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Edited Transcript of BRBR.N earnings conference call or presentation 22-Nov-19 3:30pm GMT

Q4 2019 Bellring Brands Inc Earnings Call

Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Bellring Brands Inc earnings conference call or presentation Friday, November 22, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Darcy Horn Davenport

BellRing Brands, Inc. - CEO, President & Director

* Jennifer Meyer

BellRing Brands, Inc. - Head of IR

* Paul A. Rode

BellRing Brands, Inc. - CFO & Treasurer

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Conference Call Participants

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* Andrew Lazar

Barclays Bank PLC, Research Division - MD & Senior Research Analyst

* Brian Patrick Holland

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Bryan Douglass Spillane

BofA Merrill Lynch, Research Division - MD of Equity Research

* Christopher Robert Growe

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst

* Kenneth B. Goldman

JP Morgan Chase & Co, Research Division - Senior Analyst

* Kenneth Bryan Zaslow

BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst

* Kevin John Lehmann

Evercore ISI Institutional Equities, Research Division - Director

* Pamela Kaufman

Morgan Stanley, Research Division - Senior Analyst

* Vivek Srivastava

Goldman Sachs Group Inc., Research Division - Research Analyst

* William Bates Chappell

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Welcome to BellRing Brands Fourth Quarter and Fiscal Year 2019 Earnings Conference Call and Webcast. Hosting the call today from BellRing Brands are Darcy Davenport, President and Chief Executive Officer; and Paul Rode, Chief Financial Officer.

Today's call is being recorded and will be available for replay beginning at 1:30 p.m. Eastern time. The dial-in number is (800) 585-8367 and the passcode is 4878954. (Operator Instructions)

It is now my pleasure to turn the floor over to Jennifer Meyer, Investor Relations of BellRing Brands, for introductions. You may begin.

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Jennifer Meyer, BellRing Brands, Inc. - Head of IR [2]

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Good morning, and thank you for joining us today for BellRing Brands Fourth Quarter 2019 Earnings Call. With me today are Darcy Davenport, our President and CEO; and Paul Rode, our CFO. Darcy and Paul will begin with prepared remarks and afterwards, we'll have a brief question-and-answer session. The press release that supports these remarks is posted on our website in both the Investor Relations and the SEC filings sections at bellring.com. In addition, the release is available on the SEC's website.

Before we continue, I would like to remind you that this call will contain forward-looking statements which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements. These forward-looking statements are current as of the date of this call, and management undertakes no obligation to update these statements.

As a reminder, this call is being recorded and an audio replay will be available on our website. And finally, this call will discuss certain non-GAAP measures. For a reconciliation of these non-GAAP measures to the nearest GAAP measure, see our press release issued yesterday and posted on our website.

With that, I will turn the call over to Darcy.

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [3]

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Thanks, Jennifer, and thank you all for joining us today. I'm excited to speak -- to be speaking with you on our first earnings call.

As you are aware, the fourth quarter of fiscal 2019 was our last quarter fully owned by Post Holdings. We launched our IPO in early October and began trading on the New York Stock Exchange on October 17 under the ticker symbol BRBR. I want to thank and congratulate everyone who worked so hard to make the IPO happen. It could not have happened without the amazing team effort across Post and BellRing.

I will begin today's discussion with a brief overview of BellRing, our strategies for growth and our positioning heading into 2020. Paul will then provide you with greater detail on our fourth quarter, full year 2019 results, capital structure and 2020 guidance. Following that, we will open the call for your questions.

For those of you who are new to our story, I would like to give you a quick overview of our business. We are a fast-growing leader in the convenient nutrition category, bringing great-tasting nutrition to the mainstream consumer. Our business has scale, double-digit growth, strong margins and high cash generation. Our business was formed from 3 acquisitions by Post Holdings: Premier Protein, Dymatize and PowerBar, each of which helped establish and build the convenient nutrition category.

Under these brands, we market and sell ready-to-drink protein shakes and other RTD beverages, powders and nutrition bars. Our flagship brand, Premier Protein, which represents 80% of our net sales, is the #1 brand in the convenient nutrition category but only has 5% household penetration, highlighting the brand's untapped potential. Our other 2 key brands, Dymatize and PowerBar, represents 13% and 5%, respectively, of our net sales and focus on powders and nutrition bars. Both brands are complementary to Premier Protein and offer future upside to BellRing.

