Earnings Call Transcript - BYND Q3 2020

Operator, Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Beyond Meat Incorporated 2020 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to Mr. Lubi Kutua, Vice President of Investor Relations. Sir, please begin.

Lubi Kutua, Vice President of Investor Relations

Thank you. Good afternoon and welcome. On today’s call are Ethan Brown, Founder, President and Chief Executive Officer; and Mark Nelson, Chief Financial Officer and Treasurer. By now, everyone should have access to our third quarter 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. Before we begin, please note that all the 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. Forward-looking statements in the earnings release that we issued today, along with the comments on this call, are made only as of today and will not be updated as actual events unfold. Please refer to today’s press release for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please also note that on today’s call, management will refer to adjusted EBITDA, adjusted gross profit, adjusted gross margin, and adjusted net income or loss, which are non-GAAP financial measures. While we believe these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today’s press release for a reconciliation of adjusted EBITDA, adjusted gross profit, adjusted gross margin, and adjusted net income or loss to their most comparable GAAP metrics. And now I’d like to turn the call over to Ethan Brown, Chief Executive Officer of Beyond Meat.

Ethan Brown, CEO

Thank you, Lubi, and good afternoon, everyone. Our Q3 2020 results warrant careful consideration to capture full and accurate appreciation of our business today. Let me begin by sharing broad observations on the overall impact of the COVID-19 macro environment, our net revenue results and mix, as well as highlight compelling underlying signs of continued momentum and growth. First, in line with the overall food category across retail, we saw a clear and prodigious pattern of consumer panic buying in Q2 followed by moderation in Q3. Second, the recovery in our foodservice business has lagged the overall foodservice sector, given our exposure to certain segments that have been disproportionately affected by COVID-19. And third, we continue to contend with COVID-19-related timing delays with large strategic quick-serve restaurants or QSRs. The above notwithstanding, the fundamentals supporting our growth are live and well, whether it be our increasing U.S. retail market share; household penetration buyer rates, purchase frequencies and repeat rates; our increasing points of domestic and international distribution; our increasing rate of new product introduction; and some promising indications that QSR partners may be emerging in what has been an appropriate and understandable delay in new launches during the pandemic. In light of what we view as transitory COVID-related factors, contrasted with the enduring strengths of our business, we have not blinked in our focus on the exciting long-term growth path ahead of us. As such, we have neither retracted nor delayed our ambitious expansion agenda. Turning specifically to our Q3 performance. We experienced the full brunt and unpredictability of COVID-19's impact for the first time in Q3, producing net revenues of $94 million, a sequential drop from record net revenues of $113 million in Q2. While the effect of COVID-19 in our foodservice business is offset by the unprecedented surge in retail grocery demand in the second quarter, our third quarter did not enjoy the same level of benefit and was conversely disadvantaged by consumer stockpiling and subsequent moderation in buying following this run-up in grocery spending in the previous quarter. Accordingly, Q3 reflects our second largest quarter of retail sales ever. Our retail revenue growth is less to offset continued and significant COVID-19-related interruptions for our foodservice revenues, including delays in launches or expansions with strategic partners. To keep all this in perspective, it's important to note that sales of Beyond Meat products were up 63% year-over-year, while the plant-based meat category as a whole was up 41%, contributing to a 270 basis point year-over-year increase in market share for the Beyond Meat brand. Further, across MULO, our sales velocity measured in dollars per total distribution points was 3.5 times higher than the category average and increased 15% year-over-year in the latest 12-week period, even as our points of distribution grew 55% year-over-year. To understand the significance of these trends, keep in mind that velocity typically declines as you add distribution points, meaning more stores while also seeing higher revenues per store is a very encouraging time with regard to our value proposition to consumers. More generally, COVID-19's considerable impact on Q3, retail and foodservice sales notwithstanding, our year-over-year net revenue growth for the nine months ended September 26, 2020 stands at 52.9% with our net revenues from retail alone, up 116.5% for the same period versus a year ago. The positive metrics underpinning this growth further bolster a determination to resist short-term attraction or delay. An additional look at SPINS and IRI, consumer panel data provides a clear picture of progress, where our U.S. household penetration increased to 5.2% compared to 4.9% as of June and just 2.7% a year ago, where repeat rates increased to 51.9% in September versus 49.3% in June. Recent distribution wins include, but are not limited to, incremental placement of the Beyond Burger and Beyond Breakfast Sausage Patties at Walmart, and additional distribution gains for Beyond Breakfast Sausage Patties at select