BYND Stock | Beyond Meat Inc Q3 FY20 Earnings Call

Thank you, Lubi, and good afternoon everyone. Our Q3 2020 results were in careful consideration to capture a 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 and 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 food service business has lagged the overall food service 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 alive and well, whether we are increasing US retail market share, household penetration, buyer rates, purchase frequencies, and repeat rates, increasing points of domestic and international distribution, increasing rates of new product introduction, and some promising indications that QSR partners may be emerging from 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 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 on our food service business was 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 stock freezers 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, but our retail revenue growth did less to offset continued and significant COVID-19 related interruptions for our food service 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 are up 63% year-over-year, but the plant-based meat category as a whole was up 41%, increasing to a 270 basis point year-over-year increase in market share for the Beyond Meat brand, according to SPINS data for US multi-outlet, or MULO, and natural and specialty channel sales for the 12-week period ended October 4, 2020. Further, across MULO, our sales velocity measured dollars per total distribution points was three and a half 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. Gaining more stores while also seeing higher revenues per store is a very encouraging sign with regard to our value proposition to consumers. More generally, COVID-19's considerable impacts on Q3 retail and food service 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 our determination to resist short-term retraction or delay, even if our insistence on investing in our future during a period of disruption puts pressure on our P&L. An additional look at SPINS and IRI consumer panel data provides a clear picture of progress: our US household penetration increased to 5.2% compared to 4.9% as of June and just 2.7% a year ago; repeat rates increased to 51.9% in September versus 49.3% in June; purchase frequency increased 8% from June to September; and our buyer rate increased 133% from June to September. In other words, despite challenging macroeconomic conditions and highly variable buying patterns, more households are buying our products, they are buying them more frequently, and on average they are spending more per household on our products over time. Recent distribution wins include, but are not limited to, incremental placement for 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 in an exciting and new avenue 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 Meatballs will be available at 5,000 CVS Pharmacy locations across the country. We continue to launch new products through the Beyond Meat rapid and relentless innovation program, having brought to retail markets Beyond Meatballs and Beyond Sausage Links in the last three months to strong retailer acceptance. Lastly, as I mentioned a moment ago, our sales velocity remains well above category averages at a time when we are seeing an increased focus from our retail customers around shelf space optimization decisions. The ensuing 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 of 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, according to SPINS data for US MULO and natural and specialty channels, the category sequential growth rate peaked at 20% during the height of consumer panic buying and has since decelerated sharply to a decline of 3% in the 12-week period ended October 4, 2020, for a 23% 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 category, as evidenced by similar buying patterns elsewhere within the retail grocery space. Turning to international retail, we saw deceleration from Q2 to Q3 as we did here in the US. Similar dynamics played out in several of our most important markets. Nevertheless, as we saw domestically, net revenues in our international retail channel also increased considerably, growing 27% year-over-year in Q3 2020. During Q3, we increased our international retail outlets from approximately 27,000 to roughly 33,000. In food service, as noted, our Q3 results reflect continued COVID-19 disruption. Total net revenues for our food service business declined 41% year-over-year, with our US and international businesses declining 11% and 65%, respectively. As I unpack our performance in food service, let me first address the broader non-quick serve restaurant portion of our business. We call the quick serve restaurants, or QSR customers, make up roughly one-third of our overall food service sales, while the remaining two-thirds consist of sales to a wide variety of customers including, but not limited to, independent restaurants, smaller regional chains, bars and pubs, lodging venues, casinos, academic institutions, healthcare facilities, corporate catering services, government institutions, convention centers, movie theaters, sports arenas, and other recreation venues. As you can imagine, many of these customers have been disproportionately affected by COVID-19 and have generally experienced a slower rate of recovery relative to the overall food service sector. Although we did see a sequential improvement in overall demand from these customers relative to Q2, their total sales contribution remained well below pre-COVID levels. With COVID-19 infection rates beginning to pick up again in many parts of the US and abroad, uncertainty around the shape of the recovery in this portion of our business remains elevated. To provide further context, I'd like to focus a bit more on trends within this broader third of our US food service business as captured in NPD data, and then turn to our QSR partners. As a reminder, NPD tracks broadline distribution to US food service outlets that generally excludes major QSRs, which often utilize direct delivery systems. According to NPD data for Q3, sales of Beyond Meat products declined 34.7% on a year-over-year basis, compared to a 37.5% decline for the overall category. In other words, we achieved a slight gain in market share of this NPD-tracked channel even as the entire category remains significantly challenged. Although our outperformance relative to the overall NPD category narrowed in the third quarter versus our recent history, we do believe our results are uniquely impacted by our segment mix, which I alluded to earlier. Unfortunately, several of our highest share segments within NPD-tracked channels, including lodging, recreation, full-service restaurants, and business and industry, for example, have been hardest hit by COVID-19. Here, as is the case with our large strategic QSRs, we continue to provide both support and important patience as our customers adapt to the changing realities of COVID-19. Turning to the remaining one-third of our food service business, the large QSRs, we saw a sequential improvement from Q2 to Q3 from this portion of our business. However, total sales contribution from these customers also remained well below pre-COVID levels. The prevailing dynamic defining our work with large QSR customers since the onset of COVID-19 has been a delay in plans to initiate tests or expansions of plant-based meat menu 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 is important not to interpret this near-term pandemic-induced drop in activity as a weakening in our long-term value proposition in this critically important space. 