The convenient nutrition category is large and growing, representing $17 billion of sales in the U.S. and growing at 7%. Macro trends like mainstreaming proteins, convenience and snacking are all fueling that growth. Mainstream consumers are increasingly entering the category as they become aware of the importance of making healthier choices in their diets. These mainstream consumers are key to Premier Protein's success. Premier's RTD shakes combine category-leading nutrition, great taste and approachable positioning that appeal to multiple consumer segments, needs, tastes and consumption occasions. This unique combination has resulted in category-leading brand loyalty and repeat rates. In fact, Premier Protein is responsible for over 50% of total RTD category growth.

BellRing has a combination -- a strong combination of scale, organic growth, strong margins and high free cash flow generation. For fiscal year 2019, our net sales were $854 million with adjusted EBITDA of $198 million. We have organically grown sales since fiscal 2016 at a compound annual growth rate of 14%, and our asset-light model allows us to generate high free cash flow with minimal capital expenditures.

Looking forward, we have multiple strategies to continue to drive growth. We expect our first 3 strategies, including increasing household penetration, expanding distribution and innovation, to have the biggest immediate effect on our business. The final 2, international expansion and M&A, are longer-term in nature.

Let's start with driving household penetration. We believe the RTD category and our products are in the early stages of consumer adoption. With Premier Protein having only 5% household penetration, increasing marketing and promotion in fiscal 2020 are key enablers to driving more households into the brand.

Expanding distribution is another growth driver, both within our existing channels as well as new channels. Our biggest distribution opportunity is increasing our shelf space where we already have distribution. Premier Protein represents 16% of RTD category sales but only represents 5% share of shelf. Our eCommerce business, representing 6% of our net sales, also has great momentum, growing over 30% in 2019. Finally, we believe there also is a sizable opportunity in new channels.

Innovation is our next growth driver. We've had tremendous success in product innovation through new flavors and package types. We are encouraged by the incrementality of our new shake flavors, and we'll continue to drive this strategy.

Now to our final growth drivers, international expansion and value-accretive M&A. We see significant growth opportunities in our current international markets, including Canada and Western Europe, as well as markets where we have distribution -- where distribution is more nascent, including U.K., China and the Middle East. Regarding M&A, the category is very fragmented with many attractive targets. However, as we discussed during the roadshow, we believe the single biggest opportunity is to organically grow the Premier Protein brand.

We have good momentum heading into 2020. Our best measure of the health of the business is consumption. During the fourth quarter, Premier Protein shakes dollars grew 16% and in October, this growth accelerated to 20%. We expect consumption and sales growth to continue to accelerate in our first quarter of fiscal 2020 as we lap the effects of our supply constraints. We are happy to say we are going into 2020 with solid safety stock, a stronger supply chain and a sales and marketing team excited to drive the business.

We enjoyed meeting many of you on our roadshow in October and appreciate your support. I look forward to updating you on our progress next quarter. And with that, I will now turn the call over to Paul.

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Paul A. Rode, BellRing Brands, Inc. - CFO & Treasurer [4]

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Thanks, Darcy, and good morning, everyone. As we previewed during our roadshow, fourth quarter net sales were $214.5 million. Adjusted EBITDA came in at $46 million with a margin of 21.6%. Darcy mentioned consumption for RTD shakes remained strong, up 16% this quarter. However, Premier Protein net sales and volumes declined 2% and 4%, respectively, in the fourth quarter. This decline was expected and primarily driven by the early delivery of RTD shakes to a large customer in the third quarter to support promotional activity, resulting in an estimated $15 million headwind to the fourth quarter. Solid organic growth, driven by strong eCommerce sales and distribution gains in RTD shakes, offset a portion of the net sales headwind.

Dymatize had a good quarter with net sales and volumes each growing 5%. This result was driven by organic growth in international, eCommerce and specialty and was partially offset by lapping a product pipeline fill in the prior year. Net sales and volumes for PowerBar declined directly as a result of our decision to discontinue all the top 3 highest-performing products in North America. We expect to lap the effect of the reduced distribution in the second half of fiscal 2020.

Turning back to consolidated results. Gross profit increased 4% this quarter with gross margin up 230 basis points to 35.8%, benefiting from favorable input costs.

SG&A expenses as a percentage of net sales increased 230 basis points to 16.4%. SG&A included $2.7 million of separation costs, which we treated as an adjustment to non-GAAP measures. Excluding this amount, SG&A as a percentage of net sales increased 100 basis points driven by higher warehousing and compensation expense, partially offset by lower consumer advertising. Adjusted EBITDA for the quarter was $46 million, an increase of 5%, with adjusted EBITDA margin of 21.6%, an improvement of 160 basis points.