Kroger, Super Target, Publix, and Harris Teeter locations across the nation. Further, we have secured distribution authorization on exciting new avenues of retail outlets for us. We are pleased to announce today that as of January 2021, the Beyond Burger will be available at 7,000 CVS Pharmacy locations nationwide and Beyond Meat Balls will be available at 5,000 CVS Pharmacy locations across the country. We continue to launch new products with the Beyond Meat Rapid & Relentless Innovation Program, having brought to retail markets Beyond Meatballs and Beyond Sausage Links in the last three months to strong retailer acceptance. Lastly, our sales velocity remains well above category averages at a time when we’re seeing an increased focus from our retail customers around shelf space optimization decisions. The actions are expected to favor brands such as ours that continue to drive overall category growth, further increasing our ability to expand our on-shelf presence, even within our existing retailers today. The deceleration caused by intensified Q2 buying and freezer loading followed by moderation in Q3 was felt across our retail category. Looking at a time series of rolling 12-week sales for the plant-based meat category as a whole, the category sequential growth rate peaked at 20% during the height of consumers’ panic buying and has since decelerated sharply to a decline of 3% in the 12-week period ended October 4, 2020, or a 23-point negative swing in sequential growth compared to late Q1 and early Q2. This pattern of Q2 freezer loading followed by Q3 moderation does not appear to be unique to our categories, as evidenced by similar buying patterns within the retail grocery space. Turning to international retail, we saw a deceleration from Q2 to Q3 as we did here in the U.S., as similar dynamics played out at several of our most important markets. Nevertheless, net revenues in our international retail channel also increased considerably, around 27% year-over-year in Q3 2020. During Q3, we increased our international retail outlets from approximately 27,000 to roughly 33,000. In foodservice, as noted, our Q3 results reflect continued COVID-19 disruption. Total net revenues for our foodservice business declined 41% year-over-year, with our U.S. and international businesses declining 11% and 65%, respectively. The prevailing dynamic defining our work with large QSR customers since the onset of COVID-19 has made a delay in plans to initiate tests or expansions of plant-based meat and new items. Despite the near-term impact on our business, we fully understand and respect the propensity of large customers to maintain menu status quo or streamline offerings during the pandemic. Here again, it’s important not to interpret this near-term pandemic-induced drop in activity as a weakening in our long-term value proposition. We certainly do not. And despite the potential for another round of sustained stay-at-home orders, we are seeing strong signs that certain large QSRs are planning for menu additions. As always, we cannot promise any launches for a variety of reasons, including an inability to predict the course of COVID-19 and its impact on launch or expansion strategies within the QSR space. Looking abroad to Asia, we are proud to continue our partnership with Yum China, which recently conducted a new test with the Beyond Burger across 210 KFC locations in six major Chinese cities for a three-week trial. Throughout our operations, we continue to invest in the business to support current and future growth. First, we recently completed the acquisition of one of our former co-manufacturing facilities in Pennsylvania. We will continue to align ourselves with best-in-class co-packing partners here and abroad, and expect the acquisition of our new Pennsylvania facility to only strengthen these relationships as we’ll be able to do important product scaling work in-house before transferring certain downstream activities to these partners. We continue to make strong progress in research and development, despite the continued impact of COVID-19 on our ability to operate at full scale. We're proud to utilize recyclable shipping boxes in the UPS carbon-neutral shipping as part of this initiative. Overall, with regard to our availability, Beyond Meat is now available in approximately 122,000 retail and foodservice outlets globally, up approximately 10,000 locations or 9% since the end of June, with the majority of that increase coming from our international retail outlets. I would like to now comment briefly on our margin performance, which Mark will expand on in greater detail shortly. Our results reflect a combination of ongoing COVID-19 challenges as well as deliberate decisions we made for the benefit of our long-term strategy, despite the understanding that these would negatively impact our profitability metrics in the near term. Our adjusted gross margin of 28.9% in the third quarter was down 670 basis points as compared to the same period last year. The decision to opportunistically increase our promotional intensity holds strategic importance as we've communicated to you in the past and is aimed at driving increased household penetration for our brand. Therefore, these tactical actions appear to be working, with our latest U.S. household penetration nearly doubling in the year and increasing roughly 23% over the last two quarters. We believe seasoning on the immense global opportunity within plant-based meats over the years to come draw the clear focus on long-term strategy and a willingness to make near-term sacrifices in order to establish a much stronger position for our brand over the long run. With that, 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 greater detail.