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 of the Beyond Burger across 210 KFC locations in six major Chinese cities for a three-week trial. And as I will discuss in a moment, we continue to invest in personnel and production capabilities in China. 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. The capability to produce a certain portion of our finished goods completely in-house is a key part of a longer-term strategy to reach price parity with that of animal protein. We intend to use our new Pennsylvania facility to not only reduce production costs, but to pilot processes and products, including our new design continuous production lines, and perform initial scale-up trials of new products. With the addition of this wholly-owned production capacity, we are also welcoming some 180 employees to the Beyond Meat family. I should note that 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 will be able to do important product scaling work in-house before transferring certain downstream activities to these partners. Internationally, we continue to invest in production capacity in China and in the EU. As you know, in early September we announced our signing of an agreement with the Yashin Economic and Technological Development Zone to develop two manufacturing facilities in China, including a state-of-the-art production facility of which the size, sophistication, and sole dedication to plant-based meat we believe will be unique. This larger facility was preceded by our first production plant, where work is well underway to get it ready for production trials by the end of this year. The second facility, expected to be a significantly larger, purpose-built plant, once completed, is expected to be one of the largest dedicated plant-based meat factories in the world. Similarly, work is well underway at our recently acquired manufacturing facility in the Netherlands, which also remains on track to begin production trials before year-end. And we are continuing to build out strong teams in both regions. Finally, a word of appreciation for all of our talented team members working in operations around the globe. These essential employees work tirelessly to meet demand within a difficult operating environment replete with strict mandates around social distancing, masks, and sanitation requirements related to COVID-19. Add to these conditions the highly variable fulfillment requirements given unusual consumer buying patterns that are present in the COVID-19 economy, and it should become clear why we are so grateful for their work ethic and sacrifice. 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 at the Manhattan Beach Project Innovation Center here in Los Angeles. Our scientists, engineers, and technicians continue to work a two-shift model that better supports social distancing. I can't emphasize enough how proud I am of the team's productivity despite myriad pandemic-related impositions. In addition to the new retail innovations we recently launched, the team continues to make great progress on our next iteration of Beyond Burger, and I'll have more to share with you about that soon. Moreover, these talented women and men continue to work in deep partnerships with our QSR partners. Until you've worked a full shift with masks, it's hard to fully grasp the difficulty of performing challenging research and development day after day in these conditions. As with our operations team, my hat is off to them. In keeping with our strategy to make our products as widely accessible as possible, we launched our direct-to-consumer, or DTC, e-commerce site in late August. Consumers across the contiguous United States can now order a variety of our products with a clickable button, enjoying two-day shipping on each order. We are proud to utilize recyclable shipping boxes and UPS carbon neutral shipping as part of this initiative. While DTC will likely remain a negative portion of our overall sales in the near term, we are nonetheless pleased with the effort as it symbolizes our commitment to meeting the consumer wherever they prefer to shop. Overall, with regard to our availability, the Beyond Burger is now available in approximately 122,000 retail and food service 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. Our products are now also available in over 80 countries across the US, up from over 50 a year ago. 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. On a year-over-year basis, our adjusted gross margin of 28.9% in the third quarter of 2020 was down 670 basis points as compared to Q3 2019. Of this variance, over 500 basis points is attributable to price and mix, largely driven by increased trade discounts primarily, but not exclusively, in retail. The decision to opportunistically increase promotional intensity holds strategic importance, as we communicated to you in the past, and is aimed at driving increased household penetration for our brand. According to the SPINS/IRI consumer panel data I referenced earlier, these tactical actions appear to be working, with our latest US household penetration nearly doubling versus a year ago and increasing roughly 22% just over the last two quarters. Our aforementioned insistence on continuing to serve long-term growth ambitions naturally impacted our P&L during this period of disruption, where our operating margin suffered in the face of lighter net revenues. We believe seizing on the global opportunity within plant-based meat over the years to come requires a 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. Finally, and before I turn the call over to Mark, I'll provide some thoughts on the competitive environment. We watch entrants carefully and view the level of investment and interest in the category as a generally positive development in the long-term growth of the plant-based meat category. In this environment of significant spend by new and incoming players, we are seeing, as mentioned, our velocity increase and our key panel data metrics moving in the right direction, including, as noted, the number of households buying our products, spend per household, frequency of purchase, and repeat rates all increasing. Strong retailer and consumer interest in our new SKUs and continued expansion of our points of distribution both domestically and abroad. Lastly, we continue to see solid growth in the plant-based meat category above and beyond that of animal protein, and importantly, our brand continues to outpace the category growth. 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.