Turning quickly to full year 2019 results. Net sales of $854 million grew 3% over the prior year or 4% excluding the impact of a recently adopted accounting standard. Gross profit margin was 36.5%, and SG&A as a percentage of net sales was 14.9%. Adjusted EBITDA of $198 million increased nearly 27% over prior year, with margins improving 430 basis points to 23.2%.

Before outlining our guidance for 2020, I want to review our capital structure that went into effect upon closing of the IPO on October 21. We issued 39.4 million shares of Class A common stock at a price of $14 per share, raising approximately $552 million in gross equity capital. Net proceeds from the IPO were approximately $524 million after deducting underwriting discounts and commissions.

Additionally, we borrowed $800 million in total principal value of debt, which provided approximately $776 million in net proceeds. Subsequent to the close of the IPO, we used $1.227 billion of the combined net proceeds to repay the Post bridge loan and related interest. Pro forma for these transactions, our cash balance is approximately $63 million, resulting in net debt of approximately $737 million and pro forma net leverage of 3.8x. Our net leverage target is 3x, which we expect to achieve by mid-fiscal 2021.

Turning to fiscal 2020 guidance. We expect net sales to range between $1.0 billion and $1.05 billion. Adjusted EBITDA is expected to range between $192 million and $202 million, which will include approximately $7 million of incremental public company costs. We expect our quarterly cadence to continue to reflect variability because of the timing of key customer promotional events and related shipments, which can move from quarter-to-quarter.

Last, giving consideration to both BellRing Inc.'s taxes and tax distributions with Post Holdings, BellRing's total income tax cash outflows is expected to be approximately $30 million in 2020. We expect cash interest expense to be approximately $47 million.

With that, I would like to turn the call back over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Andrew Lazar of Barclays.

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Andrew Lazar, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [2]

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Congratulations on the recent IPO.

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [3]

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Thank you.

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Paul A. Rode, BellRing Brands, Inc. - CFO & Treasurer [4]

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Thank you.

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Andrew Lazar, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [5]

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Sure. Darcy, I was hoping to pick up a little bit on Paul's comment on what we know, that there's more variability in the way results play out over the quarters just because of some key customers and promotional activity and such.

I was hoping maybe there's a little bit more color you could add to that as we think about the cadence of earnings this year, how those key customer promotions tend to work in terms of timing and then, I guess, what visibility you have currently as we think about the start to the fiscal year and the type of growth that I think is supposed to be pretty strong given some of these things in terms of like what you know, what's locked in, in terms of new products shipping, things like that and maybe how much of it is predicated on takeaway trends remaining in that 15% to 20% range?

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [6]

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Yes. So I'll start on -- just from a general standpoint of just building blocks for our top line, and then I'll pass it to Paul to address the quarterly variability. So just from an overall building block for our volume, so the way we look at it is that is kind of we start with organic growth and we expect that to contribute kind of high single digits. And then we have -- because you're right, we are estimating pretty strong growth coming up because of our supply chain challenges last year that we are lapping. So the second piece is the supply chain lapping, and we're expecting kind of middle single-digit growth on top of that. And then the remainder comes from the incremental marketing and promotion and distribution.

And from the marketing, promotion and distribution, we have good line of sight to what distribution we will gain in the coming resets, which for us, is about 50% in the fall and about 50% in the spring. So we have good visibility there. We also have good visibility into the promotional calendar for Q2. Q1, in this category, you really don't have very much promotion in the kind of O&D period. But we have good visibility and locked in promotions for Q2, and we're already starting to have conversations about promotion for the Q3 and Q4.

So that is from a general standpoint, how we're looking at our growth and the building blocks, and then I'll pass it to Paul for the quarterly cadence.

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Paul A. Rode, BellRing Brands, Inc. - CFO & Treasurer [7]

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Yes. If you look at kind of overall variability, quarter versus fiscal '19, so Darcy touched on, our first quarter will be lapping -- that's the quarter that's most impacted by the supply issues that we had in prior years. So first quarter, we'll be lapping a lower comparable as well as some of the load-in related to some of the promotional and display events that are occurring. So that's kind of first quarter.

