat to the European market, where Vevey, Switzerland-headquartered Nestlé has been active for many years and recently extended its plant-based food range with “cook from raw” Garden Gourmet Incredible Mince and an improved version of the proprietary Garden Gourmet Incredible Burger.

Meanwhile, it has been reported that Redwood City, California-based Impossible Foods Inc., maker of the Impossible Burger, formally filed on September 30 to begin selling fake meat products in the EU containing soy leghemoglobin (AKA heme), an iron-containing molecule made with genetically modified yeast that closely mimics meat flavor. The application is now in the hands of the European Food Safety Authority.

While Europe’s appetite for meat alternatives is robust, the acceptability of genetically engineered products or GM ingredients among consumers on the continent is decidedly underwhelming. Furthermore, governmental regulation in this area is quite strict. So it will be interesting to see how Impossible Foods’ application is received.

Positively Pleasing Q3 for Beyond Meat

“We are very pleased with our third quarter results, which reflect continued momentum across our business,” said Ethan Brown. “We remain focused on expanding our distribution footprint, both domestically and abroad, building our brand, introducing new innovative products into the marketplace, and bolstering our infrastructure and internal capabilities to fuel future growth.”

The company’s impressive Q3 results, while topping Wall Street expectations by about $10 million, fell a bit short of the whopping 287% gain posted during the second quarter. It was the first quarterly profit recorded by Beyond Meat.

Gross profit for the three-month period that ended on September 28, 2019 was $32.8 million, or 35.6% of net revenues, compared to gross profit of $5.0 million, or 19.2% of net revenues, during Q3 2018. Net income was $4.1 million, or $0.06 per diluted common share, compared to net loss of $9.3 million, or $1.45 per common share in the year-ago period; and Adjusted EBITDA, which is a non-GAAP financial measure, was $11.0 million compared to an Adjusted EBITDA loss of $5.7 million in Q3 2018.

The rise in gross profit and gross margin was primarily due to an increase in the volume of products sold, resulting in operating leverage and production efficiency improvements. A greater proportion of gross revenues from the company’s fresh portfolio also contributed to the improvement in gross margin. At the same time, gross revenues from purchases of frozen products increased 75% year-over-year despite the discontinuation of the frozen chicken strip product line during the first quarter of 2019.

Income from operations in the third quarter of 2019 was $3.6 million compared to a loss from operations of $8.0 million in the third quarter of the prior year. This improvement was driven entirely by the year-over-year increase in net revenues and the resulting increase in gross profit, partially offset by higher operating expenses primarily to support the company’s expanded manufacturing and supply chain operations, higher administrative costs associated with being a public company, higher restructuring expense, and continued investment in innovation and marketing capabilities.

“We remain pleased with our continued strong sales growth trajectory and are equally pleased with our sequential improvement in profitability in the third quarter. Our 35.6% gross margin in the quarter is a validation of our team’s ongoing efforts to improve our operating efficiency and is a critical enabler of greater strategic flexibility in the future,” commented Mark Nelson, chief financial officer and treasurer.

For the full year 2019, Beyond Meat is raising its guidance and now expects net revenues in the range of $265 million to $275 million, updated from its prior expectation of net revenues to exceed $240 million.

Nothwithstanding the bear run on Beyond Meat’s share value on October 29, President and CEO Ethan Brown remains extremely bullish about the future of the plant-based protein manufacturing and marketing company that he founded. Its profitable third quarter performance, greatly exceeded Wall Street expectations as sales surged a whopping 250%.