Sure, sure. Thanks for the question. And just before I delve into the specifics on that, I do want to just recap and reiterate where I think this quarter ended up and why I think the headline really is that food service remains highly challenged. Like 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. So there's clearly something going on around COVID where folks that were drawing on our products are not doing so at the same clip as we are into the third quarter. That does not mean that it is 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 will see some good recovery there we think. And 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 fell to the stay-at-home orders that were going to be a very enduring part of our economy. And so that stockpiling that masked the weaker food service activity in the second quarter simply didn't occur in the third quarter, and was in fact exacerbated somewhat by the fact that freezers were full across homes throughout the country. And so you then saw the full brunt of this decline in the food service 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 food service. 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 are looking quite strong in those areas. And then lastly, on the two questions on retail and food service as we head out of the third quarter and into the fourth, are we seeing signs of recovery? We have really shied away and 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 rundown 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 is simply too variable. But we are seeing that where buying is happening in large lumps versus maybe the more even distribution that we've seen in the past. And on the food service side, we are seeing some recovery there, but it's too early to tell. And with respect to the McDonald's announcement, we are not in a position to comment on that at this time.

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 I think overall we're feeling very optimistic about where we're headed and look forward to sharing some good results. If you look at where this quarter ended up, from the second quarter we were about 113 net and now about 94, and this is in a period of extreme pandemic, so we think we're doing pretty well and we look forward to continuing to grow.

Think the second was around the McPlant question. As I watched that unfold today, I was reminded of the Mark Twain quote that reports of my death have been greatly exaggerated. Our relationship with McDonald's is good, it's really strong. Our work there on behalf of what they're doing continues. I really want to defer to our large duty customers what they want to share about their supplier base and their launch plans. I don't want to get ahead and insert ourselves to the point where we're dominating the headlines of their investor day, so I respect their decision to refer to the big plant platform in a generic sense. We are working very closely with them on a number of matters, and folks will just have to continue to be patient. But I feel, as I've said in the past, good about that relationship and good about what we're contributing to the McPlant platform.