Kind of historically, the second and fourth quarters tend to be our lowest because there's really kind of 2 components, there's a sales component and the load-in, and then there's the EBITDA margin impact because when we have large promotions at our -- especially at our bigger customers, the club customers, that tends to result in quarters that have lower EBITDA margins. And historically, those have been in the second and fourth quarters and we expect that to continue. So it's kind of -- as you look at the quarterly pacing, again, we'll be lapping first quarter last year with the supply constraints. And then the third and fourth quarter of this year had that $15 million shift from Q3 to Q4. So we'll see if that occurs again, but that'll be something else that we'll be watching for as we go into fiscal '20.

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Andrew Lazar, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [8]

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Great. And then, I guess just finally, maybe Darcy, could you share a little bit with us maybe some of the lessons learned, not from the supply chain issues themselves, but what you learned about sort of the Premier Protein brand vis-à-vis customers and consumers when you went from sort of the core 7 down to 2 and then now back up to 7 and whether that sort of informs you a little bit about maybe where the potential growth opportunity is for that brand going forward?

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [9]

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Yes, sure. Thank you. Yes, it -- this last year was a big learning year for us, and I think that what we really learned is the resilience of the Premier Protein brand. As we went -- as you said, we went from 7 SKUs to 2 SKUs. Really, where you saw it affecting consumption was November, and then we came back fully by April, so a considerable amount of the year. And what we found is the majority of our consumers actually either went to chocolate and vanilla, so stayed dedicated to our brand and went to chocolate/vanilla or they actually left the category. So it just further emphasized our tremendous consumer loyalty and the fact that they would stay with us during that period of time. And then we saw big bumps and a lot of consumer excitement when we came back with the flavors, which was also really fun to see.

And so yes, as we look back, we continue to see incrementality with the new flavors, as I said in my prepared remarks, but -- and so we're excited to continue that strategy. And again, one of our biggest growth drivers is really around household penetration. So the more we can tell people about the brand and what we stand for, we think that will continue to grow the household penetration.

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Operator [10]

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Your next question comes from the line of Ken Goldman of JPMorgan.

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Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [11]

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One quick one and then a longer one. I wanted to ask Paul a little bit about the inventory. Obviously, it jumped this quarter for the safety stock. Can you just help us think about modeling that number or however you want to think about inventory going forward? When do you sort of leave that safety stock off and get back to normal?

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Paul A. Rode, BellRing Brands, Inc. - CFO & Treasurer [12]

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Yes. I think that's a great question. So as you mentioned, we have built our inventory up to better levels, especially as we look back to last year. As we go into fiscal '20, we think we are prepared for our first and second quarter promotions and displays that we have coming. And so that's part of the reason we're carrying higher levels coming into Q4. So I think as we go through fiscal '20, we'd expect the inventory levels to come down slightly, but I don't -- we aren't expecting them to have significant changes. Obviously, demand will drive that one way or the other. But overall, our model would suggest that inventory levels will come down some, but not dramatically.

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Kenneth B. Goldman, JP Morgan Chase & Co, Research Division - Senior Analyst [13]

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Okay. And then a different question is on maybe migrating the Premier brand away from the pharmacy aisle. I got the sense in getting to know you guys before the IPO that some on the team felt like it was a little bit closer in proximity, maybe a couple of years away, and some felt that that's a little bit farther away. What I'm talking about is maybe selling some of the product in aisles, maybe the beverage aisle, something like that. So I just wanted to get a better sense from all of you, sort of when do you think it's the right time for Premier to start pushing some of its customers so that it does what other convenience items have done and be sold not only in pharmacy, which you can still own, but maybe elsewhere in the store as well?

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [14]

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Yes. I'll answer that and it's a good question. And you're right, yes, we obviously had a lot of conversation about that during the roadshow. So I still believe that we have tremendous upside just within pharmacy and building our block there. We've talked about -- and I mentioned in the prepared remarks about our 16% market share and only a 5% share of shelf. So there still is a lot of room, kind of low-hanging fruit from a distribution standpoint within the pharmacy, and it will take time. So we do believe that this is a mainstream proposition and the category overall is really being driven by mainstream consumers and really, us. So we think that -- think 2 to 4 years from now that the category or part of the category will move to more of a mainstream aisle. Whether that is beverage or breakfast, I think that is still up for debate and likely will happen via testing.

So we've seen part of the category, specifically in the nutrition bar space, some of the mainstream brands already moved to the breakfast and the granola aisle very successfully. So we think it's a model that grocers are generally comfortable with but now, it's just a matter of doing it in a very thoughtful way in partnership with our -- with probably some of our competitors as well as with the grocery partners.