Mark Nelson, CFO

Thank you, Ethan, and good afternoon, everyone. As Ethan described a moment ago, we experienced a meaningful deceleration in our financial performance during the third quarter, causing our results to fall short of our expectations. However, we believe this was in large part attributable to challenges associated with COVID-19, which we view as a transitory factor. The underlying fundamentals of our business continue to give us confidence about Beyond Meat's future, notwithstanding the fact that near-term volatility will likely remain elevated, as the shape and impact of the global pandemic remains uncertain. When you peel back the layers of our Q3 performance, certainly the 39% year-over-year revenue growth across our retail channel was solid. But, as you might expect, demand in our foodservice channel, while up 78% sequentially from last quarter, remained significantly weaker than the prior year. Operationally, we reacted admirably to mitigate much of the impact of this demand shift, by reducing excess capacity and thereby minimizing inventory charges during this softened demand period. Going forward, our near-term goal is to drive growth within our retail channel while continuing to manage through the difficulties in foodservice, and standing ready to capitalize in that channel as the pandemic subsides and consumers regain confidence in away-from-home consumption habits. With that broader perspective shared, let me now walk you through our third quarter financial results in a bit more detail. Net revenues in the quarter were $94.4 million, up 2.7% compared to the third quarter of last year. In aggregate, growth in net revenues in the third quarter was driven by an 11% increase in volumes sold, partially offset by lower net price per pound, due mainly to our continued strategy to drive incremental consumer trial by offering more aggressive pricing and promotional programs. Retail net revenues increased 39% year-over-year, while foodservice net revenues decreased 41% versus the third quarter of 2019. In retail, our volume of products sold increased 46% year-over-year driven by continued expansion in the number of distribution points, both domestically and abroad, as well as higher sales velocities at existing retail outlets and contribution from new products. In foodservice, we continued to experience significantly lower levels of demand relative to a year ago, albeit meaningfully improved on a sequential basis. Our foodservice net revenues declined 41% year-over-year with non-QSR locations generally faring worse than larger chain QSR customers. Sales to our international customers across retail and foodservice channels represented 17% of our net revenues during the quarter compared to 32% in the year-ago period. Gross profit during the quarter was $25.5 million, or 27% of net revenues, compared to $32.8 million, or 35.6% of net revenues, in the third quarter of 2019. Included in the cost of goods sold during the quarter was $1.8 million of expenses directly attributable to COVID-19, including inventory write-offs and reserves associated with foodservice products deemed to be unsalable and product repackaging costs as we leveraged additional opportunities to repurpose certain foodservice items for retail channels. Net loss during the third quarter of 2020 was $19.3 million or $0.31 per common share as compared to net income of $4.1 million or $0.06 per common diluted share in the third quarter of last year. Adjusted net loss, which excludes costs attributable to COVID-19, was a loss of $17.5 million or $0.28 per common share. Adjusted EBITDA was a loss of $4.3 million or negative 4.5% of net revenues in the third quarter of 2020 compared to adjusted EBITDA of $11 million or 12% of net revenues in the year-ago period. The Company’s cash and cash equivalent balance was $214.6 million and the total debt outstanding was $50 million as of September 26th, 2020. For the nine months ended September 26th, 2020, net cash used in operating activities was $42.7 million compared to $18.3 million for the prior year period. Capital expenditures totaled $38 million for the nine months ended September 26th, 2020, compared to $9.5 million for the prior year period. The increase in capital expenditures was primarily driven by continued investments in production equipment and facilities related to capacity expansion initiatives. As Ethan mentioned, we recently completed the acquisition of a former co-manufacturing facility in Pennsylvania. Over time, we expect bringing this manufacturing in-house will lower our cost of production while increasing our supply and U.S. distribution capabilities. Finally, with respect to our 2020 outlook given the ongoing uncertainty regarding the duration, magnitude and effects of COVID-19 on our business and those of our customers, our 2020 guidance remains suspended at this time. We will continue to periodically reevaluate this position as broader macroeconomic conditions continue to evolve. With that, I’ll now turn the call back over to the operator to open it up for your questions.