Yep, yep, thank you.

Yeah, so we're not seeing buying behavior at the customer level — I mean customer, the grocer level — that would suggest that they're still trying to burn through a lot of inventory. They were pretty quick to react to the consumer downturn in buying that occurred in the third quarter, so I think they're pretty well calibrated. So yeah, we had some pretty good returns in the beginning part of this quarter, and I think we just have to wait and see what the rest of the quarter looks like. It's such a variable year. I'd like to avoid offering guidance for the quarter any more specific than that.

I think some of what happened is, to try to give you a little more detail, at 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. But again, we're seeing a pretty strong beginning. Whether that'll persist throughout the rest of the quarter, we just can't say.

Yeah, I would say not actually. I think given the consumer resonance with our brand and the momentum we have with consumers, the brand that we've established, we think it deserves to be up there on the menu. Nearly all of our QSR partners have done that and benefited as a result. 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 may 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.

Thank you for the questions. And just on the issue around the velocities, I'm looking at our multi-outlet data and we're seeing even as we dramatically expand points of distribution — I think we've grown by about 55% year-over-year — we're still seeing that our velocity is about three and a half times higher than the category average, and on a year-to-year basis they're up about 15% over the last 12-week period. So there's puts and takes, and there's going to be differences depending on the SKU and whether a particular competitor is going heavy on promotions. But overall, that 15% rise in velocity year-over-year coupled with a 55% increase in distribution is pretty hard to do. So we feel pretty good that even as we expand our total distribution, you're seeing a higher overall level of velocity. I think that speaks to some of the underlying strength of the brand around the household data that we shared. I think we're at now 5.2% up from 2.7 a year ago on household penetration. But what's also happening there, which I find so alluring and encouraging for our brand, is the buyer rate since June, even in this period of crisis, is rising. So you have great economic challenges across the nation and tremendous disruption in retail buying patterns as well as in food service engagement, and yet what are households doing? They're buying more Beyond Meat. If you look at our ring for buyer rate in September, it was about $36.50, up from $32 in June. So from September to June, you're seeing that very large increase in buying across households. I obviously look at all the scouting reports on animal protein and on our competitors, and those numbers are great on a relative basis.

Yep, thank you.

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 exert itself over the course of the fourth quarter, the buying patterns have been so unusual for this year that we can't say with any precision what that effect will be. It may be that some of the buying we didn't see in 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 that Beyond Meat is an innovation engine at its core. That's what we do. Our core asset is an understanding of protein and lipids from plants and getting them to behave in the structure of animal protein to provide the sensory experience that consumers are so used to. 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 it. We have always maintained that our brand stands not only for the ability to do something great for the globe from an environmental perspective, animal welfare, climate, etc., but also for your own body and your own health. So when people think about Beyond, they should be thinking about the tremendous great taste that we're striving every day to be closer and closer to the animal protein equivalent, but also this is going to help me lead a healthier lifestyle and do something good for the planet. This burger delivers on those promises. We've done extensive consumer testing on it, and it did better than our current version, which is always something we want to do — we want to make our current version obsolete. It did absolutely 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. It represents continued growth for us. When that hits, we're not going to say exactly right now, but we'll be making an announcement soon, and we think that'll have some impact as we talk about the fourth and particularly the first quarter.

Good, how are you?

Sure, no, it's a fair and good question, and you're asking the right one. As I've said, I value so much these relationships with the customer. As much as I want to provide assurance to the street and to all the people that have helped us over the years that things are such and such a way, it's really their show. If I have a supposition about why they were more generic in their comments today, this is my own Ethan Brown observation, not Beyond Meat or McDonald's, that this is their day. It's their investor day, and news of something more broadly with Beyond Meat within the McPlant platform would have been disruptive to their own desire to stay on message. So I respect that and understand that, and I really need to leave it to them to make further comments about how we plan to interact with McPlant. I will say this: everything I've said is true. We have developed a very long-term relationship with them. We worked very hard on developing the burger that was in the PLT and that will be in the McPlant, but it's really up to them to say the extent of that, where it's going to be, how it's going to be there. But everything that I've been doing and our research team has been doing is marching toward a particular outcome with them, and I feel good about that.