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Operator [15]

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Your next question comes from the line of Jason English of Goldman Sachs.

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Vivek Srivastava, Goldman Sachs Group Inc., Research Division - Research Analyst [16]

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This is Vivek Srivastava speaking on behalf of Jason English. Can you elaborate on the specific drivers of top line growth beyond FY '20 and how much of this growth you think is because of the strength in the overall health and beverage category and how much you think will be predicated on your share gains in the category?

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [17]

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Sure. So you're talking about drivers of growth past 2020?

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Vivek Srivastava, Goldman Sachs Group Inc., Research Division - Research Analyst [18]

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Yes.

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [19]

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Okay. Yes. No problem. I'll hit that, and then Paul can add on anything. So you're right, the first is simply category growth. As I mentioned, the category is growing high single digits. We expect that to continue. And then the second is we have a ton of distribution opportunity both within the pharmacy set and just getting our fair share of the shelf where we already are distributed, but also within expanding into new channels. We see a lot of opportunity with eCommerce.

Across both Dymatize and Premier Protein, we see upside there. If you think about it, we only started really launching into eCommerce a few years ago, and it's a different way of doing business. So we are really building the foundation to date. And now we know what works, we know what drives our business, and now it's about just accelerating those activities. The third is really about marketing and promotion, especially with the Premier Protein brand, we have underinvested, especially this last year because of the capacity constraints. So now, we will start investing at the levels that we believe will drive the business and also drive the category.

And then the other pieces are really around international and M&A. So we believe that international offers additional growth for all of our brands, including Dymatize and PowerBar, and then innovation is another piece where we are launching. We've pulled back on innovation in the last couple of years, especially on Premier Protein. And so we're excited to launch new products and get back to, I think, what is expected by our consumer and also what our company is excited for in the coming years.

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Operator [20]

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Your next question comes from the line of Pamela Kaufman of Morgan Stanley.

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Pamela Kaufman, Morgan Stanley, Research Division - Senior Analyst [21]

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I was hoping that -- I was wondering if you could elaborate on the timing of innovation launches throughout 2020 and what the plan is for rolling out distribution for your new products from a channel standpoint.

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [22]

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Sure. So for us, for our category, the resets are -- it's interesting, the resets used to be, in this category, more heavily weighted to spring. There have been some changes within some of the major retailers and so now, it's about 50-50 between spring and fall. So our new products align with the reset windows of our retailer partners. Obviously, in the club channel, there's more flexibility.

And from a category excitement standpoint, January, February, March are -- is really the big time for the category. It's when most new consumers enter the category, kind of that "new year, new you" time frame. And so we try to align our launches around that time to make sure we are there when consumers are entering the market. So that gives you a sense of timing.

And then distribution, again, also really predicated by the reset windows. So I think we've talked about expanding share of shelf as being a big growth driver and then -- and that would be, again, based on the reset windows.

For eCommerce, obviously, you can put your items on eCommerce at any time. So that is -- so we will be launching new items during the high -- kind of the "high season", which would be January, February, March. And then from a new channel perspective, those are ongoing conversations with those channels, and they vary in reset windows.

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Pamela Kaufman, Morgan Stanley, Research Division - Senior Analyst [23]

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And then can you talk about your plans for marketing spend increasing next year and elaborate on the types of initiatives that you'll be spending behind?

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [24]

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Yes, sure. So again, it -- we really align with when new consumers would enter into the category since much of our volume comes from consumers outside of the category. So the -- our Q2 time frame will be a big push for us, very similar to other competitors in the category. And yes, we are excited to launch across multiple touch points, and you can expect to see us not only on doing -- we have a very strong digital presence. So expect us to be on digital but also launch on national television, which is exciting. So I think that next year will be fun to see how this business responds to an increased marketing level, which I think, internally, we've been waiting for.

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Paul A. Rode, BellRing Brands, Inc. - CFO & Treasurer [25]

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Yes. Just to touch on your question on spend. So I think for fiscal '20, we are increasing our spend about 100 basis points of net sales, and we expect that increase really to occur really throughout fiscal '20.

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Operator [26]

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Your next question comes from the line of Chris Growe of Stifel.

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Christopher Robert Growe, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst [27]

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Just had a question for you, if I could, and follow-on a bit. I think you just said it, Paul, but the phasing of marketing that would happen throughout the year, does any of that start to hit now or around the kind of the height of the season, the peak season? Is that when you tend to see the majority of that spending coming through? Or is it more ratable throughout the year?