Operator, Operator

Thank you. Our first question or comment comes from the line of Alexia Howard from Bernstein. Your line is open.

Alexia Howard, Analyst

Good evening, everyone.

Ethan Brown, CEO

Hi, Alexia, how are you?

Alexia Howard, Analyst

Great. So, I guess my question and follow-up would firstly the, I know you're not providing guidance for the fourth quarter, but could you give us some idea about how the retail side of the business and the foodservice channels are trending? As we look out into the fourth quarter, do you expect a sequential improvement on either side of the business? And also, what's happening internationally? So just some sense of how things are trending. And then, I guess my second follow-up question would be, given the news about the McDonald's Plant McPlant platform that came out this afternoon. Could you talk a little bit about what your role might be in that platform? And how you expect that to play out over time? Thank you very much, and I'll pass it on.

Ethan Brown, CEO

Sure. Thanks for the question. And just before I delve into the specifics, I do want to just recap and reiterate where I think this quarter ended up and why. I think the headline really is that foodservice remains highly challenged. If you look at our Q4 2019 sales into that sector, we were about $58 million net. Then you come to today, we're about $24.4 million net. And so there's clearly something going on around COVID, where folks that were drawing on our products were not doing so at the same clip as we are into the third quarter. That does not mean that it's not a very healthy and long-term segment for us. And in fact, I'll share reasons why that is, in fact, the case that we'll see some good recovery there, we think. And then second, if you look at what happened in retail that was largely masked in the second quarter by stockpiling that was going on as consumers felt that the stay-at-home orders were going to be a very enduring part of our economy. And so that stockpiling that masked the weaker foodservice activity in the second quarter simply didn't occur in the third quarter and was, in fact, exacerbated somewhat by the fact that freezers will fall across homes throughout the country. And so you then saw the full brunt of this decline in the foodservice sector. That said, we remain really encouraged around the performance of the brand, particularly in retail and then some of the activities that we'll talk about coming up in foodservice. But if you look at that household penetration, the buyer rate, the purchase frequency, and particularly the repeat rates, those are all things that any brand would be really happy to have. And then you look at the market share. And our market share increased 270 basis points on a year-over-year basis. So we're looking quite strong in those areas. As we head out of Q3 and into Q4, are we seeing signs of recovery? We have really shied away and I want to caution against providing any guidance for the fourth quarter. But one thing that I can share is that this has been such a year of unpredictable buying patterns by the consumer, and that has continued into the fourth quarter in the sense that some of the activity we've seen early is much more in keeping with what we would have seen over the summer buying months. So there has been some trading out of consumption given the stockpiling and then the inventory run down as we head into the fourth quarter. But again, I want to be really clear that I don't want that data to be used to create any forecast for the fourth quarter because it's simply too variable. On the foodservice side, we are seeing some recovery there, but it's too early to tell. With COVID continuing to spike up in the country, we can't offer guidance in that category. But you will see us active with some of the large QSR partners that we've talked about in the coming period provided that COVID doesn't overtake the economy again. So overall, we're feeling optimistic about where we're headed and look forward to sharing some good results. From the second quarter, we were about what, 113 net and now about 94, and this is in a period of extreme pandemic, so we think we're doing really well.