Yep, thank you.

Yeah, no, you know what I worry more about is, and this is just a sort of embedded impatience within our company, that we know the consumer wants different and additional SKUs from us. We know they want to have the Beyond option at different eating occasions throughout the day. So the sense of urgency that we feel about getting additional SKUs out there is very real. We're scratching the surface of what we could be distributing in these large groceries, whether it's Kroger, Walmart, etc. Our foot is in the door, but that's about it. We have the opportunity to proliferate up to 25 or 30 SKUs in these stores. Hear from us in the coming months on some exciting developments in that regard. Our goal has always been, whether it's the McDonald's discussion we just had or some of the other partnerships we've had, to meet people where they're buying. CVS has now become a place where people are picking up some household grocery goods, so we want to be there and we want to do really well there. Having the 7,000 new locations at CVS where someone can get a Beyond Burger, or the 5,000 new locations where someone can get the Beyond Meatballs, that's great, and we plan to try to add to that distribution with other products that are appropriate for that channel. So I really do view this as we're just getting started.

Sure.

Yeah, sure. So on the food service side, if you look at the distribution of our sales into that channel, something I talked about in my opening comments, we were sort of two-thirds or so of our exposure is to independents and institutions and places that are either closed or operating at a much diminished capacity. Then you have the strategic market, which is about a third of our distribution, and those are the ones that are doing quite well with drive-thru and have been able to streamline menus and cash flow, etc. But we're not participating as much in that part of the food service category. So even internationally, we're not participating in that recovery. If you look at some of the tests that we've done in the past that have done well but are not being extended yet due to the uncertainty around COVID, it's a lot of those locations. Whether it's Pizza Hut in Puerto Rico, or KFC in China, or Taco Bell in China, there's testing going on, but I think folks are waiting for resumption of full economic activity before they start to really add things into the menu. That's happening in the US and it's happening in the EU as well. We get that there's complexity to the menus already, and when you're trying to stay afloat in a pandemic, holding off on new additions is understandable. On the retail side, we were pleased to see a 27% increase in international retail sales in the quarter, and it provided that uptick. If COVID globally doesn't shut that back down, we think we're seeing some good recovery there. I don't know if you guys want to add to that.

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 a better cost profile. It's a very attractive payback for us both in a period payback but also in a unit cost perspective. We don't want to identify it specifically, but it's a compelling argument to start looking at internalization of some of this back end. We're excited about it, really excited to work with 180 new employees and start to leverage this. We'll update more as we go, but needless to say, it's one of the bigger pieces of our cost component right now, so it's a great thing that we can work on to take cost out. On pea protein isolate, we do keep a very 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, so we work to make sure any inventories we have are rotating very efficiently. We know we have more, as things have slowed down, but as we continue to move forward, we're optimistic that will level out and we'll be matching that inflow and demand. It's not linear; we take more in earlier in the year to prepare for where we have stronger growth typically in second and third quarter. The overlay of the slowdown in demand here in Q3 did cause some growth in that inventory level, but it's something we're comfortable with. We continue to look at it and make sure we have current inventory, and it's the right inventory.