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Paul A. Rode, BellRing Brands, Inc. - CFO & Treasurer [28]

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It occurs. It -- we will see it increase kind of as we go through the year, but it is spread across the 4 quarters. So we do have increased spend compared to last year really across all 4 quarters.

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [29]

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Yes. Except for -- the one exception to that is this Q1. So this O&D period is just -- is not a big spending time frame for -- and it's -- as you can imagine, people are more concerned with Thanksgiving and the holidays as opposed to thinking about changing their health regimen.

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Christopher Robert Growe, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Analyst [30]

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I guess those shakes would benefit them if they're eating a lot over the holidays, it would seem. But yes, right. I just had a second question, if I could. With regard to the incrementality of new products, especially for Premier, you have some new products coming out. Those tend to hit next year -- throughout fiscal '20. I'm just -- a new flavor, for example, how incremental do you expect that to be and the degree to which you expect this penetration of new channels and customers and how much that can add to revenue growth in fiscal '20?

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [31]

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Sure. So historically, we have seen new flavors represent about 38% of our growth. So obviously, that is -- that depends on how many flavors. Obviously, if you're launching a third/fourth flavor, that's going to have more incrementality as opposed to your seventh/eighth. But I think we internally continue to be surprised at the incrementality of new flavors. And so we believe that will continue, especially through this year and beyond as we expand the flavor variety on shelf.

From new channels and customers, as we've expanded channels, we see tremendous growth. And I think that what's interesting about it is as we expand channels, it's less about people shifting but it's more about increasing household penetration. We get people into the franchise, they fall in love with the products. We have 55% repeat, so they repeat, they stay loyal and then oftentimes, they go to other channels where they can buy bigger packs because our products are everyday products where they consume it for, oftentimes, breakfast every day. So we see a ton of incrementality, both from a new flavor standpoint as well as when we launch into new customers, and then we bring them into our franchise.

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Operator [32]

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Your next question comes from the line of Bill Chappell of SunTrust.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [33]

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Darcy, just -- you talked about advertising and channel distribution, stuff like that. Just kind of wanted to talk a little more about the competitive launches and pressures that you may or may not be seeing. I mean, I think while you were on the road, somebody else threw out another 30 grams ready-to-drink shake. Pure -- I think it's Pure Protein that's doing a lot of national advertising when you're soon to be doing that. And it seems that Pepsi will do something with -- more with Muscle Milk now that they've got control and expand the distribution on the more convenience channel, where you're kind of taking your time to get to. So maybe help me understand the path you see. Is -- are you late to the game? Are you feeling incremental -- more pressure? Or just any update there will be great.

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [34]

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Sure. We really have seen the competitive activity increase really for the last 2 years. So we saw a lot of brands -- competitive brands launch similar nutrition -- nutritious products over -- again, yes, the last like, 1.5 years. And our brand really has not seen -- it hasn't been overly affected. I think that just goes back to how loyal our consumers are. We have a 68% share of requirement, which is a loyalty metric. And even -- I mean I think it kind of goes back to the question around this last year and what we learned about the resilience of the brand.

We are always aware of watching competition. But the latest entrant is -- we've seen a lot of other 30-gram products launched. And so far, again, they have not really affected our growth.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [35]

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Got it. And then just a follow-up. I've forgotten, but I know you've told us this before, but in terms of commodity outlook, are you locking in -- are you largely locked in for kind of your protein needs for the next year?

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Paul A. Rode, BellRing Brands, Inc. - CFO & Treasurer [36]

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Yes. So we have pretty good visibility several quarters ahead on our key commodities. I don't want to go too deeply into our coverage strategy. But yes, we tend to cover out -- like I said, we have pretty good visibility several quarters out. So we feel pretty good about where we are for fiscal '20.

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Operator [37]

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Your next question comes from the line of Ken Zaslow of Bank of Montreal.

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [38]

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As you put out your incremental new products and you do your marketing, how much have you invested in analytics? As I listen to the conversation here, a couple of things you said is like, "It'll be fun to see how much advertising actually helps. The competition, we're surprised by how much the products haven't really competed with ours as much and we keep on gaining share." How much is needed for increased analytics to kind of hone in and say, "All right, every dollar that we spend gives this type of lift, this type of incremental?" Can you talk about that and where you're going on that?