Alexia Howard, Analyst

Great. Thank you very much. I'll pass it on.

Operator, Operator

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

Robert Moskow, Analyst

Hi, thanks. Ethan, I think you addressed my first question when you mentioned that consumer retail activity might be picking up again in the fourth quarter. Does that give you confidence that consumers' inventory at home is back to normal and that the excess stock from panic buying is no longer an issue? Can you also reassure us that if retail inventory is now normalized, it means that what we observed in the third quarter wasn't an excessive amount of inventory at retailers? Do you have any insight into the current situation regarding that?

Ethan Brown, CEO

Yes. We are not observing customer buying behavior at the grocery level that indicates they are still trying to deplete a large amount of inventory. They responded quickly to the decline in consumer purchasing during the third quarter, so I believe they are well-adjusted. We had good returns in the early part of this quarter, and we will need to monitor how the rest of the quarter unfolds. This year has been quite unpredictable, and I prefer not to provide more specific guidance for the quarter than that.

Robert Moskow, Analyst

And just a follow-up on, I mean we get Nielsen data lagged. So, there's a few weeks I haven't seen, but it doesn't show, at least through October 7, I think, a dramatic pickup. Growth is decelerating a little bit, maybe down to 42%, still strong, but there's no like rebound. Are you saying that as you look towards the end of October that it does go higher?

Ethan Brown, CEO

I think some of what happened is to just try to give you a little more detail is, the end of the third quarter, we did see a lot of buying occur from the retailer base. And then we filled a lot of those orders in the first part of October. So, I don't think it's matching directly with the Nielsen data that you're seeing. And so, but again, we're seeing a pretty strong beginning, whether that will persist throughout the rest of the quarter, we just can't say.

Robert Moskow, Analyst

I understand if you don't want to share details about McDonald's' plans. However, is it reasonable to say that you're generally comfortable with your product being included on quick-service restaurant menus, even if your brand isn’t specifically mentioned? I assume you would prefer one scenario over the other, but would you be fine with it not being listed on the menu?

Ethan Brown, CEO

Right. Yes, I would say not, actually. I think given the consumer resonance with our brand and just the momentum we have with consumers, the brand that we've established, we think it deserves to be up there on the menu. And nearly all of our QSR partners have done that and benefited as a result. And if you look at how the PLT was positioned, it was pretty clear in all sales collateral and signage that it was with the Beyond Meat burger. Now we can't specify or speak for McDonald's to how we interplay with McPlant Burger. But we clearly think it'd be in everybody's best interest to use our brand, and I would resist efforts to not use it.

Robert Moskow, Analyst

Okay. Thanks for the clarity.

Ethan Brown, CEO

Thank you for the questions. Regarding velocities, I have been reviewing our data and other sources. Even with our significant expansion in points of distribution, which has grown by about 55% year-over-year, our velocity remains approximately 3.5 times higher than the category average. Over the past 12 weeks, we've seen a 15% year-over-year increase in velocity. There are various factors at play and differences depending on the SKU and the promotional strategies of competitors. However, the overall 15% rise in velocity year-over-year, together with a 55% increase in distribution, is quite impressive, and we feel positive about it.

Mark Nelson, CFO

Thanks, Rob.

Operator, Operator

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

Bryan Spillane, Analyst

Hey, thanks operator and good afternoon everyone. Ethan, as we transition from summer to fall, you spent the summer stocking some inventory while also having products like burgers available. Now that barbecue season is over, can you discuss if and how merchandising will change as we move into the fourth and first quarters? Should we consider anything regarding retail inventory? Will this lead to any disruptions in revenues during the fourth and first quarters? Additionally, related to seasonality, while demand has been strong, do you still observe seasonality during grilling season, or is it becoming less seasonal due to increased household penetration compared to previous years?