Yeah, no, sure. So as we talked about in the second quarter call, we saw this 195% increase in shipments occur throughout the second quarter relative to a 121% increase in our sales according to SPINS and IRI panel data. At the time we attributed, which turned out to be right, most of that to club and then also some very late shipments of our Cookout Classic that weren't caught in that consumption data because of the cutoff date. So there was just a tremendous amount of buying going on by the consumer in the second quarter. Then if you think about the stay-at-home orders relaxing and people going back into food service, where people were getting buckets of KFC and other large strategic quick service restaurant offerings, we weren't really participating in that because the streamlining of their menus. Our food service was coming more from that other two-thirds institutional, etc., and smaller restaurants, as well as lodging and casinos and recreational centers. So we just didn't participate in that. The consumption went into another category we weren't really being well represented in, and that was what caused, in our view, the sequential deceleration in retail buying. But you can't get around, in my view, these very strong numbers to make a case that somehow dietary changes are occurring that would run in the face of household penetration rising, repeat rates rising, purchase frequency rising, and every buyer buying more per household. So all the right trends are here. Again, I think we went from 113 million in net, which is a record quarter for us in the company's history, to 94 million in net during a pandemic, and we feel okay about that. It's one of the reasons that I did not do anything to disrupt the investments we're making in long-term infrastructure, whether it's in China with a new plant or EU with our new plant where we literally bought and put into play new facilities and put new workers on the ground and new personnel and leadership. We're not slowing down because while we don't think the models were adjusted properly because we can't provide guidance, we don't think that this was a massive step backwards by any stretch of the imagination. It was all still a pretty strong quarter for us relative to what's going on in the world. So I wouldn't point to a dietary change. I think if there is a change in diet, it's more and more people are coming into this space, particularly young people. If you look at some of the most recent data around Generation Z and their enthusiasm for plant-based eating and for the brand, we continue to see enormous upside in consumer behavior.

Yep, thank you.

No, thanks for the question. This is an area that I look very optimistically to. It's so early in our — I think we're in 80 countries now, but that is truly scratching the surface. If you think about our sales team here and our broker network and all the relationships we have with Costco or Kroger or Whole Foods, we're still building those globally. So I think that is really what is speaking out in those numbers — that we just don't have a mature sales organization globally yet. That is something that you'll see us investing in, and we have been investing in. We just hired some sales team, we put together a sales team in China as an example, and for competitive reasons won't share the number, but hired some additional staff in the EU. So to me, it gets down to just let's test the market, let's make sure we understand it, let's make sure we make the right hires in terms of relationships, and let's go for it. That's kind of happening now, and I think you'll see the retail outlets grow substantially. In the last quarter, I think we started at 27,000 in retail outlets and we're now up at 33,000 internationally, so feel pretty good about that.

Yeah, I mean one of the reasons that it's not — we're not putting that many new SKUs into each of those new stores that are coming online. So I think we just got to get the opportunity for us to build out our brand portfolio in those aisles, and you'll start to see those sales rise. But overall, we look at the same metric: our sales growing year-over-year, whether it's domestic or international.

Thanks so. Could you repeat that last part? I just didn't catch the last part of your question.

Yeah, I think it's the same. We're very cautious with regard to offering new guidance. I continue to look at some of the data that we're seeing both in the food service and retail sector that is positive, as well as some of the pending launches that you guys will be hearing about pretty soon. So it all gets back to the same central point: at what point in an economy can we say that COVID is under control or behind us? Until that point, I think we can't offer much guidance on either retail or food service.

Right. So yeah, 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. On the capacity that we have itself, a lot of the work we've done to secure, for example, pea protein, we feel good about that because of the shelf life of that ingredient. It's not something that we have to consume right away. But we don't have any reason to pull our more optimistic long-term growth projections. We want to make sure that we have the capacity in place to be able to serve those, and that's really what the capacity is about. It's not a commitment to the markets that we're going to hit that on any given date, but we are prepared to do it and have both 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, if you want to add to that.

Yeah, and if you look at some of the activities even during this COVID period, whether it's KFC in China where we went into 210 restaurants, Starbucks in Taiwan, Starbucks in Thailand, the Puerto Rico Pizza Hut, we don't see any reason to not continue on the path that we have put forward around growth. It is a transitory environment with respect to the pandemic. As I mentioned in my comments, our growth path is enduring. 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, many years. So we'll keep making that investment, and if for some reason it doesn't time exactly with the way our growth unfolds, we'll be okay with that.

So just wanted to thank everybody for calling in and appreciate the great questions. As we head into holiday season, let's all be safe, and we look forward to talking to you again next quarter. Thanks very much.