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [39]

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Yes. So you're exactly right. I think, as much as maybe my comments didn't come across that way. We are really -- we are a very data-driven organization, especially our marketing team. So just to give you a sense of -- we're going to be looking at multiple data points to assess the effectiveness of our advertising. And we're going to be -- we're obviously looking at sales. We're going to look at online sales. We're going to look at web traffic. We're going to look at multiple data points to give us a sense of, "Is it working and is it working as well as we have forecasted?"

The other thing that we're going to be doing is -- after the campaign is over, we'll be doing what's called a marketing mix analysis, which will be assessing all of our -- not just advertising, but all of our vehicles, including promotional vehicles, EPR or discounts to assess what moves our business the most. So yes, so we have a ton of analytics going on in the background that's going to guide our future strategy even later in 2020, but also beyond.

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [40]

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Are there return on invested capital numbers, as you think about investing in marketing or any other -- that you're willing to kind of give us as a proxy of every dollar that you invest you expect some sort of return or a way to think about that? Because I think that's kind of a 2021/2022 kind of growth algorithm to think about. And I'll leave it there.

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [41]

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Yes, yes. So we will be looking at all of those metrics to guide our strategy. So those are exactly the ones making sure that we're spending the dollar where it's going to have the biggest effect on our business.

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [42]

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But you don't have any metrics that we could -- that you'll tell us of what you're looking at, like 10% return, a 20% return, anything like that -- that we could do that?

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [43]

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Yes. I'm not -- I don't think in this forum I'm comfortable talking about those kind of specifics, but I'm happy to give you guidance on how we make our decisions.

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Operator [44]

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Your next question comes from the line of David Palmer of Evercore ISI.

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Kevin John Lehmann, Evercore ISI Institutional Equities, Research Division - Director [45]

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Kevin Lehmann on for David. Darcy, you and your team have done a great job explaining how you plan to boost Premier Protein's penetration through wider distribution, more innovation. You talked a lot about the loyalty that brand enjoys, even some capabilities on analytics that might help.

When we analyzed sales of Premier Protein state by state, we can see that you're fairly significantly under-indexed in places like New York, New England, California, essentially the coastal areas of the U.S. relative to more of the center of the country. Is it fair to assume that a big chunk of your targeted growth going forward should come from closing that coastal penetration gap? And if so, can you talk about some specific marketing initiatives or strategies or analytics you might employ to help do that in 2020 and going forward?

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [46]

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Yes. I think that -- I think this is just goes back to the overall number of household penetration. So if you think of just going back to -- I mean we only have 5% household penetration. The RTD category has 23% household penetration. Bars -- nutrition bars have 45%, the category has 55%. So there is just tremendous opportunity regardless of state. So I think that our focus is really just increasing that household penetration.

At this point, that is so large that we are not necessarily looking at states. We have the luxury to have so much opportunity that we don't necessarily have to go state by state or region by region. We're looking at national advertising. And so we're looking to blanket -- to just to increase that 5%, and we believe there's a lot of upside.

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Operator [47]

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Your next question comes from the line of Brian Holland of D.A. Davidson.

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Brian Patrick Holland, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [48]

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If I could just maybe kind of peek out longer term here. I think you guys are targeting sort of 10-plus percent long-term growth rate. I'm wondering how that's segmented out when we think about your key brands. Obviously, you're going to get some outsized growth this year. Is it sort of primarily or exclusively driven by Premier Protein? I -- you mentioned earlier about lapping some of the rationalization efforts on PowerBar. So I'm wondering if the expectation is that PowerBar would grow beyond 2021. And then also Dymatize, obviously, you got an inflection this year, you've had some distribution. So wondering what the white space is for that. So if we could just start there, kind of big picture, how that growth breaks out long term.

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [49]

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Yes. I'll give you a big picture, and if, Paul, you want to add anything. So the bulk of the growth will be coming from Premier Protein. I would think about Dymatize and PowerBar as being long-term contributors. You've already seen -- you saw the 5% increase in Dymatize. We expect that to continue and potentially even grow. I've been -- we've been very excited and pleased with the channel-shifting strategy that Dymatize has gone through. And so -- and we're already seeing that brand return to growth.

From a PowerBar standpoint, we think the opportunity is international. So yes, we're still going to be lapping through 2020. But in -- by 2021, we think that will also be a contributor, but the bulk and where I would think that you guys would probably spend most of your time would be on Premier Protein.