Ethan Brown, CEO

Yeah. So I was going to answer your first question with that perspective, that our brand does have some seasonality to it, around grilling season. But as we continue to offer new SKUs to the public, I think that will be dampened somewhat. So while we expect to see seasonality express itself over the course of the fourth quarter, the buying patterns again have been so unusual for this year. We can't say with any precision about how that effect will be. It may be some of the buying we didn't see. And the third would occur in the fourth and maybe that doesn't happen. And the seasonality is fully expressed. But, one thing I do want to talk about, as we think about the fourth and first quarter is, as I've always said, Beyond Meat is an innovation engine in its core. That's what we do. Our core asset is an understanding of protein and lipids from plants and getting them to behave. And so I'm very pleased to announce that we're going to be launching our Beyond Burger 3.0. And I could not be more excited about. We've done extensive consumer testing on it. It did better than our current version, which is always somebody we want to do. We want to make our current version obsolete. It absolutely performed very well against competition and started to scratch a little bit on some characteristics around 80/20. So something I'm excited to get out and it represents, I think, continued growth for us.

Bryan Spillane, Analyst

Okay. Great. Thanks Ethan.

Operator, Operator

Thank you. Our next question or comment comes from the line of Ken Goldman from JPMorgan. Your line is open.

Ken Goldman, Analyst

Hey, good afternoon.

Ethan Brown, CEO

Hey, Ken. How are you doing?

Ken Goldman, Analyst

Good. How are you? Thanks. I think you described McDonald's remarks today in a more positive light. Some investors might view it differently. They indicated that they were somewhat going their own way, and my understanding based on Beyond’s somewhat public statement is that you weren't pleased with that, right? You essentially said that you are collaborating with them. It seems like that wasn't part of your original plan. To me, it feels like you're causing some concern among investors. You're not providing any meaningful information about what could potentially be your largest source of growth. As a result, we are left to assume the worst: that you're not producing anything substantial and are just licensing some expertise, perhaps. Is there anything you can share with us today that would help clarify your relationship with this customer?

Ethan Brown, CEO

Sure, that's a fair and good question. You're asking the right one here. I really value the relationships with our customers. While I want to reassure everyone that things are going well, it's ultimately their decision. What I can say is that we have built a strong long-term relationship with them. We put in significant effort to develop the burger that's part of the PLT and will be at the meat plant. However, it’s up to them to determine the specifics of where and how it will be utilized. Everything my team and I have been working on is aimed at achieving a specific outcome together, and I feel positive about that.

Ken Goldman, Analyst

Okay. I'll leave it there. Thank you.

Operator, Operator

Thank you. Our next question or comment comes from the line of Rupesh Parikh from Oppenheimer. Your line is open.

Rupesh Parikh, Analyst

Good afternoon. Thanks for taking my question. So I wanted to ask a little bit more about your retail distribution. Could you worry at all about over-distribution at this point on the retail side? So it was interesting to hear just about your planned CVS launch as well later this year?

Ethan Brown, CEO

Yes. What concerns me more is that within our company, we understand that consumers are looking for different and additional product options from us. They want the Beyond option available at various meal times throughout the day. There is a genuine sense of urgency for us to introduce more products. We have made a start, but that's just the beginning. We have the potential to expand to 25 or 30 products in these stores, and you can expect to hear about some exciting developments in the coming months. I truly believe we are just getting started.

Rupesh Parikh, Analyst

Okay. Great. I’ll pass it on. Thank you.

Operator, Operator

Thank you. Our next question or comment comes from the line of Ben Theurer from Barclays. Your line is open.

Ben Theurer, Analyst

Hi, good evening. Ethan, Mark, thank you for answering my question. I wanted to explore the dynamics of the international market, specifically in retail and foodservice. Looking at the European and to some extent the Asian markets during the last quarter, many foodservice locations were not under lockdown due to the initial wave of COVID, allowing people to go out again. I expected a more significant increase, but on the foodservice side, we observed marginal improvement compared to the second quarter, when COVID-related restrictions had the most impact on food sales in markets like Europe and parts of Asia. Additionally, while retail showed strong performance in the second quarter, there has been a notable slowdown sequentially into the third quarter. I would appreciate it if you could elaborate on the dynamics in both the foodservice and retail segments in international markets to help us better understand the outlook for the coming quarters.

Ethan Brown, CEO

On the foodservice side, around two-thirds of our sales are focused on independents and institutions that are either closed or operating at reduced capacity. The remaining one-third is in the strategic market, which is performing well with drive-through services and has streamlined menus and cash flow. However, we are not as involved in that sector of foodservice, and this trend extends internationally as well. While we have seen some successful tests in locations like Pizza Hut in Puerto Rico and KFC in China, these initiatives are currently on hold due to ongoing uncertainty with COVID. Many are awaiting a return to full economic activity before enhancing their menus. This situation is observable both in the U.S. and the EU. On the retail side, we were pleased to report a 27% increase in international retail sales for the quarter, as long as the global rise in COVID cases doesn't reverse this trend. We believe we are witnessing a solid recovery there.

Mark Nelson, CFO

Good. Go ahead.

Ethan Brown, CEO

Thank you.

Operator, Operator

Thank you. Our next question or comment comes from the line of Adam Samuelson from Goldman Sachs. Your line is open.

Adam Samuelson, Analyst

Hi. Yes. Thank you. Good evening, everyone. So I guess my question is really just on the cost side. And so two parts. One, just wanted to get a sense of having that co-packing investment and if I'm reading the Q right, that was $14.5 million. Just trying to get a sense of kind of, what that can do to the unit cost and you in-source and not paying that co-packing fee at least for a portion of your production? And then second, on pea protein isolate purchase commitments. It looks like the purchase commitments for the fourth quarter and the purchase commitments into 2021 are substantially in excess of the amount of you consumed, both in third quarter and year-to-date? And just I know there's a shelf life, but it would imply that revenues are well over doubling if I'm understanding the math right. I just want to get some comments on how you look at the ability to consume those purchases? Thank you.

Mark Nelson, CFO

Sure. Thanks, Adam. So when we look at the internalization of that back end, the forming and mixing and packaging elements of the product, it is a pretty significant piece of our cost. So we look at internalization through this acquisition as a great way to offset that, bring that cost in-house and then leverage that to achieve better cost profile. It's a very attractive payback for us, both in a period payback, but also in a kind of unit cost perspective. On pea protein isolate, we do keep a close eye on that. Our contracts with suppliers of the pea protein isolate, we work with those suppliers and make sure that protein is current. It typically has a two-year shelf life. We know we have more as things have slowed down, but as we continue to move forward, we're optimistic that that will level out and we'll be matching to that inflow and demand. And it's not linear. We take more in earlier in the year to prepare for where we have stronger growth, typically in the second and third quarter.

Adam Samuelson, Analyst

Okay. Thank you.

Operator, Operator

Thank you. Our next question or comment comes from the line of John Baumgartner from Wells Fargo.

John Baumgartner, Analyst

Good afternoon. Thanks for the question. I'd like to come back to the consumer stockpiling. What sort of changed relative to your outlook from August? Because, I guess, presumably, consumption is expandable here given the low starting base. You have the overlap with grilling season and then also the work-from-home, which could also be a tailwind for demand. So it seemed like a pretty solid backdrop. I mean, are you just not seeing consumption intensity progress in line with your expectations? And then I guess, how are you thinking about how quickly dietary habits can shift here in the short-term for that marginal buyer to sustain these growth rates? Thank you.