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Brian Patrick Holland, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [50]

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Okay. That's helpful. And then maybe just on the advertising side. You gave some good color about how that'll phase and step up there in 2020. But -- so can you go back historically? And obviously, I understand last year, the spend was maybe impacted by the capacity constraints. But if you think of sort of peer group -- your [grocery] staples peers spending about 10% of sales on advertising. Even maybe before last year, you were still kind of closer to the mid-single-digit range, and that's kind of -- well, on a relative to sales base, and that sort of seems to be what's implied by next year, and you can correct me if I'm wrong about that. But where does that need to be? Where do you think that needs to be long term? I don't know how much of that is a function of your channel exposure, club may require less advertising spend but certainly your aspirations go beyond that. So just curious where that number sort of evolves to over time.

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [51]

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Sure. So I think what is interesting about the Premier Protein brand is that the brand was really built on word-of-mouth marketing. So friends and family telling their loved ones about how this product worked for them. So that is really -- it -- we have -- the brand has never been a heavily advertised brand, and so we believe that by -- when we increase our spend, even if it is in the single digits, that we will get more bang for our buck because of this passionate group of followers that will then take that and basically kind of extend our dollar, so to speak. And so that is really where our thinking is. Obviously, we're going to make changes. We'll -- this is dynamic. So we'll be watching to see how the business responds to more national advertising, and then we'll adjust as we go.

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Operator [52]

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Your next question comes from the line of Bryan Spillane of Bank of America.

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Bryan Douglass Spillane, BofA Merrill Lynch, Research Division - MD of Equity Research [53]

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Just 2 quick ones for me. First, I think Bill Chappell asked earlier about just -- some new products, some new competitors coming into the market. And I guess I wanted to tie that to just the overall capacity -- availability of third-party capacity. So can you remind us just how much you have sort of increased your access to capacity? And then as you're seeing more competitors come into the market, are you concerned at all that there's going to have to be more capacity added to the industry to kind of support potentially more new competitors coming into the market?

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [54]

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Yes, sure. So we're feeling really good about where we are from a capacity standpoint. I think that we have a couple of things where it gives me confidence going into 2020. The first thing is all -- our supply chain really has stabilized, and we have every [command] over-delivering on their commitments. We now have -- and you've seen it on our balance sheet. We now have between 8 and 10 weeks of shake -- of inventory, so that gives us the flexibility to really see some increases in some of our promotions, maybe unexpected increases, and the business will have the flexibility to manage those changes.

And then -- and just from a capacity standpoint, we have long-term commitments. So we are feeling like those commitments will satisfy what our volume expectations are as well as some additional flexibility because of our arrangements, that we'll be able to handle that. So again, I think that capacity -- we now are in a very good place and so we don't expect that to be a constraint.

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Bryan Douglass Spillane, BofA Merrill Lynch, Research Division - MD of Equity Research [55]

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Okay. And then maybe the second one. You talked a bit about -- and there's been some discussion on the call about expanding distribution, and I guess as I listened to it, it's getting your fair share in the pharmacy, maybe into the breakfast aisle or other aisles within like a grocery store or food store. But it doesn't sound like immediate consumption or single-serve is necessarily high on the priority list. And so I guess my question is, if that's true, is there just something that's structurally more difficult about that, whether it's getting the route to market or maybe having to be in a different package? Just trying to understand how that could fit in and if it's just structurally maybe more challenging than maybe other parts of the store.

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Darcy Horn Davenport, BellRing Brands, Inc. - CEO, President & Director [56]

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Yes. So I think what is unique about this business is all of the opportunities. So actually, I just didn't talk about it. The -- so we do have a single bottle. We actually have 2 sizes. We have a 14-ounce single-serve bottle as well as an 11.5-ounce bottle. We are -- have been very successful in moving into kind of what we call the grab-and-go sections of grocery stores as well as mass stores. So that is an active strategy that our sales team is currently executing. In addition, some of the newer channels of convenience and dollar and what we call kind of on-the-go, those are also active strategies that we are executing on.

The one thing that I would just say is that the convenience channel is a highly fragmented channel, and it is -- so it just takes -- it takes a while to build. So that will be -- that is a long-term strategy that we will continue to be moving on, but we are -- we think that is an important part of the business and part of our long-term strategy.

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Operator [57]

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Ladies and gentlemen, we have reached the allotted time for questions and answers. We thank you for participating in the BellRing Brands Fourth Quarter and Fiscal Year 2019 Earnings Conference Call and Webcast. You may now disconnect your lines, and have a wonderful day.