Ethan Brown, CEO

Yes. Sure. As we talked about in the second quarter call, we saw this 195% increase in shipments occur throughout the second quarter relative to 121% increase in our sales according to SPINS/IRI panel data. We attributed much of that to club and then also some late shipments of our COA classic that weren't caught in the consumption data because of the cutoff date. So there was just a tremendous amount of buying that was going on by the consumer in the second quarter. And then if you think about the stay-at-home orders relaxing, and people going back into foodservice, where people were getting buckets of KFC and other large strategic quick-serve restaurant offerings, we weren't really participating in that because of streamlining their menus. Our foodservice was coming more from that other two-thirds institutional, et cetera. And smaller restaurants as well as lodging and casinos, recreational centers, stuff like that. So we just didn't participate in that. The consumption went into another category we weren't really being well represented in. That was what caused the sequential deceleration in retail buying. But you can't get around, in my view, these very strong numbers to make a case, for example, that somehow dietary changes are occurring. That would run in the base of household penetration rising, repeat rates rising, purchase rising. And of course, every buyer is buying more per household. So all the right trends are here. Again, we think we're doing really well even though the pending challenges of the pandemic impact our performance and we feel encouraged that despite the circumstances, we are on a strong growth trajectory.

John Baumgartner, Analyst

Great. Thank you, Ethan.

Operator, Operator

Thank you. Our next question or comment comes from the line of Michael Lavery from Piper Sandler. Your line is open.

Michael Lavery, Analyst

Thank you. Good evening. When we look at your outlets internationally and U.S. and sales per outlet on the foodservice side, they don't look very different, but on the retail side, it looks like the U.S. is significantly higher. The Canada re-class could throw some of the comparisons a little bit, but it's maybe even 10 times what they are outside the U.S. How should we think about what drives some of that? Is it number of facings? Is it just some consumer preferences or lack of awareness? How does the international piece of retail evolve? And what should we expect there?

Ethan Brown, CEO

Thanks for the question. I look very optimistically toward. It's so early in our reach; I think we're in 80 countries now, but that is truly scratching the surface. So if you think about our sales team here and our broker network and all the relationships we have with whether it's Costco or Kroger or Whole Foods, we're still building those globally. And so I think that is really what is speaking out in those numbers is that we just don't have a mature sales organization globally. That is something that you'll see us investing in, and we have been investing in. We're building strong teams in China and the EU. And we think as that develops, we should see improvement in sales across more outlets.

Michael Lavery, Analyst

Okay. Great. Thank you very much.

Operator, Operator

Thank you. Our next question or comment comes from the line of Bill Kallo from Baird.

Ben Kallo, Analyst

Hey. It's Ben here. Thanks, guys. I wanted to talk about just your capacity. You talked about $1 billion ending the year. You mentioned the second phase of China. Could you talk about what the second phase does? And then, I guess the worry is, obviously, right now is demand and how you flex that capacity going forward based on what you're seeing out there? And then my second question is just on your visibility because I think that the stock is telling us that we were all surprised by this. Can you just remind us about your level of visibility going forward across all channels?

Ethan Brown, CEO

Right. So, we can't give guidance specific to China, but I think you can see the amount of investment we're making there in energy and focus. We have the supply contracts in place as well as the capacity now. So that when the economy does recover from COVID, we're able to resume the higher levels of growth that we've seen in the past.

Mark Nelson, CFO

No, I think that's right. The capacity is designed to match the growth in those regions.

Ethan Brown, CEO

And so, if we have to have higher absorption, because we didn't time it exactly right, that's fine. We're not building this business quarter by quarter. We're building it for many years. And so, we'll keep making that investment. If for some reason, it doesn't time exactly with the way that our growth, we'll be okay with that.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes our Q&A session. I'd like to turn the conference back over to management for any closing remarks.

Ethan Brown, CEO

I want to thank everyone for joining the call. I appreciate the insightful questions. As we approach the holiday season, let's all stay safe. We look forward to speaking with you again next quarter. Thank you very much.

Operator, Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.